Japan takes affirmative action to help the aged
By Paul Mackintosh - 03/12/12
According to Reuters and Japanese media, Japan’s Government Pension Investment Fund (GPIF), the world’s biggest public pension fund at US$1.31 trillion, has selected four external providers, three local and one international, to conduct feasibility studies into alternative investments. The four – local law firm Atsumi & Sakai, Japanese PE research and consulting firm Brightrust PE Japan, Swiss fund of funds and asset manager Capital Dynamics, and local insurance-linked T&D Asset Management – will look at whether private equity, real estate and infrastructure (though not hedge funds) can boost the long-term returns on the GPIF’s huge asset pile, which since 2009-10 has started to make payouts to Japan’s ageing population in excess of its receipts.
Japan’s vast pensions system has for decades represented an untouchable holy grail for local and offshore general partners (GPs), as conservative limited partners (LPs) continued to favour domestic bonds at the expense even of equities. The result is that one of the developed world’s most severely ageing populations is supported by one of its least productive pensions systems. GPIF’s total return for 2011 was around 2.32%, versus 12.8% for the Government Pension Fund Norway in FY2008-09 (though the latter has also seen net negative years) and 21.7% for CalPERS in FY2010-11. Now Japan’s demographic crunch has made some policy shift inevitable. Already this year the GPIF, though still weighted 67% to domestic bonds, has started investing in emerging markets equities, and begun selling off government bonds to fund its obligations. The latest figures show a poor performance in its domestic equities holdings for the year, emphasising the need for other approaches. At least the GPIF now seems to show some sense of urgency. The contracted firms are to deliver their conclusions by March 2013.
This turn towards returns marks one more step towards the end of the ‘grand bargain’ that drove so much of Asia’s growth post-war in the 20th century, when profits from industrial development were reallocated towards producer interests rather than supporting the population’s quality of life, and public pension funds were seen as a useful capital pool. In Japan, the GPIF, along with Japan Post’s huge savings bank and insurance operations, were required to purchase so-called Zaito bonds to fund construction projects – latterly, often boondoggles for local politicians. The Japanese population looks likely to carry the results of this closed circle system well into their old age.
Private equity at least offers the prospect of more market-driven returns. Ironically, it also offers a way of achieving precisely the business-building and commercial development objectives that the original public pension schemes were used to underwrite. Local and foreign PE firms have tried repeatedly to reform Japan’s sclerotic corporations, but perhaps it is some sign of hope that one of its most rigid institutions has started to unbend, just a little, towards PE.