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OECD Working Papers on Finance, Insurance and Private Pensions No. 6 - page 12 / 33





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  • There is less scope for political interference in the management of the reserve fund. Under the segregated mode, key decisions, such as the strategic asset allocation are decided by an autonomous entity at arm‘s length from government and the social security institution;

  • There is greater clarity in mandate and objectives, without any other policy goals than the investment of the reserve fund‘s assets. For example, under the segregated model, the governing body is not responsible for contributions and benefit payouts;

  • There is greater transparency and accountability of a segregated fund‘s governing body. The focus on investment management raises the visibility of the board‘s action and allows an effective measurement of its performance;

  • It is easier to attract qualified investment professionals than to a social security institution. An autonomous management entity may be able to apply a different salary scale than the one in place in the social security institution and may also be able to avoid many of the latter‘s bureaucratic procedures.


In principle, Japan‘s reserve fund follows the preferred model of segregated governance. The GPIF is established as an Independent Administration Institution. However, its role is to administer the tasks based on the medium term objectives and plans instructed and approved by the Minister of Health and Welfare, including key strategic objectives such as the target rate of return11 and a requirement to rely primarily on passive (index) funds to implement the investment strategy. Therefore the GPIF decision making is limited to what has been authorized by the Minister in charge i.e. it is not a fully independent, segregated entity and therefore not in line with OECD recommendations or international good practice of its peers. The Ministry takes on some functions of governing body of the reserve fund and has some influence over its staffing. As of April 2010, 7 of the 75 staff of the GPIF were from the MHLW. It is also unclear whether the Ministry also plays a role in the formulation and approval of the strategic asset allocation, a key responsibility that is in principle under the responsibility of the chairman of the GPIF. At least one aspect of the GPIF‘s investment policy, passive management, is determined by the MHLW.

Given the size of the fund and its current investment policy (with an important allocation to assets other than Japanese government bonds), there would be merit in granting more autonomy to the GPIF, in terms of both decision-making responsibilities and budgetary control. Ideally, the Ministry should have a supervision role rather than requiring its approval for decisions taken by the GPIF. Following OECD

reserve funds is to help facilitate tax-smoothing over a relatively long time period, an independent governing body can focus on long-term investment objectives.


In accordance with government instructions, the target, long-term rate of return should be sufficient to maintain a stable ratio of reserves to annual public pension expenditure. As a result, the GPIF has a long-term real rate of return target of 1.1% p.a. above the assumed rate of growth of wages (i.e.2.2% p.a. real or 3.2% nominal based on current expectations). The 2009 OECD Economic Survey of Japan points out that the projections are sensitive to the economic and demographic assumptions and additional reforms may become necessary in the future if the assumptions are not met. The 2009 projection assumes a higher rate of return at 4.1% (compared to 3.2% in the 2004 projection) and a wage growth of 2.5% (compared with 2.1%), thus widening the gap between the return on investment and wages from 1.1% to 1.6%.


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