SWF Radar GovernmentPensionInvestmentFund

The Economist writes that, “The [Japanese] plan is a Petri dish for a potentially much bigger investment pool.”

Dow Jones reports that, Japanese Bank Minister Yoshimi Watanabe showed Thursday a supportive stance toward a government panel proposal for the creation of a sovereign wealth fund to manage the nation’s pensions, but warned that steps must be taken carefully.”

The article adds that, “A panel of the ruling Liberal Democratic Party, led by former bank minister Yuji Yamamoto, suggested the creation of a Y10 trillion sovereign wealth fund using public pension assets. … However, the group avoided calling on the government to actively manage the country’s huge foreign currency reserves, in response to opposition from other lawmakers and the finance ministry.”

As I have argued previously, categorizing a fund that invests public pension assets (which are, at least in Japan’s case, not easily described as sovereign assets) as a sovereign wealth fund raises questions about SWFs and the current debate surrounding them.

It should be noted though, that Edwin Truman of the Peterson Institute includes in his list of sovereign wealth funds (PDF) (page 8) several pension funds that are funded (at least primarily) through employee contributions. These include Japan’s Government Pension Investment Fund (GPIF), the assets of which would no doubt make up the bulk of the assets invested by the Japanese sovereign wealth fund under discussion. Truman even suggested recently that the GPIF may in fact be the world’s largest SWF.

Thomson Reuters reports that, “Japan’s public pension fund [the Government Pension Investment Fund (GPIF)], the world’s largest, said on Wednesday [at the Reuters Japan Investment Summit] it may consider alternative investments in the future, but it must take into consideration risks, market size and other factors.”

Thomson Reuters writes that, “Japan’s Liberal Democratic Party is set to call for a 10 trillion yen sovereign wealth fund using public pension funds, the Nihon Keizai Shimbun financial daily reported on Wednesday.”

The article adds that the LDP’s proposal comes amid calls for Japan’s $1.44 trillion state-run Government Pension Investment Fund, the largest in the world, to seek higher returns.

Categorizing an investment vehicle set up to invest the assets of the Government Pension Investment Fund as an SWF adds more vagueness to the already vague term “sovereign wealth fund.”

The Government Pension Investment Fund is, according, for example, to an OECD working paper (PDF) released in January 2008, a social security reserve fund (SSRF), defined as a fund that is “set up as part of the overall social security system, where the inflows are mainly surpluses of employee and/or employer contributions over current payouts, as well as, in some cases, topup contributions from the government via fiscal transfers and other sources.”

According to the report, SSRFs live alongside sovereign pension reserve funds (SPRF), which are “established directly by the government (completely separated from the social security system), [with] financial inflows… mainly from direct fiscal transfers from the government,” as one of two sub-categories of public pension reserve fund (PPRF).

Since the definition of SSRFs, of which the Government Pension Investment fund is an example, contains reference to “mainly surpluses of employee and/or employer contributions over current payouts”, such funds can only at a stretch be considered to relate to sovereign wealth, unlike their SPRF siblings. The acceptance of the term “sovereign wealth fund” to describe a vehicle designed to invest the assets of such an SSRF would therefore suggest that the sovereign character of assets under management is not a necessary condition for the categorization of such an investment vehicle as an SWF.

Although this may seem academic, it suggests that the concerns raised by sovereign wealth funds are not concerns about sovereign wealth per se but are in essence concerns about something else, such perhaps as the (at least potential) political manipulability of funds that invest abroad. If this is the case and if the concerns have indeed been misunderstood, then the distinction in the context of sovereign wealth fund investment between SWFs (in the form of such funds as ADIA and CIC) and, say, public pension funds may come to be recognized as one without a substantial difference.

Vladimir Putin’s denial to Henry Paulson yesterday of the existence of a Russian SWF, while the National Wealth Fund is generally considered to be an SWF, suggests (since the National Wealth Fund has yet to invest abroad) that engaging in foreign investment may be considered a necessary condition for categorization as an SWF, while the sovereign character of managed funds may not.

The fact that SOEs have always been discussed in the context of SWFs (and that the DP World and CNOOC debacles kicked of the contemporary debate now considered to be a debate about sovereign wealth funds in the first place) suggests, in turn, that fund-like character is also not a necessary condition for categorization as an SWF. Note also that Gazprom and other Russian SOEs are also often mentioned in the context of sovereign wealth investment, as are Chinese banks and steel companies, among others.

And the clearest recent example of protectionism against a foreign fund is that of CPPIB’s failed attempt to acquire a 40 percent stake in Auckland Airport, which was scuttled by the New Zealand government for questionable reasons. Although CPPIB is often mistaken for a sovereign wealth fund, it in fact shares very little in common with SWFs, and certainly nothing substantial. Yet many of the concerns raised about CPPIB in the context of the potential New Zealand investment were, in essence, identical with those raised in the west about SWFs. Again this suggests that the entire debate may not, in essence, be about sovereign wealth funds or even necessarily about foreign state investment - or that it may at least evolve into a different debate.

Bloomberg reports that, “Japan needs to hire professionals to invest its $1.4 trillion of pension assets, the world’s biggest cash pool, and force out managers who fail to perform, said Yuji Yamamoto, the former financial regulator heading a reform panel.”

Pensions & Investments reports that, “Signs that Japanese regulators are seeking ways to boost returns of the country’s huge public pension fund [the $1.4 trillion Government Pension Investment Fund] could eventually open new opportunities for foreign asset managers in areas such as absolute return and alternatives.”

Bloomberg reports that, “Japan shouldn’t use pension reserves to create a sovereign wealth fund, because it would force risks upon the general public, according to the president [Takahiro Kawase] of the nation’s pension fund [the Government Pension Investment Fund], the world’s biggest.”

Thomson Reuters reports that, “A panel under Japan’s top economic advisory council urged the country’s $1.44 trillion state-run pension fund on Friday to diversify its holdings, including investments in alternative assets, to seek higher returns. The panel said in a report that the Government Pension Investment Fund (GPIF) should seek to enhance “international diversification” by taking advantage of various investment tools, such as real estate and commodity futures.”

Bloomberg reports that, “Japan should split the nation’s 150 trillion yen ($1.4 trillion) pension reserves into smaller funds and diversify the number of assets it invests in, private-sector members of a government advisory panel said.”

Edwin M. Truman of the Peterson Institute said in a speech delivered at the Japan Society on May 1 that, “Japan’s Government Pension Investment Fund may already be the largest SWF in the world with about $1.3 trillion in assets. Its foreign assets alone, at about $250 billion, would rank it sixth among all SWFs.”