2017 Reports

Public Pension Fund Governance and Investment: Update and Critique Comparing Japan’s GPIF with Foreign Peers

Horie, Sadayuki

Public pension fund management has undergone major changes globally over the past two decades. Pension fund management mainly involves (1) institutional design, (2) governance and (3) investment. Approaches to institutional design, the main focus of which is pension finance, differ internationally. The two main models of public pension finance are prefunding and pay-as‐you‐go. Japan has adopted a predominantly pay‐as‐you‐go model, where current labor force participants essentially fund retirees’ pension benefits. However, in anticipation of changing demographics, namely the change in the elderly dependency ratio, Japanese public pension plans have prefunded reserves to cover benefit payments in excess of contributions. Pension financing models differ internationally, reflecting differences in individual countries’ attributes such as population composition, social solidarity and national attitudes toward risk‐sharing, social insurance programs and entitlement to retirement income. This report will leave the issue of institutional design to other papers, and mainly examines public pension plan governance and investment, two areas in which global consensus on best practices exist to at least some extent.