Prioritize reinforcing governance of public pension fund management


The Yomiuri Shimbun

To manage a massive amount of funds safely and efficiently, it is vital to build an effective organization and system suited to carrying out the task.

A council of the Health, Labor and Welfare Ministry has proposed that the current ban on direct stock investment by the Government Pension Investment Fund (GPIF) remain in place, at least for the time being.

The ruling coalition of the Liberal Democratic Party and Komeito has supported the proposal. The government has decided not to include direct stock investment by the GPIF in a bill related to pension reforms, which it plans to submit to the current Diet.

This was a reasonable conclusion, as it is not only doubtful if the GPIF, under the current structure and human resources, would be able to make appropriate stock investment decisions but also difficult to ensure impartiality and transparency in such investments.

The GPIF, which manages the reserve funds of corporate employees’ pension programs and the national pension program — worth a combined total of about ¥140 trillion — is one of the world’s largest institutional investors.

In principle, the GPIF manages funds through trust banks and other financial institutions, and is prohibited from making direct equity investments.

The GPIF had called for lifting the ban on direct stock investment on the grounds that by flexibly responding to capital market movements, it will be able to earn more profits, while reducing the commissions it pays to the trust banks.

But the decision-making power of the GPIF has been concentrated on its president, and few of its staff members specialize in fund management.

Expert panel appropriate

The council’s proposal calls for reinforcing the GPIF’s governance structure to increase public trust in it.

The main point of the proposal is to establish an executive committee, comprising financial experts and other people, with a collegial decision-making system to consider such important matters as the component ratio of management assets. This is an appropriate recommendation.

To carry out asset management stably over the long term, it will be important to develop its own specialists in fund management and enhance risk-management capabilities.

The fund’s organizational reforms, led by welfare minister Yasuhisa Shiozaki, ran into difficulties last year due to differences of opinion with the Pension Bureau. We hope efforts to develop a new structure will be expedited.

The ministry says it plans to study the issue of direct stock investment again three years from now.

Needless to say, there is risk involved in investing in stocks that fluctuate widely. Safety is an essential consideration to manage pension funds over the long term.

There is also the problem that if the GPIF takes a more active role in investing in stocks with massive amounts of pension funds, it will likely have greater influence on stock markets. This is because stock prices likely would be affected by which stock the GPIF buys and how much.

The GPIF’s fund management reforms are seen as part of the government’s measures to prop up stock prices. Should pension funds be used with short-term price increases in mind, it will distort stock prices. Sufficient consideration should also be given in this respect.

(From The Yomiuri Shimbun, Feb. 22, 2016)

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