We suggest the following governance recommendations which would bring the GPIF further into line with OECD guidance and international good practice. Such governance changes would also be required before any restructuring of the investment strategy:
Separate operational and oversight functions within the GPIF, establishing a Board of Directors and a separate executive team led by a CEO and CIO, who are selected by the Board following a hiring process based on transparent, professional (fit and proper) criteria.
Grant budgetary and administrative autonomy to the GPIF, –including control over pay grades and personnel policy (separate from the civil service). The GPIF‘s Board should establish its annual business plan and budget and submit it for approval by the Japanese government (or Diet).
Members of the Board of Directors should be appointed by the MHLW, but possibly also by labour and employer associations. An additional control on the appointments may be introduced by requiring the ratification of the appointments by the Japanese Diet. The board should also include some independent experts, such as academics and independent consultants, without ties to the fund‘s main stakeholders or the financial industry. Given that the GPIF is in effect the largest pension fund in the world, it should be possible to recruit global leaders in the pension field to this role.
All board members should have some knowledge in financial and investment matters and should be subject to ―fit-and-proper‖ requirements. There should also be an induction policy for new members and a training programme to ensure that the knowledge and skills set of the Board‘s members is kept up to date.
Transparent, formal appointment procedures should be set out for board members (independent selection committee and public hearings / approval by the MHLW or the Japanese Diet), along with criteria required to fulfill the role, fixed term appointments and clear guidelines for when/ how they may be removed.
The responsibility of the government vs. GPIF should be clarified. Given its responsibility for the operation of the public pension system, the MHLW should establish the overall funding target of the GPIF (in consultation with the GPIF) and conduct an annual, oversight review of the organisation. The MHLW should also establish a long-term, investment performance goal of the fund consistent with the funding target and the actuarial valuations of the public pension plan.
The GPIF‘s board should alone set the investment policy for the fund, including the ongoing target rate of return, the risk tolerance for the fund and the strategic asset allocation for achieving these targets. The investment committee should be responsible for advising the board on passive vs. active investment and other aspects of the investment policy, selecting external managers, choosing specific assets, managing the tactical asset allocation around the strategic target and have day to day responsibility for the investments of the fund.