APAC pensions industry and recent trends in Japan

June 15, 2021 08:28
People aged 65 and over make up 28.7% of Japan’s population, and this proportion is projected to reach 35.3% by 2040.  Photo: Bloomberg

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

However, the Mercer CFA Institute Global Pension Index Report 2020 showed that Asia’s pension funds slightly lagged their global peers in performance last year. Indeed, many will face further challenges as the market impact of Covid-19 will likely delay urgently needed reforms. This will further stress Asia’s retirement fund systems, which are already tackling aging demographics and a low-growth, low-interest rate economic environment that has hindered some retirement schemes from funding future liabilities.

Despite these challenges, the Government Pension Investment Fund of Japan (GPIF) remains the world’s largest pension fund, with JPY177.7 trillion (USD1.72 trillion) in AUM (as of December 2020). It is more than 40% bigger than the second-largest fund, the Government Pension Fund of Norway.

Pensions industry in Japan and cross-border investments
As pension funds maintain their status as one of the largest asset owners globally, asset globalization and foreign content in domestic portfolios continue to rise. Traditionally, pension funds have invested in bonds and equities, but they have diversified their portfolios’ asset classes and geography in recent decades. This trend toward foreign investments has led to increased foreign exchange (FX) trading within portfolios.

As of 2018, foreign investments accounted for roughly a third of global pension funds’ total AUM and 34% of total pension investments (compared to 31% in 2014). Increasingly, this diversification is seen as necessary for the success of pension funds since safe-haven investments are less attractive in a consistently low-interest rate environment.

For instance, the GPIF announced a new policy in April 2020 to increase foreign asset allocation from 40% to 50% of its total portfolio (25% each for foreign bonds and equities). In fact, it has continued to increase its investment in riskier stocks and allocate more of its portfolio to overseas bonds, heightening exposure to volatility. However, if the entire portfolio were comprised of Japanese government bonds, the reserves would dry up by the 2060s and affect pay-outs to seniors. Therefore, GPIF’s approach has been to actively seek risks even when asset values have fallen.

The pandemic has prompted pension funds in Japan to think about their future investments, the proper level of diversification and how best to achieve it. In recent months, Japanese pension funds have driven the country’s growing appetite for the higher yields of overseas bonds, with GPIF leading the charge.

Pension reforms

In Asia Pacific, many countries continue to face longstanding and wide-ranging changes and challenges in pension system reforms due to rapid shifts in demographics, including longer life expectancies and declining birth rates. According to the Mercer CFA Institute 2020 Global Pension Index, the region’s pension fund index value, which measures the adequacy, sustainability and integrity of retirement systems, fell slightly from 2019 to an average score of 52, against a global average of 59.7.

For most Asian countries, pension system development remains at an early stage. However, improvements are expected in some countries that have started to take active measures. People aged 65 and over make up 28.7% of Japan’s population, and this proportion is projected to reach 35.3% by 2040. The new administration will likely encourage those eligible to delay drawing on their pensions until at least age 70 to improve the cashflows of the public pension and make it easier for public pension funds to invest in illiquid assets.


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

In a growing market such as the pensions industry, where global trends indicate greater exposure to foreign assets and insourcing of portfolio management activities, understanding and mitigating FX settlement risk are essential for ensuring stability of the FX market and reducing risk globally.

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General Manager for Japan & Korea, CLS Group.