June 23, 2010 / 7:45 AM / in 9 years

UPDATE 1-Japan public pension fund may need asset split -panel

* GPIF assets should be split to raise transparency - panel

* Some also want asset allocation left unchanged - panel

* GPIF world’s biggest pension fund, Y122.5 trln in assets (Adds background, analyst comments)

By Chikafumi Hodo

TOKYO, June 23 (Reuters) - Japan’s $1.35 trillion public pension fund may need to split its asset management into two portions — one for safe assets and one seeking higher returns, a government panel said in an interim report on Wednesday.

Such a move could make the fund more transparent to the public, the report said.

But opinions in the panel were divided on the issue, with some also saying that it could complicate matters and be more costly, and that the overall asset allocation should remain unchanged.

The panel, composed of university professors and private-sector financial experts, has been studying how best to organise the Government Pension Investment Fund, the world’s biggest public pension fund whose 122.5 trillion yen in assets under management is greater than India’s GDP.

Investors closely monitor the GPIF for possible shifts in its asset management as even a minor change could have major implications for financial markets, especially Japanese government bonds, where it parks two-thirds of its portfolio.

The panel held its first meeting in November amid mounting criticism that the fund’s management strategy is too conservative with too heavy a weighting in JGBs. The benchmark 10-year JGB yields about 1.165 percent, the lowest among Group of Seven developed countries.

The review also comes after the GPIF suffered a 9.7 trillion yen loss in the fiscal year ended March 2009, despite its relatively conservative investment stance.

The panel is proposing a further look into whether the fund’s management should be divided into safe assets such as JGBs and another pool of assets for riskier investments that could yield higher returns, according to the interim report.

The panel also called for the need to improve the governance of the GPIF, whose chairman is solely responsible for investment decisions.

The panel aims to issue a final report of recommendations by the end of the year.

Industry sources have mixed views on the idea of splitting the GPIF’s assets.

“Public pension funds should stick to safe assets in principle, but it’s natural to pursue higher returns considering the GPIF’s enormous asset size,” said a senior pension fund consultant, who spoke on condition of anonymity.

“Pension recipients would want the GPIF to stick to safe assets. But younger people, or future recipients, may want the GPIF to take more risks and seek higher returns by taking on more exposure in emerging markets, which could be more promising than investing into conventional assets,” he said.

The consultant said the government should open the debate more widely to the public to seek more opinions.

The idea of dividing up the GPIF’s portfolio may also require legal changes, industry experts said.

Key government ministers have shown differences in opinion.

Internal Affairs Minister Kazuhiro Haraguchi told Reuters in April the GPIF could increase investments in emerging economies such as the so-called BRIC nations or could possibly finance government projects, such as foreign aid loans. [ID:nTOE60609M]

But GPIF Chairman Takehiro Mitani, who became head of the public fund in April, told Reuters last month that the GPIF would continue to focus on safe assets. [ID:nTOE64G07R]

Mitani said the GPIF is not thinking about investing in new asset classes such as hedge funds or emerging markets. ($1=90.51 yen) (Reporting by Chikafumi Hodo; Editing by Chris Gallagher)

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