Japan Sees Trouble Ahead for Public Pension; Report Paves Way for Reshuffle of $1.27 Trillion Pension Fund

Japan Sees Trouble Ahead for Public Pension

Report Paves Way for Reshuffle of $1.27 Trillion Pension Fund

ELEANOR WARNOCK

Updated June 3, 2014 10:22 a.m. ET

TOKYO—Japan’s health ministry released a financial outlook for the public pension system Tuesday, paving the way for the nation’s gigantic pension reserve fund to reshuffle its investment portfolio.

The estimate indicated that unless there is more participation in the work force by women and older people, boosting the flow of taxes into the system, the government could struggle to meet a pledge to pay retirees benefits worth at least 50% of their take-home salary for the next 100 years.

Yet the forecasts don’t require that the reserve fund make significantly better returns than it is achieving now in order to meet its goals. That could frustrate politicians and investors who are calling for the nearly ¥130 trillion ($1.27 trillion) reserve fund—the Government Pension Investment Fund—to become a dramatically more aggressive investor.

The results of the health ministry’s survey have been anticipated by investors because they are seen as setting the tone for the GPIF’s future investment plans, likely to be announced after July. Prime Minister Shinzo Abe’s administration has targeted an overhaul of the fund’s 60% weighting to low-yielding domestic bonds as the nation faces mounting payouts to retirees.

The sheer size of the fund means even a 1% shift in assets could send more than $10 billion out of Japanese debt and into other global financial markets.

“I understand that the report says that if the percentage of women and older people working rises, we can fully maintain the public pension system for 100 years, so there’s no change in our efforts to increase the percentage of those people working,” Chief Cabinet Secretary Yoshihide Suga told reporters Tuesday about the report.

He also said that based on the result of the outlook, it would be necessary to review the GPIF’s investment strategy.

Under a middle-of-the-road scenario for growth published by the health ministry, the fund will be expected to earn a return of 1.7 percentage points higher than growth in wages over the long term. Since pension payments are decided based on earnings, the health ministry publishes GPIF’s investment-return target in relation to wage growth.

That target is 0.1 percentage point higher than the GPIF’s current 1.6 percantage-point target, calculated in 2009, when the health ministry most recently surveyed the finances of the public pension system.

The GPIF has been able to meet its return target in recent years mostly because wages have fallen. For the seven years through March 2013, its average return exceeded the change in wages by 1.99 percentage points.

At a health ministry pension-committee meeting where the report was presented Tuesday, one panel member expressed concern that the target return could be criticized as being set too high in order to patch up weaknesses in the broader pension system.

Teruyuki Katori, head of the health ministry pension bureau, said the fund had been able to meet and exceed its investment targets in both good and bad times.

Setting the target “is about considering what kind of spread [over wage growth] you will get in the specific economic conditions of that time, so I don’t think this is an issue of the spread being set a little too high in order to stabilize pension finances,” he said.

Yet with the 10-year Japanese government bond yield at 0.6% and consumer prices increasing for the first time in 15 years, actuaries and pension consultants say the GPIF won’t be able to meet its return target by relying mainly on government debt.

A government-appointed panel of experts advising on the outlook for the pension system wrote in March that it wasn’t necessary to stick to a domestic bond-centric portfolio, even though “under deflation, domestic bond-centric investments might have been safe and efficient.”

The government promised in 2004 that it would keep the ratio of benefits to salary above 50%.

According to Tuesday’s report, that ratio will fall to a little more than 50% in about 30 years even if more women and elderly are assimilated into the workforce, down from 62.7% in the fiscal year that started in April.

If the level can’t be guaranteed by the next pension projections, due in five years, the government will be obligated to take steps to correct that.

In the outlook released Tuesday, the health ministry also calculated scenarios including extending the period for which workers can pay into the basic pension system. Health ministry officials have said that the additional calculations will set the stage for debate on potential pension overhauls in order to maintain the system.