Japan - Ageing Population Shifts Pension Funds Focus To Global Infrastructure

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One of the infrastructure team's key views is the increasing presence of pension funds in the infrastructure sector. Pension funds globally are increasingly looking to infrastructure for stable and long-term returns, in turn, pension funds are filling an important void in infrastructure financing opened due to the ongoing impact of the global financial downturn. Japanese pension funds, with the added pressure of a rapidly ageing population, are increasingly following suit, in the hope of offsetting the impact of Japan's sluggish economy.

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Japanese pension funds are looking to infrastructure investments to diversify their portfolios and ensure more stable returns. However, due to the majority public nature of infrastructure development in Japan, and the fact that the construction industry has been mired in stagnation, the funds are looking overseas for opportunities. Like Japanese construction companies before them, pension funds are realising that the infrastructure opportunities lie outside the country's borders. Investments are being targeted in both developed and developing countries, and focus on the toll road, port and pipeline sectors.


A Grey Outlook  
Japan Population, By Age Bracket, %

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So far seven of the 47 Japanese pension fund have added infrastructure to their portfolios, according to data from JP Morgan Asset Management, as cited by Bloomberg. Four more funds have already voiced intentions to follow suit since the end of the last financial year (31 March 2010). Those turning to the sector include the pensions of drug maker Astellas Pharma, which has allocated 10% to alternative investments including infrastructure, and cosmetics producer Shiseido, which has allocated 1% of its total assets to infrastructure, according to Bloomberg.

Although the percentage of investments in infrastructure is on average still nigh on zero in Japan, with growing pressure to cater to a rapidly ageing population, pension funds are likely to up their interest in the sector and catch up with other developed market based pension funds, where infrastructure accounts for between 3% and 5% of portfolios, a figure we believe will increase noticeably over the short term.

Japan's population is the fastest ageing globally; already 31% of the population is over the age of 60, by 2040 this is expected to reach 43%, according to UN population forecasts. Already the strain is starting to show; with Bloomberg reporting that the country's top 278 companies by market value were JPY21.5trn short on pension funding in FY2009/10.

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The strain is also coming from a poor economic picture, a 5.2% y-o-y contraction in 2009 only added to pressure on pension funds, over the medium term, growth will be minimal, only just reaching over 1% on average between 2011 and 2014. Further woes have come from low bond yields and a slumping stock market. Combined, the issues are forcing pension funds in Japan to look to alternative asset classes, and infrastructure has been the most popular.

Infrastructure and pension funds are a good fit. The long-term nature of an infrastructure investment allows liabilities and commitments to members to be on the same timeframe. Although returns are generally low yield, they are also low risk, and in comparison to the current performance of equities and bonds, the yields are looking more attractive. In turn, infrastructure sponsors are desperate to access any source of financing currently untapped as government funding remains constrained and access to credit continues to be restricted. As such, with benefits to be gained from both sides, BMI sees little sign of this trend slowing.

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