Options to Improve the Governance and Investment of Japan's Government Pension Investment Fund

The Japanese public pension reserve fund earned its name in 2006 as part of a major governance reform that aimed at increasing the transparency and autonomy of the fund. While much improved, the new governance structure still falls short of international best practices and in some aspects does not meet some of the basic criteria contained in OECD recommendations, in particular the OECD Guidelines for Pension Fund Governance (OECD 2009).

The main concerns over the governance structure of the GPIF are the following:

The GPIF does not appear to be a fully independent, segregated entity. The Ministry of Health,
Labour, and Welfare (MHLW) takes on some functions of governing body of the reserve fund. It
has some influence over the GPIF‘s staffing (a few GPIF employees are civil servants from the
MHLW) and sets out medium-term goals for the fund. It is also unclear whether the Ministry also
plays a role in the formulation and approval of the strategic asset allocation, a key responsibility
that is in principle under the responsibility of the chairman of the GPIF. At least one aspect of the
GPIF‘s investment policy, passive management, is determined by the MHLW.

As an Independent Administrative Agency, the GPIF is subject to government wide restraints on
operating costs, including controls on the fund‘s staff remuneration policy – however investment
management costs are exempt. This may be creating a bias towards outsourcing, which is not
necessarily in the best interests of the fund. Cost controls also explain the GPIF‘s relatively small
staff.

The GPIF has a Chairman, a Director (Chairman‘s aide/Counsellor) and two Auditors, which is in
line with the Japanese legislation‘s requirements for Independent Administrative Agencies.
However, such a structure is atypical for a pension fund, especially one of the size of the GPIF‘s.
This legislative requirement impedes the clear separation of oversight and executive
responsibilities between a Board of Directors on the one hand and a CEO (or/and CIO) on the
other. Rather, all oversight and executive powers within the GPIF are effectively concentrated in
one person, the Chairman.

There are no specific written guidelines for the appointment of the chairman of the GPIF. Although
the Chairman is required to have experience in economic and financial matters, it is not clear that
there are any relevant criteria for the Director and Auditor. The selection process is not transparent,
neither are the criteria and processes for removal.

The GPIF has also established an investment committee of a suitable size (up to eleven members), with the requirement for financial and economic experience. A few are from academia and there are also two representatives each from labour and management. None of the members of the investment committee are full-time investment managers of the GPIF, which apparently results from the cost constraints imposed by the regulations of Independent Administrative Agencies.

While there is a requirement for an annual independent audit and the GPIF itself has two internal
auditors, there is no audit committee. It is not clear therefore how effectively internal control and
audit issues are addressed. Risk management is not very developed either (there is no risk
committee and it is not clear whether the risk management function is secured).

There appears to be no requirement for the GPIF‘s Chairman to draft and publicly disclose the
following documents: code of conduct, conflicts of interest rules, and statement of investment
policy.

There are also some specific issues with respect to the governance of the investment management process that call for review such as the current practice of setting a return target linked to wage growth for performance benchmarking purposes.