To ensure the Stewardship Code functions effectively, we propose specific measures to strengthen pension governance.
August 2016
Strengthening pension governance is essential to completing the governance reforms of Abenomics.
For the Corporate Governance Code to function at its fullest potential, the Stewardship Code must be effectively implemented. No matter how much emphasis is placed on “constructive dialogue,” dialogue activities and proxy voting are inherently “cost centers” for fund managers, requiring significant time and effort. Unless a fund manager’s key clients specifically demand such activities, asset managers tend to cut corners and settle for superficial actions.
Unfortunately, despite the government’s efforts, significant problems remain in Japan’s investment chain. Pension funds are the most important clients for fund managers. They entrust substantial sums on a regular basis, making them akin to gods. If pension funds clearly state that stewardship activities and ESG analysis are key criteria in selecting fund managers, “constructive dialogue” would instantly cease to be viewed as a cost center that feels like half PR.
But among the hundreds of institutional investors that have declared their acceptance of the Stewardship Code, how many non-financial listed companies’ pension funds do you think are included? At present, only one (Secom’s pension fund). Just one! With this, the code simply cannot reach its full potential.
Furthermore, while it is commonly believed that “valuing employees” is a Japanese corporate practice, institutionally speaking, Japan lacks legal systems as robust as the U.S. ERISA or the UK Pension Act for protecting workers’ post-retirement income. The specific professional knowledge required of trustees, along with the scope of their fiduciary duties and duty of care, remains unclear. Moreover, in most cases, plan participants cannot sue trustees either legally or in practice. Unlike under ERISA, participants also cannot sue fund managers or other service providers. Furthermore, when workers allege violations, there is no proactive enforcement system by authorities like those in the US or UK.
At the same time, retirement benefit systems are quite dubious when objectively evaluated from the employee’s perspective. Even if accounting provisions exist, the money isn’t actually deposited there. How many workers are aware that it’s merely an accounting figure—an account that exists only on paper? Not only is there no “separate bank account,” but there are also no other accounts or mechanisms anywhere that serve as collateral for the retirement benefit liabilities. If the company goes bankrupt, there’s a high probability employees won’t receive their retirement benefits. Interestingly, Germany has a similar system. It’s generally perceived as a mechanism where “employees lend money to the company at low interest rates.” This interpretation aligns with reality.
The pension funding shortfall for listed companies alone stands at 26 trillion yen, and this figure will undoubtedly expand further under negative interest rate policies. Yet companies bear no obligation to disclose detailed information to workers regarding these issues or the implementation status of stewardship responsibilities by individual corporate pension funds. After all, the single statement above says it all: Corporate pension funds have no obligation to declare acceptance of the Stewardship Code, and most of them do not prioritize “stewardship.”
For corporate governance and stewardship reforms to function effectively, the most crucial factor is for end asset owners such as corporate pension funds to become true stewards, upholding their fiduciary duties with professional expertise. To achieve this, strengthening pension governance and enhancing disclosure obligations to plan participants is essential.
My Proposal
Therefore, we have submitted the following specific proposals to the government regarding corporate pensions.
1) To reflect the importance of stewardship responsibilities, corporate pension funds will be required to include an explanation of “matters concerning stewardship responsibilities” in their “basic investment policy” commitments.
- Method: As shown on page 4 of the “Defined Benefit Corporate Pension Act, etc. (Excerpts)” below, insert the underlined phrase “including matters concerning stewardship responsibilities” into the “Defined Benefit Corporate Pension Act Enforcement Regulations.” (That is, that part of the Enforcement Regulations will read: “7. In addition to the items listed in the preceding items, necessary matters concerning investment operations (including matters concerning stewardship responsibilities).”) This requires corporate defined benefit pension funds to explain matters concerning stewardship in their basic investment policies. Currently, this is not mandatory. Therefore, “only one non-financial listed company has declared its acceptance of pensions.”
For reference: Defined Benefit Corporate Pension Act, etc. (excerpt)
2) To clarify the above explanation and the content of the disclosure obligation, the following wording shall be added to “About the Defined Benefit Corporate Pension Plan” in accordance with the “Proposed Additional Wording” in the following file.
- Regarding Defined Benefit Corporate Pension Plans (Notice No. 0329008 dated March 29, 2002, from the Director-General of the Pension Bureau, Ministry of Health, Labour and Welfare, to Regional Directors of Health and Welfare (Branch Offices))
1. Add the following after the provision in Section 6, “Matters Concerning the Management of Reserve Funds,” Item 1, “Regarding the Basic Policy for Management” of the same notice (after “…the guidelines for formulating the basic policy for management (Appendix 1) shall apply.”):
The matters specified in Article 83, Paragraph 1, Item 7 of the Regulations include: (1) Whether the company has declared acceptance of matters concerning stewardship responsibilities (meaning stewardship responsibilities as defined in the Principles for Responsible Institutional Investors (Financial Services Agency “Expert Panel on Japanese Stewardship Responsibilities,” February 26, 2014)), and if acceptance has been declared, the policy for addressing these principles; if acceptance has not been declared, the reasons therefor; (2) The method for informing subscribers of the business overview (including the specific method if the method specified in Article 87, Paragraph 2, Item 4 of the Regulations is selected); and (3) Matters concerning the system for continuously complying with the employer’s obligations under Article 69 of the Act.
2. Add the following after the first sentence of Section 3 under “VIII. Other Matters” in the same notice (after “…select a method that ensures reliable notification to all subscribers.”):
The matters specified in Article 87, Paragraph 1, Item 8 shall include: (1) the contact point and other contact information (including the name of the responsible person) for when a participant requests disclosure of information regarding the general status of operations related to the defined benefit corporate pension plan from the employer or other relevant party; and (2) a specific explanation of the specific actions a participant may take to pursue liability (including legal, public, and private arbitration measures) against any party in the event of illegal or improper conduct.
For reference: Defined Benefit Corporate Pension Plan – Proposed Additional Language
Recommendations of the Liberal Democratic Party’s “Project Team on the AIJ Problem” (2012)
Actually, in 2012 (four years ago), the Liberal Democratic Party’s “Project Team on the AIJ Problem” proposed the following, but its most crucial part has not been realized. Quoting from the “LDP-AIJ Problem Project Team Proposal”:
【1】 Addressing the “Structural Issues” of the Employees’ Pension Fund
(1) Establishment of the “Japanese version of the ELISA Act”
① Legislative Framework: The fundamental law governing retirement benefits and pensions. Separate system designs are established through related laws and operational regulations such as the Pension Security Act and MHLW guidelines.
② Content to be included: Eliminate the practice of placing former officials from the Social Insurance Agency and similar organizations into positions of responsibility for fund management; Promote investment education for those responsible for fund management; Emphasize the obligation for diversified investment in pension fund management; Thoroughly enforce the Prudent Man Rule and due diligence; Clarify responsibility for significant deviations from the trustee’s investment policy; Improve the transparency and disclosure of pension actuarial calculations; Strengthen reporting obligations to participating companies and supervisory authorities; Enhance the Corporate Pension Federation’s payment guarantee program.
…
【2】 Establishing Self-Responsibility and Fiduciary Responsibility Regarding the Investment Performance of the Employees’ Pension Fund
(1) Thoroughly Communicating the Principle of Self-Responsibility Regarding Market Price Fluctuation Risks for the Pension Fund
(2) Clarifying the fiduciary responsibilities of the Employees’ Pension Fund and ensuring thorough fiduciary accountability for investment results
…
(6) Strengthening penalties for financial crimes to match those under the Financial Instruments and Exchange Act
Nicholas Benes
As an Individual
Other Reference Materials