TOKYO Wed Feb 25, 2015 5:07am EST

Japan's prime minister's office has baulked at a proposal to create a large board to oversee the country's $1.1 trillion pension which could delay attempts to improve its governance as it increasingly moves into riskier assets, according to sources and draft legislation seen by Reuters.

The Government Pension Investment Fund (GPIF) last year cut its allocations for low-yielding government bonds and doubled its target for stocks, a key element of Prime Minister Shinzo Abe's agenda to jump-start the long-sluggish economy, boost returns for millions of pensioners and spur risk-taking.

But five months after those changes helped boost Tokyo stocks, the dispute over the fund's governance is endangering the prospects for a governance bill, being prepared by the Ministry of Health, Labour and Welfare, to bolster oversight of the world's largest pension fund.

The bill, championed by Welfare Minister Yasuhisa Shiozaki, would put the fund under the management of a committee of up to 10 members, modeled on the board of directors of the Bank of Japan.

They would get broad powers as final judges on how the fund invests its 130 trillion yen in assets, the previously undisclosed draft shows.

The massive fund manages reserves of national and employee pension plans covering 67 million people, but hired its first chief investment officer only last July and has roughly 80 employees. Most of its investments are managed by outside fund managers.

Shiozaki and other reformers "believe that a more professional GPIF could not only deliver better returns for pensioners, but could also serve as a powerful activist investor, pressuring Japanese companies to improve their return on equity," said analyst Tobias Harris at Teneo Intelligence.

But the Prime Minister's Office has pushed back, essentially stalling Shiozaki's bill, on the grounds that GPIF needs a nimbler structure with more streamlined decision-making, said two people briefed on the matter.

"People in the ministry are still working on the draft, but the sense is that they are unlikely to get the green light to submit it to this session of parliament," said a person briefed on the process. That would mean the reform would be delayed until at least the autumn.

Chief Cabinet Secretary Yoshihide Suga, asked about potential delays to the bill, said this week the government should move ahead with what steps it can as they are ready "and move ahead with a sense of speed."

Abe's cabinet on Tuesday approved a separate, smaller measure that would add a senior GPIF executive and rescind a previous plan to move the fund's headquarters to Yokohama from Tokyo.

"The reform plan is still being debated at the relevant ministerial committee," said Hiyoshi Kai, an official at the ministry's pension department. “It’s hard to say if it’s going to be submitted in this session of parliament."