Translation of a paper originally published in an academic journal of Yokohama National University “Yokohama Management Research” vol. 38, March 2018.

Prof. Osamu Yamaguchi presented a nine-chapter odyssey of Japan’s corporate pension scheme, covering from primitive plans in the early days to issues to be fixed in the future. IJ introduces each chapter over several months.

Past, Present and Future Perspective of Japan's Corporate Pension Scheme

Osamu Yamaguchi
Emeritus Professor of Yokohama National University

Chapter 5
Development and reduction of Employees' Pension Fund (EPF) scheme

5.1 Establishment of Employees' Pension Fund (EPF) scheme – Integration with public pension

The revision of Employees' Pension Insurance Act in 1965 aimed to increase benefit level remarkably and to raise premium. At that time, the Nikkeiren (the Japan Federation of Employers' Associations) pointed out that retirement benefits or corporate pensions by companies overlapped Employee's Pension granted by the government for old age security and cost burden. And they claimed that the revision of the act could be admitted only if adjustment of public and private pensions were made.

On the other hand, the labor union side strongly opposed the opinion, stressing that retirement benefits were the obtained right for employees and they should not be reconciled with Employees' Pension which was a public social security. Also, members with public interests pointed out that corporate pensions were based on relationship of rights and obligations based on management-labor agreement while Employee's Pension was social security based on governmental responsibility, so the adjustment of the two was inadequate.

However, the Nikkeiren firmly insisted that revising the act without the adjustment could not be accepted. Under this situation, an idea was presented, suggesting that premiums could be adjusted if a company established an EPF that substituted a part of Employees' Pension benefits. The revised act incorporating this idea passed the Diet and was enacted.

This substitute ('Daikou' in Japanese) method is not an equivalent of the "contract-out" method in the UK. It simply substitutes a part of Employee's Pension benefits. The benefit level of an EPF should be more than the substitute ('Daikou') portion and should add the additional (plus alpha) benefit based on the sponsoring company's benefits.

5.2 Development of the EPF scheme

Under the rapid growth of the economy in those days, the Employees' Pension Funds (Plans) steadily spread out, not only as single or combined established plans for large companies but also as collectively established plans based on industry associations of smaller companies. The number of EPFs expanded to 853 covering employees up to almost 5 million by the end of 1972 ( * All one-year referred in this article are in Japanese fiscal year which is from April to March. FY1972 is from Apr. 1972 to Mar. 1973.). Later, after authorization standards for establishment and investment rules were eased, the number of EPFs reached to the highest of 1,883 by the end of 1996 and employees covered expanded to 12.25 million by the end of 1997. So here, EPF came to be the core of Japanese corporate pension scheme.

However, as stated in the next paragraph, the introduction of corporate accounting rule for retirement benefits triggered the dramatical change of companies' attitude and number of EPFs began to substantially decrease.


5.3 Introduction of the retirement benefit accounting standard and 'Daikou Henjou'

The decrease of EPFs was closely related to the newly introduced retirement benefit accounting standard as a part of financial accounting standards for publicly listed companies. At the introduction of the retirement benefit accounting standard, the details were described in practice policies whose exposure draft was publicized in August, 1999. In fact, the substitute part of EPF was excluded from the liability valuation of the sponsoring company at this stage. This was revised to be included when the finalization of practice policies were made in September, the same year.

As a result, the substitute part of EPF resulted to be included in the liability recognition of the sponsoring company after 2000, when the retirement benefit accounting standard started, and the huge funding deficiency was disclosed in the financial statements. To overcome this situation, business organizations demanded that the substitute part should be permitted to be returned to the government since it was originally a part of governmental benefits.

Later, the act of Defined Benefit corporate pension scheme was enacted to maintain pension plans after the return of the substitute portion. Thereafter, most of the single/combined established EPFs starting form Toyota and Denso, returned the substitute portion to the government ('Daikou Henjou') like an avalanche since its enforcement in April, 2002. The number of EPFs that was 1,883 in 1996 was substantially decreased to 687 at the end of 2005 and most of the remaining plans were collectively established EPFs based on smaller companies.

5.4 AIJ fraud scandal and the dismissals of collectively established EPFs

After that, a fraud scandal of AIJ Investment Advisors Co., Ltd. exposed serious deterioration of fiscal conditions of collectively established EPFs that might affect Employees' Pension itself. To deal with this situation, the stabilized act (the act to revise Employees' Pension Insurance Act etc., to enhance the soundness and reliability of public pension scheme) was enacted on April 1, 2014. It recommended EPFs to shift other corporate pension plans and introduced special treatment for dismissal of plans. Therefore, collectively established EPFs rushed to 'Daikou Henjou' or dismissals, and number of EPFs rapidly decreased further more.

The number of remaining plans (excluding plans with 'Daikou Henjou' in the terms to come) substantially reduced to 7 single/combined EPFs and 17 collective EPFs, only 24 EPFs in total.¹ Here, the EPF scheme essentially came to an end.

¹ Pension Fund Association, 'Current Situation of Corporate Pensions, as of Dec. 1, 2017′,

< Translated by Tomoyuki Kubo >


Overview of Japan's Corporate Pension Scheme, 6 of 9: