Japan’s trifecta of challenges

After 18 years working with Japan’s leading pension funds and asset managers Chris Battaglia, president of the Global Fiduciary Symposium in Japan, is well placed to observe the pressures on the country’s retirement system and observes its evolution.

Japan has the trifecta of demographic challenges which are putting tremendous and growing pressure on its economy and social programs. A rapidly aging society, a declining birthrate, and an absence of any reliable immigration policy that might mitigate its rapidly declining population.

These challenges are well documented, and have been growing in size and scope, but now at a faster rate than expected. Japan has the highest life expectancy in the world for those who reach age 60 which increases the size and duration of the long-term liabilities of pillar one, and pillar two pension systems. “When I’m 64”, the famous Beatles song that laments the aging process, was written more than 50 years ago. In Japan, this song title might be better amended to “When I’m 84!”

According to Amlan Roy, global expert on demographics, these challenges are amplified by unsustainable promises made on the legacy benefits of Japan’s DB plans. These unsustainable benefit promises are not just a point of pain for Japan and other aging populations, but they are also the burden of much younger economies struggling to find the balance of government sponsored pensions alongside the adaptation of corporate DC plans, as well as personal savings and investment for retirement like Japan’s NISA and IDeCo programs.

To be sure, Japan is making progress with the advancement of its version of the 401(k) and the improvement of their asset management business. Many large Japanese corporations, such as Panasonic, are showing signs of success with the addition of their defined contributions plans and Prime Minister Fumio Kishida is seeking to improve Japan’s asset management business by providing incentives for foreign asset management companies to expand their business in Japan. The intended result is increased competition with the hopes to turning Japan’s famously known “saver” population into investors.

Japan, like many Asian cultures, is known for having a long-term view of the world and when it comes to pension investing, their strategy is no different. For example, many investors in the western world would find it interesting to see how a pension system like the GPIF can be sustained with nominal return targets much less than its peers at public pension systems outside of Japan.

While many public pension systems around the world continue to reach for returns of 7 per cent, or higher, Japan’s GPIF has built a sustainable plan for its system and beneficiaries with target returns at far less than half that amount. With continued emphasis on fees and an unswerving long-term approach, the GPIF reminds us that pensions are more of a diligent and disciplined exercise in liability management, rather than maximizing returns on assets.

Amlan Roy reminds us that the etymology of the word demographics is made up of two components, the Greek word, demos, and graphy, which is writing about people. These people characteristics generally fall into two categories when you think about economies and social programs like pension and retirement programs: consumers and workers (somewhere between the ages of 20-70). As Japan transitions to a defined contribution system and continues to sustain its GPIF (the largest retirement fund in the world), we have much to learn form how Japan manages and balances the unique characteristics of its aging and declining population and these two critically important cohorts that drive all economic outcomes for countries, governments, and societies.

This microsite includes stories from the Global Fiduciary Symposium held in Tokyo in November. The program is focused on highlighting major investment solutions, as well as providing updates on pension reforms in Japan and around the world. Top1000funds.com was the symposium media partner.Chris J. Battaglia