OPTIONS TO IMPROVE THE GOVERNANCE AND INVESTMENT OF JAPAN’S GOVERNMENT PENSION INVESTMENT FUND (GPIF)
by Fiona Stewart and Juan Yermo1
Japan has a major asset to address the impact of population ageing on its public pension system in the form of the Government Pension Investment Fund (GPIF). The GPIF is the largest pension fund in the world at JPY140tn (USD 1.4tn), representing nearly one quarter of the country‘s GDP and three and a half years of annual public pension expenditure as of September 2009. The Japanese public pension reserve fund earned its name in 2006 as part of a major governance reform that aimed at increasing the transparency and autonomy of the fund. While much improved, the new governance structure still falls short of international best practices and in some aspects does not meet some of the basic criteria contained in OECD recommendations, in particular the OECD Guidelines for Pension Fund Governance (OECD 2009).2
The main concerns over the governance structure of the GPIF are the following:
The GPIF does not appear to be a fully independent, segregated entity. The Ministry of Health, Labour, and Welfare (MHLW) takes on some functions of governing body of the reserve fund. It has some influence over the GPIF‘s staffing (a few GPIF employees are civil servants from the MHLW) and sets out medium-term goals for the fund. It is also unclear whether the Ministry also plays a role in the formulation and approval of the strategic asset allocation, a key responsibility
Fiona Stewart and Juan Yermo are principal administrators in the Financial Affairs Division of the OECD‘s Directorate for Financial and Enterprise Affairs. Though drawing on OECD Council approved recommendations and other work supported by OECD committees, the views expressed herein are those of the authors and do not necessarily reflect those of the OECD or the government of its Member countries. In particular, the Japanese Government has refrained from making any comments on this paper because it is still considering the issues referred to herein. The authors are solely responsible for any errors.
The Guidelines can be accessed at http://www.oecd.org/dataoecd/18/52/34799965.pdf. The analysis also makes references to the OECD Guidelines on Pension Fund Asset Management (OECD (2006), which can be accessed at http://www.oecd.org/dataoecd/59/53/36316399.pdf. The OECD governance and investment standards are also fully consistent with the ISSA Guidelines for the Investment of Social Security Funds developed by the International Social Security Association (ISSA 2005), which cover both governance and investment management issues and used the OECD guidelines as a blueprint.