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OECD Working Papers on Finance, Insurance and Private Pensions No. 6 - page 22 / 33





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The setting of restrictions on broad asset classes should be left to the board of the reserve fund as part of the design of the investment policy.


The GPIF has a clear mandate, which is to invest the assets so as to contribute to the long-term financing of public pension expenditures. The pension laws state that asset management should be ‗safe and efficient from a long term view‘. The fund also has a long-term performance goal which is set by the Ministry of Health and Welfare and written into the fund‘s medium-term goal. 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 assumptions). 17

While actuarially speaking, such a long-term goal makes sense, from the perspective of an investment manager such a target needs to be translated into returns that can be obtained from market instruments. The GPIF cannot be evaluated for missing a target that is ultimately outside its control (wage growth). The GPIF is the only main public pension reserve fund in the world that has a performance target that is built on non-market instruments. In order to ensure an effective and transparent evaluation of the GPIF and its board, there should also be a market-based benchmark against which the GPIF‘s performance can be assessed in a transparent and ongoing manner.

There appears to be no requirement for the GPIF to draft a detailed written statement of investment policy, as recommended by the OECD. It is also unclear whether the investment policy of the GPIF is set by the fund‘s governing body or whether the governing body recommends the policy which is then approved and actually set by the MHLW –– i.e. true independence (as recognized by OECD standards and international good practice) is not being met.

The statement of investment policy should clearly distinguish between the long-term target rate of return and the expected return and hence the benchmark - from the chosen asset allocation. Such a statement, which should be publicly disclosed, should also lay out the investment beliefs underlying the chosen investment policy, the extent to which external managers will be used and how they will be selected and assessed, as well as the methods for performance evaluation, among other issues.

Costs are also not mentioned in the GPIF investment policy. The GPIF does use its scale to ensure that it is a low cost operation (it employed only 75 staff as of 2010, and paid external investment fees of 0.02% of assets under management) but there is a danger that the GPIF is too focused on cost control (as discussed previously, due to its non-autonomous independent structure) possibly at the expense of returns. Upgrading risk-control and asset management capabilities may be seen as an investment rather than an


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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