APAC pension industry and recent trends in Japan EJINSIGHT

Pension assets in the largest pension markets grew by 11% in 2020, according to Willis Towers Watson’s Global Pensions Assets Study 2021. Asia-Pacific pension funds beat their peers in terms of asset value growth in 2019, according to a report on the Thinking Ahead Institute’s Top 300 Pension Funds in the World. Assets under management (AUM) of the top 20 pension funds grew 8.1% year-on-year in 2019, driven by 10.6% growth in Asia-Pacific fund assets.

However, the Mercer CFA Institute Global Pension Index Report 2020 showed that Asian pension funds lagged slightly behind their global peers in terms of performance last year. Indeed, many will face other challenges, as the impact of Covid-19 on the market will likely delay urgently needed reforms. This will further test Asian pension fund systems, which are already grappling with aging populations and a low growth, low interest rate economic environment that has prevented some pension schemes from funding their future liabilities. .

Despite these challenges, the Government Pension Investment Fund of Japan (GPIF) remains the largest pension fund in the world, with JPY 177.7 trillion (USD 1.72 trillion) in assets under management (as of December 2020). It is over 40% larger than the second largest fund, the Government of Norway Pension Fund.

Japan’s pension sector and cross-border investments
As pension funds retain their status as one of the largest asset owners in the world, the globalization of assets and the foreign content of domestic portfolios continue to increase. Traditionally, pension funds have invested in bonds and stocks, but they have diversified asset classes and the geography of their portfolios in recent decades. This trend towards foreign investment has led to an increase in currency trading (FX) within portfolios.

In 2018, foreign investment represented around one-third of total assets under management of global pension funds and 34% of total pension investment (up from 31% in 2014). Increasingly, this diversification is seen as necessary for the success of pension funds since safe-haven investments are less attractive in an environment of persistently low interest rates.

For example, GPIF announced a new policy in April 2020 to increase the allocation of foreign assets from 40% to 50% of its total portfolio (25% each for bonds and foreign stocks). In fact, he continued to increase his investments in riskier stocks and allocate more of his portfolio to foreign bonds, thereby increasing his exposure to volatility. However, if the entire portfolio were made up of Japanese government bonds, reserves would dry up by the 2060s and affect payments to seniors. Therefore, GPIF’s approach has been to actively seek out risks even when asset values ​​have fallen.

The pandemic has prompted pension funds in Japan to think about their future investments, the right level of diversification, and how best to achieve it. In recent months, Japanese pension funds have fueled the country’s growing appetite for higher yields on foreign bonds, led by GPIF.

Pension reforms

In Asia-Pacific, many countries continue to face long-standing and far-reaching changes and challenges in reforming pension systems due to rapidly changing demographics, including increasing poverty. life expectancy and declining birth rates. According to the Mercer CFA Institute 2020 Global Pension Index, the value of the region’s pension fund index, which measures the adequacy, sustainability and integrity of pension systems, declined slightly from 2019 to reach an average score of 52, compared to a world average of 59.7.

For most Asian countries, the development of the pension system is still in its infancy. However, improvements are expected in some countries which have started to take active measures. People aged 65 and over make up 28.7% of the Japanese population, and this proportion is expected to reach 35.3% by 2040. The new administration will likely encourage those eligible to delay payment of their pensions until at least 70 years to improve public pension cash flows and facilitate the investment of public pension funds in illiquid assets.


As pension funds increase their investments abroad, they hold more foreign currencies in their portfolios which could be hedged by currency trading. This is supported by data from CLS, which settles more foreign currency payments than any other settlement service. Analysis of CLS data suggests that the value of foreign currency payments settled in CLS on behalf of pension funds increased by around 40% globally and by more than 75% in the Asia-Pacific region between 2016 and 2019. .

In a growing market such as the pensions industry, where global trends indicate greater exposure to foreign assets and the internalization of portfolio management activities, understanding and mitigating foreign exchange settlement risk is essential to ensure the stability of the foreign exchange market and reduce risks on a global scale.

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