The Current Situation of Japanese Pension Investment - Japanese Pension Fund Perspective on SRI

Fiduciary Service Research Center

Pension Investment in Japan today: perspectives on SRI

Noboru Yamaguchi

Senior Executive Advisor, Fiduciary Service Research Center, Nomura Securities Co., Ltd

TBLI Conference Asia 2009, Yokohama

May 27, 2009


Part 1 Research data

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Institute for Policies on Pension & Aging conducted a comprehensive survey on Socially responsible investment (SRI) & Principles for responsible investment (PRI) in Japan.

The research questionnaires were sent to 1,432 employee pension funds (EPF), defined benefit plans (DB), and tax qualified pension plans (TQPP).

Response rate was 32.5 % (465 response).

This data was published in January 2008.


Table 1: Do you know about CSR?

3Source: Research Institute for Policies on Pension & Aging


Table 2: Do you know about SRI?



Table 3: Do you know about PRI?



Table 4: Have you adopted SRI?



Table 5: Why did you adopt SRI?



Table 6: When did you adopt SRI?



Table 7: Ratio of SRI allocation within Japanese equity



Table 8: Level of satisfaction With SRI investment

process



Table 9: Are you satisfied with SRI returns?



Table 10: What would be necessary for you to adopt

SRI ?



Table 11: Why didn’t you adopt SRI after considering

the option ?



Table 12: Reasons for not adopting SRI now or in

future



Table 13: What would be necessary for you to change

your mind consider SRI investment?



Table 14: Have you received any proposals for SRI

products?



Table 15: What was the selling point of the SRI

investment proposal?



Table 16: How much were you satisfied by the

proposal?



Table 17: Those who did not receive proposals



Table 18: Medium-long term influence of SRI

investment



Table 19: ESG environmental, social governance and

corporate governance



Table 20: Institutional challenges to start SRI

investment



Part 2 Challenges and conclusion

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We experienced various challenges in 2008

Equity: negative return with high volatility, risk premium?

Active manager: negative α, manager selection is key

Foreign exchange risk: strong yen and weak Japanese equity co-existed, we need more advanced risk control

Rebalancing: implementation was difficult

Illiquid assets: operational risk, counterparty risk, etc

Diversified portfolio: We experienced higher correlation than normal. How can we improve this?

Pension system & liability management should be reviewed, together with investment

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Pension funds face more challenges

International accounting rules are going to be revised shortly and they will require more transparency and more mark-to-market valuation of assets and liability.

Maintaining defined benefit employees pension funds (DB/EPF) is becoming more costly for plan sponsors

Defined benefit employees pension funds (DB/EPF) are very much underfunded

Pension investment is by nature long term, but in reality the time horizon is getting shorter because of accounting rules

If we have another three years of negative returns, the future of the defined benefit (DB) system is unclear

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Conclusions

CSR/SRI are well known but PRI is not well known yet

SRI investment is very limited (6.9%)

Pension funds need more information on investment process and track record

Proposals from managers are limited and explanation of the investment process is unsatisfactory

Plan sponsor policies and pension fund investment policiesare correlated

To start SRI/CSR investment, we need long-term stability of the pension system and more confidence about the SRI/CSR investment process and returns

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The Current Situation of Japanese Pension Investment - Japanese Pension Fund Perspective on SRI

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