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Case Study – Responsible Investment in Japan

Written by: Megumi Terayama



DBs at risk

Secom Pension Fund

Corporate pensions' mission

Tailored Japan Equity ESG-themed strategy

Responsible corporate pensions

Issue 22

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As you may know, defined-benefit corporate pensions are a globally endangered species. Most DB plans have now closed and shifted to defined-contribution plan structures in order to release the plan sponsors from a large portion of the investment risk. Unlike the global trend, most Japanese DB corporate plans still remain open and are struggling to survive. The long-lasting, low yield of Japanese Government Bonds has hurt the pensions’ funding status and pushed them take on more risk in order to pursue higher returns. However, as for Tokyo Stock Price Index, long-term investing seems not to have paid back past in the past 20 years. The investment environment surrounding Japanese pensions is somber.



Hiroichi Yagi, Managing Director of Secom Pension Fund, contemplates the future of pension fund management.1 The Secom Pension Fund has 17,000 employees and less than 1,000 retirees. Although the pension fund retained a surplus, unlike other Japanese pension funds, Yagi felt a thorough review of the investment policy was needed after the global financial crisis. Following the crisis, the task of maximizing risk-adjusted returns is particularly difficult in a low interest rate and high volatility environment like Japan. How should the pension assets be managed, then?



Now we need to go back to the basics, Yagi said. Stable payment of pension benefits is the fundamental purpose of a corporate pension fund. The sustainability of the pension scheme should be maximized over an especially long-term horizon. The pension’s asset management should be aligned with these objectives. According to Yagi, the overall mission encompassed factors: first, the pension should be defensive, with a focus on downside risk in order to retain preserve the market value of its assets. Second, the pension fund should expect reasonable returns to sustain the scheme. Finally, pension should be accountable to its stakeholders such as retirees, employees, and the plan sponsor.



Yagi’s contemplation lead him to Responsible Investing, whereby investors integrate environment, social and governance (ESG) factors into the investment process. Companies who recognize ESG issues in the world and exert an effort to address those issues through business could be more sustainable than others. Yagi’s idea was that the pension fund could benefit from investing in sustainable businesses. Yagi believes investing in businesses effectively coping with ESG issues can help the pension protect against downside risk and ensure its long-term sustainability.
Yagi had started talking with investment managers in order to develop a Japan equity strategy reflecting his points on its stock selection. The new strategy would include companies who effectively manage ESG-related risks and opportunities and would focus on ESG themes, including corporate governance and management excellence. Through simulations and back tests, Yagi found that stocks in the proposed strategy showed earnings stability, resilience against market shocks and so on, which met his expectations.


The Mitsubishi UFJ Trust Bank ended up successfully developing the new specialized fund for Yagi. The strategy was ESG-themed, concentrated, and benchmark agnostic with stable dividends and low volatility. Yagi thought it was all set to go. However, the Great East Japan Earthquake hit right before launch. The equity market plunged and Yagi was forced to make a tough decision whether to start on schedule or to delay the launch. Ultimately, he believed that the companies in the strategy, chosen based on their sustainability characteristics could overcome and bounce back from the earthquake situation over time. He gave a green light to the investment manager after the quake. In addition, the Secom Pension Fund signed up to the Principles for Responsible Investment (PRI) on March 29, 2011.


Responsible Investing allowed the Secom Pension Fund to increase its allocation to Japanese Equity, during a time when most Japanese pension funds have been decreasing their allocations in order to reduce the overall portfolio risk. The Secom Pension Fund allocated 18% of the portfolio to Japanese Equity previously. “We kept penalizing Japan Equity in our asset allocation because, overall, it had high risk with low returns,” said Yagi. However, this ESG fund has low risk and stable dividend flows so that there is room for an increasing allocation to Japanese Equity. Yagi has given mandates to other Japanese investment managers for Japan-focused ESG strategies with the same concept. Now it is doubled in the Japanese portfolio of the Secom Pension Fund.



What should corporate pensions contribute to their society? Besides supporting the livelihood of retirees, corporate pensions also can be considered to have social responsibility. Yagi understands that the corporate pensions, through ESG investing, can provide necessary capital to companies that address ESG risks and run sustainable businesses for the long-term. At the same time, corporate pensions may benefit from the sustainable stocks in the form of stable dividend flows and low volatility of market values, which the corporate pensions truly need. We at Mercer believe that ESG investing enables corporate pensions to be both robust and responsible.




This article is based on a piece by Hiroichi Yagi for the Activity Report 2011: PRI Japan Network

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