An analysis of the $2,854bn private retirement system in Japan and how policy and structural characteristics affect sustainability.

System overview

With 297 trillion yen ($2,854 billion) in assets, the Japanese pension system is the third largest in the world.1 Between public and private providers, some 54% of assets are managed by PRI asset owner signatories, a higher proportion than in Australia, the US and the UK. This report builds on ideas set out in the PRI briefing ‘Sustainable Finance Policy in Japan’, published in October 2020, providing an overview of the Japanese system and its key sustainability challenges. It concludes by making a series of recommendations to policymakers and industry participants. While Japan’s pension system has many advanced features, it has not yet been able to comprehensively reflect sustainability issues throughout the system. In this paper, we highlight three key challenges:

  1. The public pensions segment benefits from high asset concentration and strong governance arrangements, and the recently updated Basic Policy for Reserves (BPR) requires funds to take necessary steps to integrate ESG factors into investment activities. Still, how to incorporate these factors is left to the discretion of each fund.
  2. Private pensions markets are relatively fragmented in terms of assets – although the number of DB plans is falling significantly. Investment chains are complex, especially for corporate DC plans. Consideration of ESG factors is generally seen as desirable but is not explicitly and systematically required. Financial service providers play an important role and there are governance risks - for example relating to costs borne by members caused by insufficient communication between employers and Pension Management Institutions.
  3. While in recent years the leadership of the Government Pension Investment Fund (GPIF) has encouraged asset managers to focus on ESG issues, their approaches often lag those of leading international firms.

Japan’s pension system assets and PRI coverage. Sources: various sources including MHLW, GPIF, PFA, Council of Pension Management Institution, Japan Investment Advisers Association.

Total pension assets ($bn) 2,854
Workplace pension assets ($bn) 2,718
Personal pension assets ($bn)  136
Approximate total PRI signatory coverage 54%
DB as % of total workplace pension assets 95%
DC as % of total workplace pension assets 5%

Exchange rates used: $1=JPY104, all data (rounded) is from March 2020.

Responsible investment

This report should be read in the context of similar reports focusing on Australia, the US and the UK, which the PRI published in 2020. The collective aim of the four reports is to discuss the policy and structural features of pension systems and to understand how these impact the sustainability of those systems. Sustainability in this context is defined as the ability of plan boards and managers to be responsible investors, active stewards and allocators of capital to economic activities with desirable social and environmental outcomes. We have identified a range of challenges across the countries in question. One of the most important, when designing private pension systems, is that policymakers often ignore the connection between policy, structure and sustainability. To realign pension systems with sustainable, equitable economies, this gap needs to be closed.