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.
As an Independent Administrative Agency, the GPIF is subject to government wide restraints on operating costs, including controls on the fund‘s staff remuneration policy – however investment management costs are exempt. This may be creating a bias towards outsourcing, which is not necessarily in the best interests of the fund. Cost controls also explain the GPIF‘s relatively small staff.
The GPIF has a Chairman, a Director (Chairman‘s aide/Counsellor) and two Auditors, which is in line with the Japanese legislation‘s requirements for Independent Administrative Agencies. However, such a structure is atypical for a pension fund, especially one of the size of the GPIF‘s. This legislative requirement impedes the clear separation of oversight and executive responsibilities between a Board of Directors on the one hand and a CEO (or/and CIO) on the other. Rather, all oversight and executive powers within the GPIF are effectively concentrated in one person, the Chairman.
There are no specific written guidelines for the appointment of the chairman of the GPIF. Although the Chairman is required to have experience in economic and financial matters, it is not clear that there are any relevant criteria for the Director and Auditor. The selection process is not transparent, neither are the criteria and processes for removal.
The GPIF has also established an investment committee of a suitable size (up to eleven members), with the requirement for financial and economic experience. A few are from academia and there are also two representatives each from labour and management. None of the members of the investment committee are full-time investment managers of the GPIF, which apparently results from the cost constraints imposed by the regulations of Independent Administrative Agencies.
While there is a requirement for an annual independent audit and the GPIF itself has two internal auditors, there is no audit committee. It is not clear therefore how effectively internal control and audit issues are addressed. Risk management is not very developed either (there is no risk committee and it is not clear whether the risk management function is secured).
There appears to be no requirement for the GPIF‘s Chairman to draft and publicly disclose the following documents: code of conduct, conflicts of interest rules, and statement of investment policy.
There are also some specific issues with respect to the governance of the investment management process that call for review such as the current practice of setting a return target linked to wage growth for performance benchmarking purposes.