As seen in Chart 1, consolidation of Japan’s corporate pensions into defined benefit (DB) and defined contribution plans seems nearly complete.  Although more employees participate in DB plans, which are favored by large companies with many employees, DC is now a major form of corporate pensions.  Today, one in five corporate employees are covered by DC.

I think participation in DC will eventually match that of DB.  If a Japanese company changes its pension plan today, it is most often to transition to DC, just as Sony did last October.  Panasonic recently announced that this spring’s annual wage increase will include increased contributions to DC pensions.  As Japanese companies shift away from retirement packages and corporate pensions, DC will be the only option available to their employees.  Don’t expect employer matching, which is offered by around 30% of companies with DC, to become common, though.  Instead, we’ll see more employees  combine individual DC plans with corporate pensions.

What do you make of the statistics for individual DC plans?

Individual DC plans were largely stagnant for 15 years after they were first introduced.  Substantial growth came in January 2017 when coverage was extended to public servants and homemakers and the plans were given the catchy nickname “iDeCo,” by which they’re known today.  Financial organizations then got serious about acquiring customers for the non-taxable, individual accounts.  The feeling was, “If you don’t sign them up, your competition will.” Many financial houses then rushed into the market, which some dubbed the “iDeCo-fest”.  With government support from the Financial Services Agency, whose goal was to promote iDeCo as a low-cost means of asset building, financial service providers prepared attractive lineups of products and held DC plan seminars with low fees. 

Even now, 30,000 people per month join iDeCo.  Participants in corporate DC are now allowed to join iDeCo, up to the amount of their non-taxable contribution allowance.  The number of iDeCo participants will eventually match that of corporate DC plans.  Growth in Japan’s DC market seems dependent on iDeCo.

Do you have any preference among DC products?

There are three types of DC products: investment funds (toshi shintaku or toshin), insurance (guaranteed investment contracts or GIC), and deposits.  Among them, toshin (especially balanced funds) make up half of DC products.  Among toshin products, roughly 75% of corporate-type and 50% of individual-type (iDeCo) are passive.  The conservative bent among corporate plans derives from their historical preference for principal-secured products. In addition, corporate pensions first arose at large companies, such as Hitachi and Toyota, where participation was compulsory, and asset allocation was diversified and balanced.  Corporate pensions continue to practice balanced allocation, with the occasional addition of active funds, such as domestic stocks.  On the other hand, iDeCo choices tend to be more active, because participants are more keen on asset management than participants in corporate pensions, who rely on employers to manage their plans.

What do you think of asset administrators?  What should they do to encourage growth in Japan’s DC market?

Asset administrators of corporate pensions have developed enough good materials to educate employees.  But the materials are not used well and corporate pension participants are still not much interested in DC plans and products.  Administrators need to do better at showing employees what their retirement can be with the addition of plans they can contribute to now.  Business operators and owners need to find different ways of educating their employees other than DC-only seminars that employees are not interested in.  Instead, they should include DC content in career seminars or life-planning seminars on a regular basis.  Some companies ask a few basic DC questions in their promotion exams.

Other institutional and regulatory changes can be made to corporate DC.  In March 2018, the revised DC law empowered business operators to monitor asset administrators and replace them if they were not acting in the best interest of employees.  Realistically, however, corporations are unable to replace administrators because substantive in-kind rollovers/transfers are not yet allowed.  If a corporation does want to change its DC manager, it must first force its employees to sell all their DC assets managed by the DC manager and repurchase the asset under the new manager.  Management blackouts and product exclusions are imposed for several months between the sale and repurchase of assets.  DC product exclusions cause other difficulties.  Corporate DC plans are not as open as business operators would like.

I would say iDeCo asset managers are in for a shakeout in a couple of years, after which they’ll be concentrated into 2 groups: online financial institutions and face-to-face institutions.  Online institutions will provide everything from seminars to individual account data via the internet and with cheaper fees.  Face-to-face institutions would offer customized services which may relate to other services and products they provide.  iDeCo customers can choose among them according to their own tastes and preferences.

Matching the interests of administrators and iDeCo customers is difficult because the products administrators offer depend largely on the types of business they represent.  Banks push deposits, insurers sell mostly GICs.  As long as their iDeCo customers tend to buy in-house, these institutions are fine.  However, many financial institutions sell products which add to their own bottom line, but do little to help customers build assets.

Thank you very much.