Professionalizing the World’s Largest Pension

Japan’s giant pension fund is poised to improve its investment prospects with imminent reforms, an independent report says.

This year’s reform of Japan’s Government Pension Investment Fund (GPIF) is set to revolutionize its operations and ability to generate returns, according to an independent report.

A report jointly published by Cerulli Associates and the Nomura Research Institute (NRI) stated that the reforms to the ¥130.9 trillion ($1.1 trillion) pension, announced by its management team earlier this year, would help it become “more dynamic.”

“In terms of hiring, the GPIF will not be shackled by low salaries and will be better positioned to recruit top-notch talent,” said Yoon Ng, Asia research director at Cerulli Associates. “This will add more quality to its external manager selection processes.”

The GPIF—the world’s biggest pension fund—has reportedly appointed Hiromichi Mizuno as its first dedicated CIO, although the fund has yet to confirm this.

The pension is in the process of overhauling its asset allocation to double its equity exposure and increase its holdings in overseas fixed income.

“With public pension fund reforms in place, the GPIF… may show a stronger tendency to hire managers with highly distinctive investment strategies that are differentiated from and relatively uncorrelated with other companies’ strategies,” the report offered. 

Atsuo Urakabe, a senior researcher at NRI, said the new asset allocation would push the GPIF to hire managers with “highly distinctive investment strategies” that can offer uncorrelated performance, as it seeks to achieve a higher annual return.

Cerulli’s report said Japanese pension funds had been “bogged down by ultra-conservative investment policy requirements” but pointed to the GPIF’s reforms as an indication that other pensions in the country could revise their asset allocations, diversify, upgrade risk management, and reform governance.

As well as identifying external managers, Cerulli’s research paper predicted that Japanese public pension funds outside of GPIF may seek to build up their in-house expertise.

“In the long run, this will help to bring their costs down and lead to some insourcing of assets that had previously been farmed out to be managed,” the report said.

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