Japan Changes Focus of Pension Plan Investments

October 24, 2005 (PLANSPONSOR.com) - A Greenwich Associates report reveals that a substantial majority of Japanese financial institutions and pension funds plan to increase their allocations to alternative investments.

A sizable proportion of Japanese institutional investors are planning to reduce their allocations to equities, both domestic and international, while those that are planning to significantly alter their levels of domestic fixed-income exposure are about evenly split between those planning increases and those planning reductions, according to a Greenwich Associates press release.

As far as alternative investments, though, 122 Japanese investors told Greenwich Associates that they plan to increase their allocations to hedge funds, and only four plan to decrease them.   For real estate, the number of investors planning to increase allocations outnumber those planning cuts by a margin of about 25 to 1, and for private equity the ratio is 35 to 1.

Japanese pension funds and financial institutions have adopted hedge funds at a much faster pace than their counterparts in other markets.   According to the release, almost 55% of Japanese institutional investors currently invest in hedge funds, and over 15% plan to begin using a new type of hedge fund in coming months.    Meanwhile, only 28% of US institutions invested in hedge funds at the end of 2004, and only 10% of UK institutions did this year.

In addition, the research found that a pproximately one quarter of Japanese defined benefit pension plans will be closed to new employees by 2008.   Twelve percent of defined benefit pension plans have already been shut to newly hired employees and 11% of plan sponsors anticipate closing off their plans to new employees within the next two or three years.

The decision to close DB plans is mostly due to the increasingly difficult task of funding the plans. While 30% of the country’s pension funds are now at least 90% funded, the typical Japanese pension fund holds assets covering just 83% of projected benefit obligations.    The amount of Japanese pension assets in traditional defined benefit plans has decreased to 72% in 2005, in part due to conversions to cash balance plans.   Sponsors say they expect that number to further decline to about 50% within the next 10 years.