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Pension Fund Association ("PFA") takes over the pension assets of those who have left early from corporate pension plans (Employees' Pension Funds or Defined Benefit Corporate Pensions) and those who were members of dissolved or terminated corporate pension plans and invests those assets with the objective of accumulating the reserves required over the long term to ensure pension benefit payments into the future.
In order to ensure future pension benefits, it is essential that pension assets exceed pension liabilities (the amount that should currently be held for future pension benefits) by investing the pension assets. However, achieving the investment returns to meet this objective every fiscal year is an extremely difficult undertaking. This is because investment in financial instruments is always accompanied by risks, and there is no absolute guarantee of future returns on such investments.
Most financial instruments have volatility in their investment returns due to price fluctuation. Such volatility is a risk associated with investment. Investment products with higher expected returns carry relatively higher risks that are somewhat correlated to those potential returns. On the other hand, investing in instruments with lower volatility risk to avoid losses would result in a similarly low level of returns. Unfortunately, there is no such thing as high return at low risk.
Does this mean, then, that we should be content with low investment returns with reduced risks for the sake of safe investment? If investment returns are lower than the increases in pension liabilities, it will be impossible to secure the pension assets that will be required in the future and, conversely, the financial position of pensions will become unstable. In order to secure pension assets for the future, we must aim to achieve the necessary levels of investment returns within an acceptable range of risk.
In the investment of pension assets, it is important to make highly efficient investments that will achieve as high returns as possible, at acceptable risk levels, to achieve our objectives. In this respect, diversification is the key. Diversification of various kinds, including of asset classes, securities, approaches, styles, investment managers, investment timing, and investment horizons, will enable the mitigation of investment risks.
PFA pursues highly efficient investment with diversification as its basic principle of asset management.
Using the PDCA (Plan-Do-Check-Action) cycle shown below, we constantly review and assess our investment process and amend it as necessary. In doing so, we make improvements with the aim of even more efficient investment of pension assets.
[画像:Figure:Investment process]
PFA has established its Principal Policy for Investment and invests pension assets with consistency in accordance with that policy. The Principal Policy for Investment sets out the objectives and targets of investment, policy asset mix, methods for the selection and evaluation of investment managers, guidelines for investment managers, and matters concerning in-house investment.
The manner in which asset classes are combined is the greatest determining factor of investment risks and returns. Policy asset mix refers to the composition of an investment portfolio set out as investment policy.
The formulation of policy asset mix is the most important investment policy for pension asset management.
PFA formulates policy asset mix using quantitative analysis (ALM analysis, stress test, etc.) based on the characteristics of pension liabilities, with the addition of qualitative judgments. We conduct regular reviews of policy asset mix, and if any changes occur in the prerequisite conditions, we make amendments as necessary.
However, we do not make changes to policy asset mix based on short-term market forecasts. We believe that, in the investment of pension assets that enables long-term investment, instead of staking our investments on uncertain, short-term market predictions, we should invest in underlying value from long-term perspectives.
The pension assets that PFA manages and invests can be broadly divided into two types based on the characteristics of the pension liabilities. They are Basic Pension*, which include subrogated portions, and Portable Corporate Pensions* with expected rates of return of over 2%. PFA had previously managed Portable Corporate Pensions, which began in October 2005, together with Basic Pension. for reasons such as insufficient asset size, but they have since grown to an asset size that allows for more efficient asset management. Accordingly, in fiscal 2014, we began formulating policy asset mixes to suit well to the characteristics of individual pension liabilities, and we now manage these pensions separately with their own portfolios.
*Basic Pension Pension benefits, etc. funded by basic pensions and subrogated pensions transferred to PFA from Employees' Pension Funds by March 2014 and by lump-sum withdrawal payments and dividends of residual assets transferred by September 2005. Basic pensions and subrogated pensions include benefits that pay a portion of the Employees' Pension on behalf of the state.
*Portable Corporate Pensions Pension benefits, etc. funded by the amounts equivalent to lump-sum withdrawal payments (early seceding) and dividends of residual assets (dissolution and termination) transferred to PFA in or after October 2005.
Based on a policy asset mix that has been established in advance for each funded level (ratio of pension assets to pension liabilities), Basic Pension are managed with a dynamic allocation strategy, in which asset allocations are revised in accordance with changes in funded levels.
| Funding ratio | Domestic and foreign bonds | Domestic and foreign equities |
|---|---|---|
| Less than 105% | 50% | 50% |
| 105% or more and less than 110% | 55% | 45% |
| 110% or more | 60% | 40% |
| Bonds | Global equities | |
|---|---|---|
| Policy Asset Mix for Portable Corporate Pensions |
80% | 20% |
For details of policy asset mix, click here.
PFA implements rebalancing from risk management perspectives. The actual composition of an investment portfolio can deviate from the policy asset mix due to market fluctuations. Because ignoring this would mean taking unintended risks, adjustments are needed to counteract the deviation, in a practice known as rebalancing.
Rebalancing is undertaken in principle in cases where actual asset allocation deviates from an acceptable range due to market fluctuations. However, even when the deviation is within the acceptable range, rebalancing may also be carried out from risk management perspectives, after a comprehensive assessment of factors such as transaction costs and the potential impacts of transactions on the financial markets.
Benchmarks and deviation limits have been established in the Principal Policy for Investment for policy asset mix in accordance with funding ratios. These are revised as necessary in the event of any changes in the underlying conditions, such as structural changes in the pension liabilities, future cash flows, and the long-term expected returns of each asset class.
We also conduct regular reviews to determine whether or not any such changes have occurred.
The manager structure determines the combination of investment styles and approaches for each asset class in our investment of those assets. Once this combination has been decided, we select the investment managers (investment institutions such as trust banks and investment advisory firms) that are best suited to each investment style and approach. As it is the individual investment managers that will actually execute the investments, ultimately, this process enables us to build the best combination of investment managers.
PFA selects the most suitable investment managers for the respective investment styles and approaches for each asset class. To that end, we have adopted a manager entry system for the purposes of the extensive research of information about investment institutions and the ongoing, efficient evaluation of managers. This system allows us to regularly obtain performance data even from investment managers that we have not engaged, to ascertain and evaluate the state of their investments on an ongoing basis.
[1] Evaluation of investment managers The manager entry system, where managers can apply for PFA's future consideration to be the candidates, is used to continuously monitor the management of both investment institutions that we have engaged and those with which we do not have contracts. We conduct comprehensive evaluations that include, in addition to assessment of investment performance, qualitative evaluation of factors such as whether the investment managers are conducting their investments in line with their investment policy, whether there have been any changes in their investment philosophy, approach, and structure, and whether such changes (if any) will help enhance their investment capabilities.
[2] Replacement of investment managers Based on these comprehensive evaluations, we replace investment managers as needed. To evaluate managers' essential management capabilities properly, we evaluate their performance over as long a period as possible and make changes in accordance with the degree of confidence in their future performance.
