Risk Management and Governance
of Corporate Pension Funds in Japan
APRIA 18th Conference at Moscow State University
2014Annual Conference July27-30,2014
Yamaguchi University , Faculty of Economics
Masatoshi SUGINO &Shigenori ISHIDA
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Agenda
1.
2.
3.
4.
5.
About AIJ in Japan
Our research purpose
Hypothesis
Method and DATA
Conclusion and Future issues
2
1.AIJ Scandal
 AIJ Investment Advisors ("AIJ") was a Tokyobased alternative investment manager that managed
primarily Japanese pension fund assets.
 January 2012, an investigation by the Securities and
Exchange Surveillance Commission revealed that
AIJ had long falsified its performance. An amount
of approximately JPY 200 billion (USD 2.5 billion),
had disappeared. Because, a part of this money
belongs to the public pension (substitutional part of
Employee's Pension Fund) , this scandal had major
impact.
Description of AIJ Scandal
discretionary investment
management agreement
AIJ investment advisory
Director:Kazuhiko Asakawa
discretionary
investment
management
agreement
100%
Investment
AIA
(fund management company)
Director:Kazuhiko Asakawa
super
vision
Trust
Agreement
Domination
Trust bank
Audit
firm
(Cayman)
super
vision
subcontracting
NOTE: March, 2014 “Securities and Exchange Surveillance Commission
reference”
Purchasing offer
ITM securities
super
vision
Trust
Agreement
Trustee bank
(Cayman)
Corporate pensions
Purchasing offer
AIA global fund
(Cayman)
derivative transaction
etc.
1.AIJ Scandal
 A lot of Japanese Corporate pension fund are
suffering from high assumed interest rate needed to
maintain the own fund. Such hard situation forced
contracted with the investment advisory that
advocated abnormally high investment return .
 At the same time, it is pointed out that a part of
managers was lack of asset management
knowledge. It has become a necessity not only
rebuilding of regulation by government agencies,
but also rebuilding the governance of corporate
pension fund.
2. Our research purpose
 Stakeholders involved in the governance of
pension funds include participating employees,
pension beneficiaries, the parent entity
(stockholders), the pension fund (administrator,
board of representatives), and entities to which
pension assets are consigned.
 The ties between stakeholders who enter into
consignment contracts are regarded by agency
theory as relationships between principal and
agent.
 We focus on the relationship between the
governance structure of pension funds and it’s
founding ratio, which high figure makes sure of
providing pension benefits.
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2. Our research purpose
 We pick up Governance and Risk Management of pension
fund assets and liabilities.
 Until now, awareness of pension liabilities in international
accounting standards and the evaluation and handling of
financial reporting of assets and liabilities, as well as
accounting methods for cost items occurring in defined
benefit corporate pensions, have been continually discussed
both in Japan and abroad.
 Within these discussions, the trend is to immediately recognize
pension obligations on the balance sheet. Each cost item is listed
under separate categories in the income statement to record profits and
losses during the accounting period. This type of treatment is
important when managing pension fund risks and identifying problem
areas.
2.Our research purpose


We examine methods of determining and amortizing unrecognized liabilities. In
accounting in Japan, investment gains and losses are not directly reflected within the
pension benefit costs of a single year, but are widely allocated as unrecognized liability.
A downside is a tendency to overlook such profits or losses because such profits and
losses from risky investments with large changes in asset values are not reflected as
expenses. In other words, deviations of fund income from such investments are
reflected as unrecognized liabilities. Although these deviations may be considerable at
certain points in time, if it is possible to amortize profits and losses over the long-term,
associated deviations in retirement benefit costs decrease annually, resulting in
underrating the negative impact to corporate profitability.
if the trend toward risky assets strengthens based on such accounting methods, the
expected returns on asset increases as deviations from investment earnings widen. On
the contrary, there is even the possibility of reducing costs and raising corporate
profitability through increasing the expected return on assets. Therefore, buffering
measures for accounting of unrecognized liability hides the actual risk of pension funds
and leads to risky investment behavior.
2.Our research purpose
<Accrued retirement benefits = pension benefit
obligation − pension assets − unrecognized debt>
<Cost of retirement benefits = service costs +
interest costs − expected return on assets +
amortization of unrecognized debt >
< Cost of retirement benefits = service costs +
interest costs − expected return on assets +
amortization of unrecognized debt (expected
return − return on plan assets) = service costs +
interest costs − return on plan assets>
3. Hypothesis
 We explore how the governance of corporate pensions deters
the increased risk that these buffering measures have on
pension asset management. Investment profit and loss are
also reflected as unrecognized obligations in retirement
benefit accounting.
 Furthermore, a high expected return on assets alone
indicates a high proportion of risky assets. For this reason,
as a discount rate for purposes of accounting, the fact that
unrecognized liabilities are considerable and the expected
return on assets is high should indicate a high proportion of
risky assets.
 Hence, there are no problems if these indicators are strong
and if the funds have plenty of assets and low short-term
expenses. However, there is a moral hazard if the level of
funding is low and expenses are high.
3. Hypothesis
 In other words, if balance is achieved between a
high level of funding and low costs in the short
term, increased freedom in investment behavior
associated with relaxed regulations leads to the
expectation of good results from governance.
 However, if low levels of funding and high costs
occur in addition to the relaxed regulations, the
fact that the results of buffering measures for
accounting purposes have poor results.
4. Method and DATA
 Retirement benefit data is used to consider the selection of
basic assumptions and the impact on accounting standards
with regard to causes of insufficient funding. We also
analyze the impact that governance of pension funds have
on insufficient funding.
 The data used was Nikkei retirement benefits and financial
data from 4,240 companies.
 In addition to financial data, the extracted data also
included retirement benefit obligations, costs, funding
ratios, etc.
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4. Method and DATA
 The surveyed period comprises the three years
from April 2008 to March 2011.
 The pension benefit obligations and funding ratios
are based on PBO.
 Over the three-year period, the ratio trends from
58.9% to 55.8% to 65.3%.
4. Method and DATA
 From the characteristics of the data, it should
be noted that this is merely a verification using
numbers from corporate accounting, and not a
direct survey of pension financing.
 For the analytical method, rather than
regression analysis with controlled corporate
attributes, Probit method clarifying differences
in funding standards according to corporate
attributes is used.
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4.Method and DATA
 The main corporate attribute variables were plan maturity,
discount rate within the assumptions, expected return rate
on investments when there is discretion in the selection,
and ratio of unrecognized liabilities to PBO.
 Other included variables were average age impacted by
retirement benefit obligations, average salary and years of
service, a proxy variable for size of the entity, and
financial status indictors for the parent entity, such as debt
to capital ratio.
4.Method and DATA
 Although it is preferable to be able to index the governance status of
pension funds, unfortunately, it is difficult to include the expertise of
personnel in charge and the level of organization of the entity within
the variables because of the financial nature of the data. Hence the
number of implementations of applicable retirement plans (defined
benefit corporate pensions, cash balance plans, and defined
contribution pensions ) is used as a proxy variable.
 Within entities that have multiple plans, it is expected that
management systems are firmly established and that there
is an abundance of specialized personnel.
5. Results ; basic statistics
Defined Benefit
Corporate Pension
Inside company
(1)
N
Min.
Max.
Statistic
Statistic
Statistic
Average
Statistic
Std.error
Std.dev.
Statistic
Funding Ratio
1498
.00
2.29
.6183
.00636
.24626
Age
1495
28.40
56.00
40.1899
.07972
3.08247
Years of Service
1495
1
28
15.14
098
3.801
(ln) Salary
1495
14.82
16.48
15.5988
.00560
.21635
Maturity
1395
-.143
1.381
.05881
.001412
.054655
Discount
1395
.50
10.00
2.1034
.02022
.054655
-3.30
9.00
2.2801
.03175
1.15590
Investment Return 1325
(ln) Revenue
1498
7.03
16.77
11.1570
.04053
1.56868
(ln) Employee
1495
.69
11.14
6.5834
.03458
1.33721
(ln) Capital
1497
4.50
14.60
8.8127
.03903
1.51000
Pension Fund
Established by
Single company
(2)
N
Min.
Max.
Statistic
Statistic
Statistic
Average
Statistic
Std.error
Std.dev.
Statistic
Funding Ratio
93
.00
1.20
.5338
.02665
.25699
Age
93
29.20
56.0
39.9921
.13360
3.33547
Years of Service
93
3.70
23.60
15.0645
.45754
4.41235
(ln) Salary
93
14.76
16.14
15.6728
.45754
4.41235
Maturity
94
.000
.821
.06350
.010318
.100041
Discount
87
.90
6.20
2.0687
.05776
.53871
Investment Return 84
.28
8.80
2.5288
.13018
1.19313
(ln) Revenue
94
7.70
16.15
12.1314
.19658
1.90590
(ln) Employee
93
1.39
10.51
7.0224
.18359
1.77052
(ln) Capital
94
5.34
13.76
9.8144
.19020
1.84410
Pension Fund
Established by
Several company
(3)
N
Min.
Max.
Statistic
Statistic
Statistic
Average
Statistic
Std.error
Std.dev.
Statistic
Funding Ratio
700
.00
1.51
.4288
.01271
.33623
Age
696
29.10
56.00
39.9216
.12560
3.31357
Years of Service
696
1.50
28.00
13.4283
.17087
4.50779
(ln) Salary
696
14.79
16.48
15.5476
.00837
.22084
Maturity
700
-.143
26.500
.18447
.044206
1.169574
Discount
530
.40
10.40
2.0737
.04063
.93540
Investment
Return
417
-3.30
8.50
2.1611
.06309
1.28839
(ln) Revenue
700
5.95
16.08
10.3926
.05711
1.51097
(ln) Employee
696
.69
10.55
5.8481
.05219
1.37697
(ln) Capital
699
4.50
13.40
8.0303
.05053
1.33599
Figure 1 Regression Results
Variable
Intercept
Pension Fund Ratio
(1)
Pension Fund Ratio
(2)
Pension Fund Ratio
(3)
-1.304
-0.780
-1.038
(2.642)
(0.845)
(1.100)
-0.031
0.000
0.005
(3.968)
(0.103)
(0.376)
-0.010
-0.009
-0.008
(3.606)
(1.464)
(1.479)
-0.007
0.002
-0.001
(2.902)
(0.507)
(0.330)
0.166
0.103
0.121
(5.122)
(1.658)
(1.903)
-0.001
0.010
0.016
(0.123)
(0.812)
(1.422)
-1.391
-0.006
-0.758
(5.721)
(2.240)
(2.810)
0.007
0.002
-0.001
(1.217)
(0.205)
(0.067)
Adj R2
0.072
0.024
0.030
D.W
1.963
1.914
1.979
F Value
15.652
0.314
2.840
Industry Dummy
Age
Years of Service
Salary
Employee
Maturity
Investment Return
Figure2 Probit Results
Explanatory
Variable
PROBIT
Average age
95% confidence
interval
Estimate Standard
value
error
-.030
.010
Z value
-3.020
P value
.003
Min.
-.049
Max.
-.010
.506
.141
3.584
.000
.229
.783
Ratio of
maturity
-.444
.288
-1.539
.124
-1.009
.122
Average
earning ratio
-.023
.026
-.898
.369
-.073
.027
Unrecognized
debt ratio
1.993
.324
6.151
.000
1.358
2.628
.121
.036
3.317
.001
.049
.192
-6.939
2.114
-3.283
.001
-9.052
-4.825
In average
salary
Number of
plans
Constant term
6. Conclusion
 To be constant of characteristic of companies and the financial
condition, we reveal the influence of the proxy pension fund
governance at figure 2. We could find fine correlation between the
proxy and the funding level. However, to concrete the relationship, we
must introduce the governance situations of pension funds into the
regression, the each case of pension funds.
 As reference to another variables, the average high age of employees
and the maturity of pension funds make the rate of funding downward.
 On the other hand, the average high salary makes it upward.
 As concern as the financial condition, the influence of the
unrecognized debt ratio(versus PBO) is the expected one, but that of
earning ratio isn't expected.
 Almost our hypothesis isn't rejected, but some correlation isn't
expected, we are going to reexamine the used data and rebuild our
regression model for more research.
Reference
 Akio Nomura(2013), "Taking Japanese's Defined Contribution Pension Plans
to the Next Level", Nomura Journal of Capital Market, Vol.4, No.3, 1-26
 Amalric, F.(2006), “Pension funds, corporate responsibility and
sustainability”, Ecological Economics, Vol. 59, No.4, 440-450
 Bikker, J.A. and De Dreu, J.(2009), “Operating costs of pension funds: The
impact of scale, governance, and plan design”, Journal of Pension Economics
and Finance, Vol.8, No. 1, 63-89
 Kowalewski,F.(2012), “Corporate governance and pension fund performance”,
Contemporary Economics, Vol.6, No.1, 14-44
 Schieber, S.J.eds.(2004), Living with Defined Contribution Pensions, Univ. of
Pennsylvania Press
 Mackenzie,G.A.(2006),Annuity Markets and Pension Reform, Cambridge
Univ. Press
Thank you for your attention.
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