Active shortfalls see pension fund fee restructure

Inadequate returns by active managers will see Japan's Government Pension Investment Fund (GPIF) revise its fee structure to prioritise performance.

Under the new structure, GPIF-contracted managers will have their base fee rate lowered to that of a passive mandate and the maximum fee rate will be scrapped. A carryover which partially accumulates payment of annual performance-based fees will be introduced.

GPIF's report explained that of its ¥160 trillion ($1.9 trillion) in assets, about 20% is actively managed. For the most part, though, GPIF believes "their performance leaves much to be desired," attributing this to possibly "adequately efficient markets" where the potential for active outperformance is limited.

GPIF also conceded underperformance may be due to the pension fund being a "poor selector of asset managers."

"GPIF itself recognises that it has room to improve its selection abilities and is working hard on continuously increasing sophistication in this area," its report said.

When examining what may be causing underperformance on the manager side, GPIF said the target excess return rates set by managers are inappropriate, and that some managers may be more focused on increasing their assets under management rather than controlling capacity to produce excess returns.

"Under the current fixed-fee structure and partial performance-based fee structure, asset managers are paid considerable sums regardless of their investment performance," GPIF said.

"They therefore have little incentive to set target excess return rates appropriately, to be innovative in seeking excess returns, and to control their management capacity, so a resolution of this issue was regarded as being far off.

"In response to this problem, GPIF decided to introduce a new performance-based fee structure as a means of stepping up its efforts to earn excess returns."

Read more: GPIFGovernment Pension Investment FundJapan
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