World’s Largest Pension Fund Ups Scrutiny of Index Investments

Japan’s $1.5 trillion retirement program wants to improve its passive management strategy. 

The world’s largest pension fund is boosting its oversight of index providers. 

The Government Pension Investment Fund (GPIF) in Japan launched its own cloud-based data and analytics portal to track and select indexes and support its own passive strategies, the pension fund said Thursday. 

Called Index Data Entry and Analysis System (IDEAS), the data platform will aggregate environmental, social, and governance (ESG), financial, and non-financial data poured into the system, which collects information from index providers. GPIF hired data provider FactSet to power information in the system. 

“GPIF is taking an extremely advanced approach to improving index selection that will drive results for asset owners,” Yumi Tanaka, regional director of FactSet Japan, said in a statement.

It’s a highly unusual move from the government pension fund, as asset owners typically do not interact directly with index providers, let alone build their own proprietary data centers. 

But the Japan GPIF, which relies heavily on passive strategies, has said for some time that it’s looking for returns in a highly saturated market. Valued at $1.5 trillion, the pension plan is mostly forbidden from managing assets in-house, considering it too costly. 

Instead, it’s searching for better opportunities within passive management, according to a working paper earlier this year from Kenji Shiomura, senior director of ESG strategy at the fund. Shiomura argued the fund should contract directly with index providers and choose benchmarks likely to generate greater returns for its managers. 

“Asset owners are the ones whose performance and appraisals are impacted the most by proper benchmark selection and quality improvement,” the report read. 

Paying license fees directly to index providers would also help GPIF better ascertain performance and gauge fees for its fund managers, the report said. 

“This leads to greater passive manager revenue transparency and is a step toward establishing a more logical fee structure in which managers are rewarded according to their actual contribution,” the report read. 

Passive managers who are typically focused on reducing index tracking errors and lowering costs could concentrate instead on spotting opportunities around index rebalancing, the report said. Accounting for climate change and ESG-related risk should also be part of a fund manager’s repertoire, Shiomura said. 

The retirement system also hired CTC to house its data center. SAS Institute will provide the analytics software and Amazon Web Services was hired to power the cloud computing system.

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