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HomeWhat is the Pension Fund Association?Investments > Overview and Approaches of Investments
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Overview and Approaches of Investments

1.Primary Objective of Pension Asset Management

PFA manages pension assets of those who withdrew from corporate pension plans after a short period of time, taking over the assets from original pension funds and corporations, and aims to accumulate reserves for pension benefits to ensure benefit payments for a long period of time in the future.

2.Diversification Benefits in Investment

In order to ensure pension benefits in the future, pension assets must exceed pension liabilities by investing in financial instruments. Unfortunately, however, there is no guranteed ways to always secure necessary investment returns in that regard. This is because future returns are not guaranteed in investments. Investment is always associated with risks.
Returns on investments are not constant and are volatile. The volatility means risk in investment. Investment products with higher expected returns carry relatively higher risks which commensurate with potential return levels. Investing in products with lower risks to avoid volatility would mean relatively lower returns accordingly. It is not realistic to expect high returns at low risk.
Then, should we be content with low investment returns with reduced risks to be safe? When you are driving a vehicle, for instance, it is not always true to say that the slower you drive, the safer you are. You may be putting yourself at greater risk if you drive a car far slower than the speed limit. Likewise, reduction in risk does not always translate into sound investment management. Investment returns that are far too low would not secure necessary pension assets and, rather, pension financing will become unstable. In order to secure pension assets for the future, we must aim to achieve necessary levels of investment returns by taking certain levels of risk.
In order to achieve the objective of pension asset management, it is important to efficiently invest to realize as much higher returns as possible while appropriately controlling risks. In this sense, "diversification" is the key. We try to diversify across asset classes, securities, approaches, styles, managers, investment timing, investment horizon, etc. as it allows to effectively reduce investment risks. Therefore, PFA aims to pursue highly efficient investment management through diversification as it is the basic principle of pension asset management.

3.Investment Process

PFA's investment process follows the Plan-Do-See cycle as shown below. We constantly review and assess this process and make necessary changes for improvement to pursue more efficient investment of pension assets.

Investment Process

(1)Investment Policy

PFA formulates investment policy and manages pension assets coherently in accordance with the policy. The investment policy sets out primary objectives, investment objectives, policy asset mix, manager selections, evaluations, guidelines, and matters concerning in-house investment.

(2)Policy Asset Mix

The composition of investment portfolio, or asset allocation, is a very important policy decision in pension asset management. PFA determines the policy asset mix based on quantitative and qualitative analyses.
The policy asset mix needs to be revised when premises change. However, it is not appropriate to revise and change return assumptions for each asset class in the short term. We believe that pension asset management is essentially long-term investment; therefore, we should invest underlying assets from a long-term perspective and not bet on uncertain, short-term market movements. Thus, we do not change policy asset mix based on short-term market forecasts. However, when the value of pension assets changes due to market fluctuations, resulting in a significant change in the pension assets and liabilities balance, or funding level, we change the policy asset mix to appropriately manage investment risk in accordance with the funding level.
PFA sets the policy asset mix as shown below:

Funding levelBondsEquities
Less than 105% 50% 50%
105%-110% 55% 45%
110% or more 60% 40%

The allowance from the above policy target, due to the market fluctuations, etc., is ±10%. Net currency exposure is allowed up to 30% of the total portfolio (excluding the daiko portion of pension liability).


The actual composition of assets can deviate from the policy asset mix due to market fluctuations. If this is ignored, we would face unintended risks. It is, therefore, necessary to make adjustments to counteract the deviation. This practice is called rebalancing.
In the case where actual asset allocation deviates from acceptable risk allowances due to market fluctuations, we make adjustments by selling of over allocated assets and making additional allocations to under funded assets. When this takes place, costs associated with selling the assets needs to be taken into account. Rebalancing is carried out with consideration of both rebalancing costs and risks associated with the deviation. Practically, adjustment of the deviation is narrower than the allowance stated in the investment policy.
Rebalancing can be carried out from risk management perspectives, even when the deviation is within the allowance range, in consideration of costs including potential impacts of transactions on the financial markets.

(4)Review of Policy Asset Mix

Investment Policy sets the policy asset mix and allowances for different funding levels. Nonetheless, these need to be reviewed when there are changes in liability structures, future cash flows, and assumptions on expected returns, etc.
We regularly examine whether or not any of such changes are happening.

(5)Construction of Manager Structure

The manager structure is to structure a combination of investment styles and approaches for each asset class. It also means to select appropriate investment managers, or managers, for each investment style and approach. Since those who actually execute investments are managers, it also means to construct an optimal combination of investment managers.

(6)Selection of Investment Managers

We select the most suitable investment managers with respective styles and approaches for each asset class. To that end, we have adopted the manager entry system to gather information for the purpose of extensive manager research as well as to continuously and efficiently evaluate investment managers. This system enables us to regularly receive performance data from investment managers of those we have not yet hired, consistently assess their capabilities, and evaluate them on an ongoing basis.

a.Evaluation of Investment Managers

Ongoing monitoring process covers both the managers hired and also managers which have not been hired with the use of the manager entry system. Performance is measured in a comprehensive manner, covering not only the results of investments, or performance, but also qualitative aspects, including consistency of investment process with philosophy, changes in the organizational structure and, if there are any changes, the effects of those changes on the enhancement of investment management capabilities.

b.Replacement of Investment Managers

Based on comprehensive evaluation, we replace investment managers as needed. In order to assess their essential capabilities properly, performance is evaluated over a necessary period and changes will be made to the manager lineup in accordance with the degree of confidence in future performance.

4.Investment Overview


The graphs below show the total fund return and the excess return. In fiscal 2020, the return was the highest on record since the PFA's inception in 1967. PFA has gained excess return surely.

Changes in Investment Return
Changes in Time-weighted Return & Excess Return

(2)Market Values of PFA Managed Assets

The value of assets managed by PFA stood at \12.5 trillion at the end of fiscal 2020. The assets was increased since the end of fiscal 2019 for the considerable positive return.

Market Values of PFA Managed Assets
The assets of "Basic Pension" and the assets of "Portable Corporate Pension" have been managed as independent portfolios since fiscal 2014.

(3)Asset Allocation

Asset Allocation
Foreign bonds hedged against exchange risk are counted as domestic bonds since fiscal 2014.

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