GPIF Should Seek 1.7% Return Plus Wage Growth, Panel Says

The world’s largest pension fund should aim for yearly returns of 1.7 percent plus the rate of wage growth, a Japanese government advisory panel reiterated.

The 128.6 trillion yen ($1.25 trillion) Government Pension Investment Fund should adopt that goal as it is suitable under all eight scenarios envisaged for the country’s economic outlook, according to a committee formed to help the health ministry decide on economic assumptions for investment targets. The group met today to finalize a draft report issued last week. The return figure may need to be increased if a health ministry review of pension finances finds that it’s not enough, Kazuo Ueda, a panel member, said.

The panel’s final report implies a target of 4.2 percent annual returns for GPIF, which amounts to a 0.1 percentage point increase on its current goal. The rate would be the lowest among pension funds against which GPIF compares itself and comes as the Japanese manager faces pressure to take more risk to cover retirement payouts for the world’s oldest population.

The 10-person committee presented its final proposal, which oversees public pension funds including GPIF, at its 17th meeting today. A separate 21-member advisory group will then use the recommendations to create a financial review of the funds and outline changes, according to a ministry document.

GPIF no longer needs to focus on domestic bonds given quickening inflation, the panel reiterated today.

Japan Bonds

Japanese bonds accounted for 55 percent of GPIF’s portfolio at the end of December, the smallest share since the fund was established in its current form in April 2006. GPIF held 17 percent of its assets in local shares last quarter, 15 percent in foreign equities and 11 percent in overseas bonds, according to a statement on its website.

California Public Employees’ Retirement System targets a 7.5 percent annualized nominal rate of return, or 4.75 percent in real terms, while the Canada Pension Plan Investment Board and Norway’s Government Pension Fund Global each require a 4 percent annualized real rate, according to data on the funds’ websites.

The health ministry advisory committee today confirmed eight scenarios for Japan’s economic outlook first provided on March 6, with the implied 4.2 percent GPIF return target based on median figures for the group’s preferred assumptions. It is made up of the 1.7 percent target, plus inflation of 1.2 percent and real total worker compensation increases of 1.3 percent.

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