AIJ fiasco points to wider abuses

Unregulated fund managers may be damaging even more pensions


Staff Writer

The fiasco at AIJ Investment Advisors Co. is not only threatening the retirement prospects of more than 880,000 people, it is also raising fears that more corporate pension money is being misinvested.

AIJ’s loss may force its client companies to slash pension benefits, raise premiums or, if worst comes to worst, collapse. Also, the possibility of veiled losses at other asset management firms during the economic slump cannot be ruled out because of a lack of proper scrutiny, experts said.

“The problem is not only about AIJ,” said Koichi Haji, chief economist at NLI Research Institute. He said that the case involves numerous pension funds and that other asset managers may also have racked up massive losses.

The AIJ scandal alone stunned its clients and their employees.

Financial regulators suspended the Tokyo-based asset manager for a month from Feb. 24 because it could not explain what happened to the money. AIJ reportedly lost most of the ¥185.3 billion it was managing through funds registered in the Cayman Islands. Its clients included 84 corporate pension funds linked to about 540,000 workers and 340,000 recipients.

As for why AIJ was able to continue engaging in its allegedly shady activities and whether other asset managers are in the same boat remain unanswered as the Securities and Exchange Surveillance Commission investigates.

But the welfare ministry said Wednesday that as many as 52 of the 84 pension funds AIJ was managing are already running deficits or will do so soon if AIJ cannot return the missing money.

This underlines the financial weakness of pension funds. Many of the 84 consist of small companies in the same industry, ranging from taxi and trucking to oil and electronics, firms that cannot set up pensions funds by themselves, data released by the ministry indicate.

If employees don’t agree on a benefit cut or a premium hike, member companies will have to pay additional contributions to offset the deficits and the portion of the public pension funds they handle. This additional spending would endanger them.

Under the pension system, all corporations must join public corporate pension funds. If they want to, they can also set up private corporate pension funds to manage their own funds and some of the public corporate pension funds.

Experts note that the problem is not confined to just the private funds at AIJ.

“In reality, not just AIJ’s funds but many others face deficits,” NLI’s Haji said.

More than 80 percent of the country’s 595 corporate pension funds have promised to yield an annual return of 5.5 percent, which experts say is too high considering the last two decades of economic sluggishness, particularly since the Lehman Brothers collapse in 2008.

An annual return of 2.5 percent would have required ¥5.7 trillion as of March 2010 to pay future benefits as promised, according to the welfare ministry. Large companies’ pension funds have already pared the promised returns.

Indeed, some small companies went under after their corporate pension funds were dissolved amid deficits.

In 2006, a taxi industry pension fund in Hyogo Prefecture dissolved itself and triggered the collapse of 14 member firms in the following six years. In the event of a dissolution, member companies are required to return part of the public pension funds they handle and offset the deficits as well.

Haji said a possible solution in AIJ’s case would be a government bailout to help reduce the firm’s deficits. But the government has said it has no plans to use taxpayer money for any such rescue.

The ruling Democratic Party of Japan launched a working team Wednesday to discuss steps to avoid another fiasco like AIJ, including amending laws to require external audits.

Currently, asset management firms don’t need to hire external auditors. They are only required to hand in a business report once a year.

Another problem is the lack of scrutiny by regulators.

AIJ, led by Kazuhiko Asakawa, formerly a manager at Nomura Holdings Inc., attracted pension funds by promising high returns. The firm reportedly vowed a 241 percent return on one fund invested in Nikkei 225 options.

Asset management firms are not subject to legally mandated inspections, although such firms surged in number following deregulation in 2007.

They are only required to obtain a registration to start business. Before the decontrols, asset management firms required the approval of financial regulators.

In the past year, only 10 asset management firms out of 265 were inspected, a financial regulator source said.

Because of AIJ, the FSA has ordered all 265 asset management firms in Japan to submit reports on their operations by Wednesday.

Prosecutors and police have also begun collecting information, alleging AIJ provided clients with reports listing fictional asset management data. Asakawa and other executives may be charged with fraud, according to media reports.