Basic Policy for the Administration and Investment of Employees' Pension
Insurance Benefit Association Reserve Fund
(Established on October 1, 2015)(Revised on March 3, 2017)(Revised on July 19, 2018)(Revised on March 31, 2020)(Last revised on December 24, 2021)
In accordance with Article 112-4, Paragraph (1) of the Local Public Service Mutual
Aid Association Act (Act No. 152 of 1962; the "Act"), for the appropriate administrationand investment of the implementing organization reserve fund (the "employees'
pension insurance ("EPI") benefit association reserve fund") stipulated in Article 79-2 ofthe Employees' Pension Insurance Act (Act No. 115 of 1954; the "EPI Act")), incompliance with the Fund Basic Guidelines stipulated in Article 79-4, Paragraph (1) of
the EPI Act (Public Notice No. 1 of the Ministry of Internal Affairs and Communications,
Ministry of Finance, Ministry of Education, Culture, Sports, Science and Technology
and Ministry of Health, Labour and Welfare dated July 3, 2014; the same applies
hereinafter) as well as the administration and investment policy of the Pension Fund
Association for Local Government Officials ("PAL") stipulated in Article 79-6, Paragraph(1), of the EPI Act and Article 112-3, Paragraph (3), of the Act, the basic policy (the"Basic Policy") on the administration and investment of the EPI benefit association
reserve fund of the National Federation of Mutual Aid Associations for Municipal
Personnel (the "Federation") is set forth as follows.
I

Basic policy for the administration and investment of the EPI benefit

association reserve fund
1 Basic policy
Especially keeping in mind that the EPI benefit association reserve fund is part of
insurance premiums collected from insured persons of the EPI and valuable
resources for funding future pension benefits, the reserve funds shall be managedwith the objective of contributing to the stable operation of EPI schemes in the future
by investing them safely and efficiently "solely for" ("for" in the case of investing inline with the objectives of the Act under Article 79-3, Paragraph (3), of the EPI Act)the interests of insured persons of the EPI from the long-term perspective.
Accordingly, on the basis of appropriately diversifying investments in multiple1

assets that differ in terms of risk/return and other characteristics ("Diversified
Investment"), the Federation shall administer and invest the EPI benefit association
reserve fund by establishing an asset mix from a long-term perspective (the"Benchmark Portfolio").
The Federation shall provide and publicly disclose a Basic Policy setting forth thematters related to the asset mix of EPI benefit association reserve fund so as toensure the appropriate administration and investment of the EPI benefit association
reserve fund, in accordance with the basic policy on fund and policy on theadministration and investment ("Administration and Investment Policy"). The
Federation shall also submit this Basic Policy to the PAL. In addition, if there is any
revision to the Administration and Investment Policy, or if the Federation determines
it necessary, the Federation shall review the Basic Policy and amend and publicly
disclose it as necessary, and shall submit it to PAL.
2 Investment target
The investment of the EPI benefit association reserve fund shall be managed
appropriately by establishing a Benchmark Portfolio in order to generate investment
returns which is the investment target for management fund stipulated in Article
79-6, Paragraph (1) of the EPI Act ("Management Fund").
In so doing, the Federation shall pay attention not to distort, among other things,
price formation in the market and private sector investment activities.
In addition, efforts shall be made to earn the benchmark returns for overall assets
and each asset class for each fiscal year by appropriately implementing theselection, management and assessment of entrusted investment management
institutions, as well as generating benchmark returns for overall assets and each
asset class over the long term.
Appropriate market indicators shall be used for benchmarks, considering, among
other factors, whether their structure reflects the market; whether they consist ofinvestable securities, whether details of the indicators are disclosed, and whether
they are consistent with the benchmark for the Management Fund.
3 Committees
The Federation establishes and utilizes the following committees:(1) Fund Management Committee
This is a committee consisting of members who possess academic knowledge
or practical experiences in areas such as economics, finance and fund2

management, which studies expert matters pertaining to the establishment andrevision of the Basic Policy and the administration and investment of the EPI
benefit association reserve fund.
(2) Long-term Benefit Fund Committee
This is a committee also participated in by representatives of associations
constituting the Federation ("Member Associations"), which conducts researchand study relating to the Basic Policy for management of the EPI benefit
association reserve fund and other important matters.
(3) Operational Management Committee
This is a committee also participated in by representatives of Member
Associations,

which

conducts

researchandmonitoringofbusiness

administration and fund management implemented by the Federation and theMember Associations, as well as assessment of business.
4 Fund management plan
For the management of the EPI benefit association reserve fund, the Federation
shall prepare an annual fund management plan at the beginning of each fiscal year
and a quarterly fund management plan for each quarter, and shall manage the fundaccording to these plans. The Federation shall also submit these plans to PAL.
The fund management plan shall include the following.
(1) Outlook for cash flows
A Amount of short-term investment as of the end of the previous fiscal year
B Expected revenues(A) Revenue from insurance premiums, etc.
(B) Repayment of long-term loans(C) Appropriation for basic pension(D) Appropriation for employees' pension(E) Return on short-term investment(F) Bond principal and interest, etc.
(G) Other revenues
C Expected expenditures(A) Benefit payment(B) Payment to PAL(C) Contribution for basic pension(D) Contribution for employees' pension(E) Long-term loans

3(F) Money transferred to the administration accounting(G) Other expenditures
D Amount of short-term investment
E Amount of investment
F

Amount of short-term investment as of the end of the relevant fiscal period(2) Fund management policy
A In-house investment
B Entrustment of investment management in the form of trust
5 Risk management
Based on conducting Diversified Investment, various risks associated with theadministration and investment of the EPI benefit association reserve fund shall beappropriately managed.
Also, while the EPI benefit association reserve fund is administered and invested
by entrustment to entrusted investment management institutions and asset
management institutions, group pure endowment insurance of life insurancecompanies, and in-house investments; risk management shall be conducted basedon reporting from the entrusted investment management institutions, asset
management institutions and life insurance companies for overall assets, each asset
class, each entrusted investment management institution, asset management
institution and life insurance company, and for in-house investments, by the methods
below. The implementation policy of this risk management shall be reported to theGeneral Assembly upon deliberation at the Fund Management Committee, etc., andtimely reports on the risk management status shall be made to the General
Assembly and the Fund Management Committee, etc.
(1) Overall assets
In order to appropriately manage the Benchmark Portfolio, check the asset
mix of the EPI benefit association reserve fund for any deviations from theBenchmark Portfolio at least monthly, and take necessary actions. In addition,
check the EPI benefit association reserve fund's asset mix for any deviations
from the Benchmark Portfolio of the Management Fund at least monthly.
Also, enhance necessary functions for understanding and analyzing market
trends in order to conduct appropriate and smooth rebalancing.
Furthermore, check the risks of overall assets and conduct the analysis andassessment of the degree of risk-taking, the analysis of factors for deviations
from the composite benchmark return of each fiscal year and the like.

4(2) Asset classManage risks associated with each asset class, including market risk, liquidity
risk and credit risk. For foreign assets, closely watch country risk as well.
(3) Entrusted investment management institutions
Understand and appropriately manage the investment and risk-taking statusof each entrusted investment management institution by presenting investment
guidelines

to

each

entrusted

investment

management

institution(the"Investment Guidelines").
Also, exercise caution for any changes to investment structures.
(4) Asset management institutions
Present guidelines on asset management to each asset management
institution (the "Asset Management Guidelines"), understand the asset
management status of each institution, and manage it appropriately.
In addition, manage the credit risk of each institution and pay attention to any
changes to asset management structures.
(5) Life insurance companies
Understand the business management status and asset management statusof each insurer and manage them appropriately.
(6) In-house investment
Establish a guideline on investment, and manage risks appropriately by, forexample, checking the investment and risk-taking status.
6 Investment methods(1) Basic approach
In principle, except for cases of cashing-out, both passive and active
investment approaches shall be employed. Based on this, active investment
management shall be conducted with the aim of generating excess returns.
However, active investment shall be conducted upon deliberation at the FundManagement Committee on fund selection standards on the assumption thatrisk selection is reasonable with sufficient grounds to back the expectations forexcess returns, also taking into consideration the past investment performance.
In addition, its transparency shall be ensured under appropriate monitoring by
the Fund Management Committee by, for example, timely reporting on mattersrequested by the Fund Management Committee.
With respect to benchmarks, not only traditional capitalization weighted
indexes but also the adoption of new benchmarks from the perspective of5

improving investment returns shall be examined.
The Federation shall review the investment methods with a view to securing
investment returns and efficient investment by such way as reviewing
benchmarks and strengthening its efforts for the better selection andmanagement of entrusted investment management institutions throughappropriate performance management. In addition, the Federation shall assess
investment performance on a regular basis and review its entrusted investment
management institutions in a timely manner, for example, by revisiting theallocation of funds.
In addition to utilizing excellent know-how of entrusted investment
management institutions, the Federation shall consider in-house investment to
the extent permitted under the laws from the standpoints of reducing investment
costs and accumulating knowledge and expertise of investment.
(2) Specific investment methods
A Matters relating to in-house investment(A) Basic policy
In order to contribute to the safe and efficient investment of the EPI
benefit association reserve fund, part of the fund shall be administeredand invested in accordance with the following long-term and short-term
investment policies.
a Long-term investment
For the acquisition of government and corporate bonds, efforts
shall be made for favorable investments over a long-term
considering the following points:(a) Creditworthiness of issuers and market liquidity(b) Coupon rate, acquisition price, and current maturity(c) Interest outlookb Short-term investment
A short-term investment is an investment of resource funds forpension benefit payment, and efforts shall be made for favorable
investment in accordance with a monthly fund plan while securingsafety and liquidity as the first priorities, considering the investable
period and short-term interest rate trends.
(B) Financial institutions
For the selection of a partner financial institution for in-house
investment(long-term

and6

short-term

investment),

standards

separately stipulated by the Federation considering credit risks andother factors shall be observed.
(C) Investment assets
a Long-term investment(a) Investment assets shall be the following yen-denominatedsecurities among those set forth in the laws and notices of the
Ministry of Internal Affairs and Communications.
(i)

Government bonds(ii) Municipal bonds(iii) Bonds issued by juridical persons under special laws (in thecase of bonds without government guarantee, limited tothose rated A or above by a qualified rating agency("Qualified Rating Agency") set forth in Article 2 of the"Rating

Agencies

Separately

Designated

by

the

Commissioner of the Financial Services Agency andCategories Separately Designated as Being Equivalent to
Rating by Qualified Rating Agencies According to Standard
for Determining Whether the Adequacy of Equity Capital of a
Bank is Appropriate in Light of Circumstances such as
Assets, etc. Held by the Bank Pursuant to Article 14-2 of the
Banking Act" (Public Notice of the Financial Services Agency
No. 28 of 2007)); provided, however, that for unrated bonds,
limited to those issued by juridical persons rated A or above).
(iv) Domestic corporate bonds (excluding bonds with new shareacquisition rights and also excluding bonds with warrants
issued under the Commercial Code before the revision
dated April 1, 2002)
Corporate bonds rated A or above by any of the Qualified
Rating Agencies(v) Yen-denominated foreign bonds
i. Yen-denominated bonds issued by the International
Bank for Reconstruction and Development, AsianDevelopment Bank, Inter-American Development Bank,
AfricanDevelopment

Reconstruction

and

Bank,

EuropeanDevelopment

or

Bank

for

International

Finance Corporation (including Euro-yen bonds; the7

same applies hereinafter)
ii. Yen-denominated bonds issued by foreign governments(including local governments), yen-denominated bonds
issued by international organizations under treaties(excluding those issued by organizations set forth in i.) or
yen-denominated bonds issued by foreign juridical
persons equivalent to government-guaranteed bonds,
which are rated AA or above by any of the Qualified
Rating Agenciesiii. Yen-denominated bonds issued by Japanese companies
or overseas subsidiaries of Japanese companies, which
are rated A or above by any of the Qualified Rating
Agencies(vi) Specified bonds (meaning specified bonds provided for in
Article 2, Paragraph (7), of the Act of Securitization of Assets(Act No.105 of 1998; the same applies hereinafter)
Specified bonds rated A or above by any of the Qualified
Rating Agencies(vii) Bonds with new share acquisition rights (limited toconvertible bond-type bonds with new share acquisitionrights; and including convertible bonds issued under theCommercial Code before the revision dated April 1, 2002)
Corporate bonds rated A or above by any of the Qualified
Rating Agencies and whose unit price at the time ofacquisition does not exceed the face value thereof(b) For the bonds referred to in (iv), (v) and (vi) of (a), investment
instruments shall be those which satisfy the following conditions:(i) bonds to be redeemed at par value;(ii) bonds with fixed rates; and(iii) bonds which are issued and redeemed, and whose interests
are paid, in Japanese yen.
b Short-term investment
Investment assets shall be short-term government bonds,
financingbills,

deposits,

negotiablecertificatesof

deposits,

commercial papers rated A or above by any of the Qualified Rating
Agencies, money management fund ("MMF") and free financial fund8

("FFF"). For assets other than deposits, MMFs and FFFs,
investment assets shall include those based on repurchaseagreements.
c Lending to other accounting
Lending to other accounting of the Federation shall be made inaccordance with a budget under the laws and regulations. However,no lending shall be made to the retirement pension accounting ortransitional long-term accounting.
d Other investment
For the management of government and corporate bondinvestment trusts (excluding MMF and FFF), securities trusts, etc.,
the risks and returns related to investment instruments shall be fully
analyzed, and cancellation fees and other costs shall be considered
in a comprehensive manner.
e Considerations(a) Diversified Investment
Issuers and other factors shall be diversified in an appropriate
way. The acquisition of bonds other than government bonds,
municipal bonds, and bonds issued by juridical persons under
special laws (excluding finance bonds) which are issued by thesame issuer shall not exceed 10% of in-house investment
assets.
(b) Response to a credit rate cut of acquired bonds
For bonds other than government bonds, municipal bonds,
and bonds issued by juridical persons under special laws
(limited to those with a government guarantee), ratings shall bechecked on a regular basis, and shall be sold in principle if all
ratings fell below the designated level. However, if the salewould not be profitable, these bonds may be retained by paying
full attention to their credit risks and other factors.
(c) Time deposits
No new investment shall be made in instruments with apotential risk of loss of principal also considering fees at the timeof early cancellation.
(D) Entrustment of asset managementa The Federation may entrust a financial institution to manage its

9in-house investment assets. The Federation shall ensure that theinstitution entrusted with asset management (an "In-house AssetManagement Institution") will perform the following:(a) Expressly provide in a contract, etc. that the financial institution
shall be bound to exercise its best efforts with loyalty, observing
the duty of due care as an expert and solely for the benefit of theFederation as a principal in connection with the administrationand investment of the Federation's assets.
(b) Strictly administer and take custody of the Federation's assets,
clearly separating them from the financial institution's own
assets.
(c) Pay utmost care in securities delivery and settlement.
(d) Give sufficient consideration to credit risk, administrative
capability, costs, etc. when re-entrusting custody services or trust
assets.
(e) Submit data regarding the status of asset management at theend of every month and, on an as-needed basis, provide
necessary data and explanations.
(f) Observe laws, regulations, contracts, etc., establishing structures
to ensure the observance.
b If an In-house Asset Management Institution has engaged in any act
that violates laws and regulations, contracts, etc., the Federation
shall promptly request reporting and give instructions as necessary.
(E) Selection and evaluation of In-house Asset Management Institutions
a Selection of In-house Asset Management Institutions
In-house Asset Management Institutions shall be selected fromfinancial institutions that are engaged in trust services and meet thefollowing criteria.
(a) Business standing (e.g., capital, financial position, number of
employees, customers) is found to be stable.
(b) Asset management status is favorable.
(c) A structure for complying with laws and regulations is in place.
b Evaluation of In-house Asset Management Institutions
In-house Asset Management Institutions shall be evaluated in atimely manner through qualitative assessment with respect to theirasset management status and structures for complying with laws

10

and regulations, and their competence shall be determined.
c Addition or reduction of entrusted amountAn addition or reduction of entrusted amount, including thecancellation of a contract, shall be made based on the assessment
set forth in b, and in the case of an addition or reduction of theamount of in-house investment due to the increase or decrease of
the balance of EPI benefit association reserve fund, the entrusted
amount may be added or reduced giving priority to the policy
decision of the Federation.
B Entrustment of investment management in the form of trust
The items below shall be observed for entrusted investments in specified
money trusts and specified comprehensive trusts under discretionary
investment management contracts with investment advisory firms, as wellas individually operated designated money trusts and individually operated
designated comprehensive trusts by banks engaged in trust services.
The Federation shall have entrusted investment management institutions
and entrusted investment asset management institutions (entrusted
investment management institutions and entrusted investment asset
management institutions are hereinafter collectively referred to as"Entrusted Institutions") administer and invest assets in accordance with the
Basic Policy.
(A) Instructions on the asset mix that serves as standards for the entrusted
investment management institutions (the "Standard Asset Mix")
The Federation shall provide instructions on the Standard Asset Mix asnecessary according to the characteristics and evaluation of theentrusted investment management institution, taking into consideration
the asset mix and the diversification of investment style based on the
Benchmark Portfolio.
If it is considered appropriate to change the Standards Asset Mix, theFederation shall promptly give instructions on the change.
(B) Matters to be observed in investment management
The Federation shall manage the observance of investment assets,
investment
management

methods,
indicators

numerical
proposed

investment
bythetargets
entrusted

and

risk

investment

management institution and agreed by the Federation, as well as
benchmarks designated by the Federation ("Manager Benchmarks")11and the Investment Guidelines regarding the following items presented
by the Federation, and give necessary instructions.
a General matters(a) Standards Asset Mix
Entrusted investment management institutions must observe
the Standards Asset Mix instructed by the Federation.
(b) Registration of investment style
Entrusted investment management institutions shall report toand register with the Federation in writing their management
philosophies for each asset class as well as the investment
styles and processes based on the philosophy, and shallcomply with the registered matters. Any change to theregistered matters requires prior discussion with the Federation.
(c) Matters related to framework for risk management
Entrusted investment management institutions shall makeefforts to vigorously manage risks, complying with theInvestment Guidelines presented by the Federation.
(d) Establishment of legal compliance frameworks
Entrusted investment management institutions must observe
laws and regulations, contracts with the Federation, theInvestment Guidelines, etc. and establish frameworks to ensure
the observance.
(e) Investment considerations
Entrusted investment management institutions must consider
the following points when making investment in securities:(i) In addition to investing upon sufficient research and analysis,
diversifying investments appropriately. With respect toassetsdenominatedinforeigncurrencies,

selectingcountries and currencies, giving full consideration to politicaland economic stability, as well as the characteristics of themarket, such as settlement systems, trading regulations, andtax systems.
(ii) When putting individual blocks of issues in the portfolio,liquidity must be considered.
(iii) When acquiring domestic bonds (excluding government
bonds, municipal bonds, and bonds issued by juridical

12persons under special laws (excluding finance bonds)),
domestic stocks, foreign bonds (excluding government
bonds of Manager Benchmark constituent countries) andforeign stocks, investment in a single issuer must be capped
at 10% of the market value of the asset. However, if this cap
is exceeded due to a rational reason, such as that the asset
mix ratio of the market value of individual stocks in Manager
Benchmarks has exceeded the cap, it must be reported to
the Federation.
(iv) Paying utmost attention to market impacts and other similar
factors when trading, making best efforts to avoid incurring
unnecessary costs.
(v) No structured instruments incorporating derivatives as
underlying

assets(excluding

floating

which
rate

are

investment

government

instruments
bonds

and

inflation-indexed government bonds) shall be purchased.
(vi) Credit status and other factors shall be fully considered inselecting a securities firm, etc. which execute transactions.
Efforts shall be made to execute transactions under a best
execution policy.
(vii) When placing an order with the parent company, or parent
group’s or its own group’s securities firms and their overseas
subsidiaries, it must be reported to and registered with theFederationinadvance.

The

purchaseof

securities

underwritten or otherwise by any of these affiliates requires
prior consent from the Federation.
(f) Considerations for derivatives transactions
Entrusted investment management institutions must consider
the following points when making derivatives transactions:(i) In principle, derivatives transactions shall be transactions
with the aim of hedging price fluctuation risk in underlying
assets held, such as bonds, stocks, and foreign exchange
rates ("Sell Hedging") or substituting underlying assets ("BuyHedging"), not for speculative purposes. Consultation on thespecific details of the handling of derivatives transactions
shall be held with the Federation in advance.

13

(ii) Notional principals of derivatives transactions for the
purposes of net Sell Hedging shall be within the amountequivalent to the asset that are currently held or to be held in
the future for certain, and, in the case of net Buy Hedging,within the surplus fund currently held or to be held in the
future for certain.
(iii) Consultation on the specific details of the handling ofderivatives transactions for a purpose other than hedging
shall be held with the Federation in advance.
b Domestic bonds(a) Investment assets shall be the following yen-denominatedbonds.
(i) Government bonds(ii) Municipal bonds(iii) Bonds issued by juridical persons under special laws (in thecase of bonds without government guarantee, limited tothose rated BBB or above by any of the Qualified Rating
Agencies; provided, however, that for unrated bonds, limited
to those issued by juridical persons rated BBB or above)(iv) Corporate bonds rated BBB or above by any of the Qualified
Rating Agencies(v) Specified bonds rated BBB or above by any of the Qualified
Rating Agencies(vi) Bonds issued by foreign governments or foreign juridical
persons and rated BBB or above by any of the Qualified
Rating Agencies.
(b) Bonds set forth in (a)(iii) without government guarantee andbonds set forth in (iv), (v) and (vi) shall be sold in principle if all
ratings fell below the designated level after the acquisition.
However, if the sale would not be profitable, these bonds may beretained by paying full attention to their credit risks and otherfactors.
If such bonds are to be continuously held, the total market
value of the bonds shall not exceed 5% of the market value ofthe domestic bond assets, and the status of holding shall bereported to the Federation.

14

c Domestic stocks
Investment assets shall be yen-denominated stocks listed on
domestic securities exchanges (including those planned to be listedon domestic securities exchanges). No margin transaction isallowed.
d Foreign bonds(a) Investment assets shall be bonds denominated in a currency of aManager Benchmark constituent countries.
(b) Bonds shall be rated BBB or above by any of Qualified Rating
Agencies.
(c) Bonds set forth in (a) shall be sold in principle if all ratings
referred to in (b) fell below BBB after the acquisition. However, if
the sale would not be profitable, these bonds may be retained bypaying full attention to their credit risks and other factors.
If such bonds are to be continuously held, the total market
value of the bonds shall not exceed 5% of the market value ofthe foreign currency-denominated bond assets, and the status ofholding shall be reported to the Federation.
e Foreign stocks
Investment assets shall be stocks constituting the Manager
Benchmark or stocks issued by companies of Manager Benchmark
constituent countries, which are denominated in the currency of theManager Benchmark constituent country.
f Hedged assets denominated in foreign currencies
Hedged assets denominated in foreign currencies shall behandled by categorization into domestic bonds, domestic stocks,
foreign bonds or foreign stocks according to the risk/return andother characteristics.
g Non-traditional assets (alternative assets)
Non-traditional assets, such as infrastructure, private equity andreal estate ("Alternative Assets"), shall not be treated as anindependent asset class, and shall be categorized into domestic
bonds, domestic stocks, foreign bonds or foreign stocks according
to risk/return and other characteristics. Also, investments shall bemade after determining that they are appropriate as investment
assets based on the results of examination in section 7 below.

15

h Sections b through g do not apply to a case otherwise provided for by
the Federation or a case regarding which consultation with theFederation has been held in advance.
(C) Asset management considerations
The Federation shall require its entrusted investment asset
management institutions to perform the following:a Strictly administer and take custody of the Federation's assets,
clearly separating them from the institution's own assets.
b Pay utmost care in securities delivery and settlement.
c Give sufficient consideration to credit risk, administrative capability,
costs, etc. when entrusting and re-entrusting custody services (inparticular,

custody

servicesforforeigncurrency-denominatedassets).
d Submit data regarding the status of asset management at the end of
every month and, on an as-needed basis, provide necessary dataand explanations.
e Observe laws, regulations, contracts, etc., establishing structures toensure the observance.
(D) Reporting on investment statusa The Federation shall require its Entrusted Institutions to submit amonthly report on management and investment.
b The Federation shall require its Entrusted Institutions to submit
documents on a quarterly basis in the forms to be separately
provided, conduct interviews on the overview of investment results,
future investment plans, etc. In addition, the Federation shall require
its entrusted investment management institutions to provide an
explanation on the status of management and investment activities
from time to time.
c The Federation shall give instruction on investment to its Entrusted
Institutions as deemed necessary.
d In cases of any act in violation of laws and regulations, contracts,
Investment

Guidelines,

etc.,

an

Entrusted

Institution

shall

immediately report it to the Federation and follow its instructions.
(E) Matters related to selection and evaluation of Entrusted Institutions
a Selection of entrusted investment management institutions
Entrusted investment management institutions shall be selected16based on the Benchmark Portfolio upon conducting detailed
interviews on the points below and other details, with consideration
given to the diversification of investment styles of the Federation asa whole in a comprehensive manner.
(a) The business standing (e.g., capital, financial position, number of
employees, customers) is found to be stable.
(b) The investment philosophy, investment method, investment
structure, legal compliance structure, and other qualitativeevaluation results are favorable.
(c) The investment performance is favorable for at least a certain
period of time.
b Selection of entrusted investment asset management institution
Entrusted investment asset management institutions shall beselected from financial institutions that are engaged in trust services
and meet the following criteria.
(a) The business standing (e.g., capital, financial position, number of
employees, customers) is found to be stable.
(b) The asset management status is favorable.
(c) A structure for complying with laws and regulations is in place.
c Evaluation of entrusted investment management institutions
Entrusted investment management institutions shall be evaluatedcomprehensively

throughbothqualitativeandquantitative

assessments on a regular basis.
(a) Quantitative assessment
In addition to their excess return against Manager Benchmarks
and indicators that incorporate the magnitude of risks taken toachieve the excess return, entrusted investment management
institutions shall be assessed by methods appropriate for theirinvestment styles.
(b) Qualitative assessment
In addition to the evaluation of quality of management of
portfolio,

investment philosophy,

structure forinvestment,

investment processes, risk management capability, structure forcompliance, etc., assessment shall be made by the methods
appropriate to investment styles.
d Evaluation of entrusted investment asset management institutions

17

Entrusted investment asset management institutions shall be
evaluated in a timely manner through qualitative assessment withrespect to their asset management status and structures forcomplying with laws and regulations, and their competence shall be
determined.
e Addition or reduction of entrusted amountAn addition or reduction of entrusted amount, including thecancellation of a contract, shall be made based on the assessment
set forth in c and d; however, in the following cases, the entrusted
amount may be added or reduced giving priority to the policy
decision of the Federation regardless of the assessment results of cand d.
(a) Adjusting the asset composition of the Federation as a whole
due to a significant deviation from the Benchmark Portfolio(b) Making adjustments upon considering the diversification of
investment styles or other similar aspects
C Investment in group pure endowment insurance
Investment in group pure endowment insurance shall be made inaccordance with the following:(A) Selection of life insurers
A life insurer shall be selected among life insurers rated above acertain level by Qualified Rating Agencies considering credit risks andother factors, in accordance with standards to be separately provided
by the Federation.
(B) Setting and addition of entrusted amount
For setting or adding entrusted amount, a decision shall be madeamong life insurers satisfying the standards of selection set forth in (A)considering the status of financial standing and dividend payment.
(C) Cancellation of insurance policies of life insurers
Cancellation of insurance policies of life insurers shall be madeconsidering rating from Qualified Rating Agencies and the status ofcompliance with laws and regulations, in accordance with standards tobe separately provided by the Federation.
7 Diversification of investments
In order to facilitate Diversified Investment, alternative investment and other18

diversification shall be discussed.
Investment in new assets shall be examined based on generally accepted expert
knowledge on fund management with appropriate monitoring by the FundManagement Committee, for example, through deliberation of the investment policy
at the Fund Management Committee in advance and timely reporting on theimplementation status and other matters requested by the Fund Management
Committee, on the assumption that Diversified Investment benefits are found;sufficient grounds are obtained to back expectations for generating excess returns;
and investment and risk management structures are in place for making suchinvestment.
In doing so, steady improvement in the assets' ability to generate returns, theexistence of the secondary market and other market environment factors shall befully taken into consideration, given that Non-traditional Assets have manydifferences compared with traditional assets in risks and other aspects based on
their marketability, ability to generate returns, individuality, transaction costs,
information disclosure status and the like, which cannot be managed only byenhancing investor side capabilities.
In addition, in evaluating Non-traditional Assets, evaluation methods shall beclarified based on generally accepted expert knowledge on asset administration andinvestment.
8 Flexible investment
Based on changes in the economic and market environment, the asset mix may
be determined flexibly within the deviation tolerance ("Flexible Investment") insteadof making it closer to that of the Benchmark Portfolio. In such case, the assumption
shall be that an outlook on the market environment is provided with a high degree of
accuracy and investment is made by stipulating the investment policy in advancebased on the outlook.
In the case of Flexible Investment, the investment policy shall be deliberated at
the Fund Management Committee and the implementation status shall be reported ina timely manner to the Fund Management Committee.
In the case of Flexible Investments, the details shall be stipulated in the fundmanagement plan in I.4.
9 Investment considering non-financial elements
With respect to the investment of the EPI benefit association reserve fund, the19necessary initiatives shall be implemented, based on a case-by-case analysis, with aview to promoting investment considering non-financial elements including ESG(environment, social and governance) in addition to financial elements based on theapproach that the sustainable growth of investee companies and the entire market isnecessary for the increase of return on investment portfolio over long time so as tosecure long-term return for the benefit of insured persons.

10 Pooled investment
The Federation may manage the EPI benefit association reserve fund bydepositing it with PAL.
II Matters to be observed in administering and investing the EPI benefit
association reserve fund
1 Ensuring fiduciary responsibility
Thorough observance of the duty of care of a prudent expert and duty of loyalty
shall be ensured for all persons involved in the investment of the EPI benefit
association reserve fund. This shall be stipulated in contracts, etc. with respect tocontracts with entrusted investment management institutions, asset management
institutions, and life insurers, etc.
2 Consideration to impact on the market and private sector activities
In managing the EPI benefit association reserve fund, the Federation shall, in
light of the market size, strive not to be excessively impacted by the market and not
to distort, among other things, price formation in the market and private sector
investment activities, especially by avoiding concentration in specific time periods forinvesting and exiting funds.
In addition, consideration shall be paid to the following points so as to avoid any
impact on the business management of private businesses.
(1) Create a restriction on the holding of securities issued by the same entities,
for each entrusted investment management institutions (including in-house
investment).
(2) Avoid selecting individual issues in stock investment, considering the impact
on the business management of companies and other factors.
3 Actions to fulfill stewardship responsibility

20

Shareholder voting rights shall be exercised so that corporations manage
business operations in ways that will maximize the interests of shareholders over thelong term.
If the Federation individually directs the exercise of voting rights, it shall give
instructions so that entrusted institutions will exercise them in accordance with thedirections. In the case of not individually directing the exercise of voting rights, theFederation shall have entrusted institutions exercise voting rights in accordance with
the Guidelines for Exercising Shareholders’ Voting Rights established by theFederation in line with the intent of the Corporate Governance Principles establishedby the Federation. Also, the Federation shall request entrusted institutions to reporton, among other things, the status of exercising voting rights.
In doing so, based on the Principles for Responsible Institutional Investors«Japan’s Stewardship Code» (February 26, 2014, by the Council of Experts
Concerning the Japanese Version of the Stewardship Code) and Japan's Corporate
Governance Code (June 1, 2015, by Tokyo Stock Exchange, Inc.), the Federation
shall review its Corporate Governance Principles, the Guidelines for Exercising
Shareholders’ Voting Rights, etc. as necessary, and take action in line with the basic
principles for performing stewardship responsibilities (meaning the responsibilities of
institutional investors to enhance the mid- and long-term investment return for theirclients and beneficiaries by enhancing and fostering Japanese investee companies’
corporate value and sustainable growth through constructive engagement or othermeans based on in-depth knowledge of the companies, and their businessenvironment).
Furthermore, in order to assist appropriate decision-making in association with
dialogues with investee companies and stewardship activities, the Federation shallconsider exchanging opinions with other implementing organizations, administrationand investment institutions, as well as having a forum for that as necessary.
4 Securing liquidity for pension benefit payment
Based on the outlook of pension financing and the profit and loss status, theFederation shall secure liquidity (e.g., cash) necessary for the payment of pension
benefits, etc., and conduct cash management efficiently.
In doing so, necessary functions, such as for understanding and analyzing
market trends shall be enhanced so that funds will be secured without shortfalls by,for example, smoothly selling assets, taking into consideration price formation in themarket.

21

5 Coordination among the Federation and other implementing organizations
In addition, the Federation shall cooperate with PAL and other implementing
organizations in collaboration with each other with respect to the investment
operations of EPI benefit association reserve funds by, for example, providing
necessary information.
III Matters concerning asset mix from a long-term perspective in administeringand investing the EPI benefit association reserve fund
1 Basic approach to the Benchmark Portfolio
The Benchmark Portfolio, which shall have an asset mix and deviation tolerance inline with the Administration and Investment Policy and investment targets, shall beestablished from the long-term perspective in consideration of generally accepted
expert knowledge on asset administration and investment as well as economic
trends in and outside Japan, based on forward looking risk analyses.
The Federation shall report on the establishment of the Benchmark Portfolio to theGeneral Assembly upon deliberation at the Fund Management Committee, etc.
2 Benchmark Portfolio
Asset classes that make up the Benchmark Portfolio shall be domestic bonds,
domestic stocks, foreign bonds and foreign stocks, and the asset mix and deviation
tolerance for the Benchmark Portfolio are as forth as below.
Exceeding the deviation tolerance shall be allowed during the period up to thetransition to the following Benchmark Portfolio.

Asset mix
Deviation
tolerance(Note)

Domesticbonds
25%

Domestic
stocks
25%

±20%

±12%

Foreign bonds

Foreign stocks

25%

25%

±9%

±11%

(1) Short-term assets and life insurance (limited to a general account) areclassified into domestic bonds.
(2) In principle, the values are based on market value.
(3) Alternative Assets are classified into domestic bonds, domestic stocks,
foreign bonds and foreign stocks according to risk/return and other22

characteristics, and capped at 5% of the overall assets.
3 Management of Benchmark Portfolio
Investment assets shall be assessed each month based on market value inprinciple to check the asset mix for each category of asset, and adjustment to theasset mix shall be made as necessary.
4 Benchmarks
Benchmarks for respective asset classes are as follows.
(1)

Domestic bonds
NOMURA Bond Performance Index (Overall)(2)

Domestic stocks
TOPIX (dividend-inclusive)(3)

Foreign bonds
FTSE World Government Bond Index (ex-Japan, ex-China, no hedge, in yen)

(4)

Foreign stocks
MSCI ACWI ex. Japan (in yen, dividend-inclusive)

Investment targets of entrusted investment management institutions and Manager
Benchmarks to be used for risk management, etc. shall be provided in theInvestment Guidelines.
5 Review of the Benchmark Portfolio
The Federation shall appropriately manage risks based on market trends, annually
verify the Benchmark Portfolio and, if it is considered necessary in specific cases,
such as that the investment environment assumed at the time of establishing theBenchmark Portfolio deviates from reality, examine the Benchmark Portfolio andrevise it as necessary. Any change to the Benchmark Portfolio shall be reported to
the General Assembly upon deliberation at the Fund Management Committee, etc. If
the Federation finds it necessary in consideration of market impact and other factors,
it shall establish a transition portfolio (meaning a transitional asset mix up until therealization of the Benchmark Portfolio) in order to smoothly transition to the revised
Benchmark Portfolio.
IV Othernecessarymatters

concerning

appropriate

investment of the EPI benefit association reserve fund23

administrationand1 Framework for responsibility of Federation(1) Responsibility of Federation
For the investment of the EPI benefit association reserve fund, theFederation shall establish structures for the administration and investment andclarify the structure of responsibilities according to the following.
A Committees
The Federation shall establish the Fund Management Committee,
Long-term Benefit Fund Committee, and Operational Management
Committee as set out in I.3 and shall manage them according to theguidelines on establishment of committees to be separately provided.
B Organizational structure for business administration
The Federation shall ensure the accuracy in execution of businesses withutmost care, and shall make efforts for the improvement of structure forbusiness administration by such way as strengthening the check andbalance function and documenting the details of business administration.
C Organizational structure for decision making
Decision-making shall be made according to the following processes.
Efforts shall be made for the improvement of an organizational structure fordecision-making.
(A) Gather and share necessary information.
(B) Any issues related to investment shall be sufficiently discussed at theorganizational level and recorded in the minutes of meetings, etc.
D Audit and internal control systems
The Federation shall have an auditor conduct a monthly audit, and, inparticular, make efforts for strengthening business audit and improving
internal control systems, including compliance.
(2) Responsibilities of persons in charge of investment management
For the investment of the EPI benefit association reserve fund, especiallykeeping in mind that the fund is a valuable resource for funding the long-term
benefits of association members, the Federation shall clarify its structure of
responsibilities and ensure that all persons engaged in the management of the
EPI benefit association reserve fund fulfill fiduciary responsibilities (duty ofloyalty and duty of care of a prudent manager).
2 Enhancing transparency
Regarding the administration and investment of the EPI benefit association24

reserve fund, the Federation shall devise ways to make disclosure documents easierto understand by promptly publishing the status of administration and investment
performance, such as investment returns and risks for each fiscal year by leveraging
its website, etc. on an annual basis (on a quarterly basis for quarterly status ofadministration and investment performance). Also, the Federation shall examine
ideal ways of information disclosure and publicity activities, responding to thediversification, sophistication and internationalization of investment, and makeenhancement accordingly.
The Federation shall report on these matters to the General Assembly and FundManagement Committee, etc. in a timely manner.
Transparency in selecting entrusted investment management institutions shall beensured under appropriate monitoring by the Fund Management Committee by, forexample, making the selection criteria subject to deliberation at the FundManagement Committee and timely reporting on the implementation status and othermatters requested by the Fund Management Committee.
When making such publication, attention shall be paid to market impacts.
3 Retaining and leveraging highly skilled and specialized talents
The Federation shall, if necessary, examine in detail the operations that require
advanced and specialized skills as well as the expertise required for such operations,and strive to retain highly skilled and specialized talents who have such expertise.
In addition, training shall be conducted by leveraging highly skilled andspecialized talents with the aim of enhancing performance of its staff.
The enhancement and development of specialized talents shall be promoted
actively, with reporting on the status made to the Fund Management Committee asnecessary and their opinions taken into consideration
4 Strengthening risk management
Necessary risk management systems shall be established.
In addition, also in light of various factors such as Flexible Investment, theFederation shall strive to enhance risk management by, for example, strengthening
forward-looking risk analysis functions, establishing risk management analysis tools,
and enhancing information collection and investigation functions as necessary.
5 Enhancing research and study operations
When conducting research and study operations, besides commissioning the work25

to think tanks and other similar institutions, engaging staff including highly skilled andspecialized talents in the work shall be considered so that know-how on theadministration and investment of the EPI association reserve fund will be
accumulated within the Federation. If highly skilled and specialized talents are
employed, the establishment of a structure for expanding internal research and study
activities by leveraging the talents shall be considered to accumulate know-how
obtained from the research and conduct the administration and investment of thefund safely and efficiently in the future.
In the case of commissioning the research, measures to prevent information leakshall be taken thoroughly.
6 Provision on necessary matters
Any necessary matters not provided for in this Basic Policy shall be separately
provided.
Supplementary Provisions
This Basic Policy comes into force from October 1, 2015.
Supplementary Provisions (March 3, 2017)
This Basic Policy comes into force from April 1, 2017.
Supplementary Provisions (July 19, 2018)
This Basic Policy comes into force from July 19, 2018.
Supplementary Provisions (March 31, 2020)
This Basic Policy comes into force from April 1, 2020.
Supplementary Provisions (December 24, 2021)
This Basic Policy comes into force from January 1, 2022.

26