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 7
Establishment and development of Defined Contribution (DC) scheme

7.1 Appearance of Defined Contribution (DC) plans

With the DB-type pension plan mentioned so far, formula for benefit calculation is defined and assets for investments are managed within the plan as a whole. On the other hand, with the DC-type plan, contributions by participants are managed individually and benefit is determined by the sum of their contributions and investment earnings. Since individual participants select investment products by themselves, their future benefits will be quite different depending on their performance.

There are two types of DC scheme introduced in October 2000. One is Corporate-type DC where contributions are mainly by companies. The other is Individual-type DC where contributions are by individual participants. There are many kinds of DC-type plans such as 401(k) plan in the United States. The Japanese DC scheme was drawn on these various US schemes.

7.2 Development of DC plans

After 5 years from the introduction, the Ministry of Health, Labor and Welfare conducted a survey at the end of December 2006. According to the result, the number of companies that introduced Corporate-type DC plans within 5 years was about 8,000. About 60% of them (mainly mid-size or over companies with more than 100 employees) shifted from other plans to DC, transferring assets from Tax-qualified pension plans or Retirement allowance plans. Smaller companies with less than 100 employees introduced new DC plans instead of shifting from other plans.

At this point, the number of participants were 2.086 million. But the number steadily increased as in the chart below and reached 5.914 million by the end of March 2017, ten years after the survey.

DC

7.3 Improvements of DC scheme (Corporate-type)

Shifting from DB plans to DC plans is a growing trend in OECD countries. Improvement of the content of Japanese DC plans is required. Under this situation, measures for tax treatments were required to be taken in the following areas in the tax amendment guidelines of 2015:

1. Introduction of matching contributions by small size companies in Individual-type DC plans

2. Expansion of participants for Individual-type DC plans

3. Amendments of portability of corporate pension plans etc.

4. Change of monthly base to yearly base of DC contributions

Items 1 and 2 are intended for Individual-type DC plans, Items 3 and 4 involves Corporate-type DC plans as well.

Furthermore, "the law to revise a part of DC laws etc." (the revised DC law) that was enacted in May 2016 introduced Simple-type DC plans that substantially eased introduction process for small sized companies (with less than 100 employees). In addition, the revised DC law made "continuous investment education" compulsory, and limited the number of investment products, while recommending "diversified investment products" as default investment method at the same time.

And now, establishment of pragmatic detail and effective operation are anticipated.

7.4 Improvement of iDeCo

The revised DC law achieved "Expansion of participants for Individual-type DC plans" as stated in Item 2 of the tax amendment guidelines of 2015. Any public pension plan participant under the age of 60 (including employees of companies implementing corporation pension, full-time homemakers and civil servants) can join Individual-type DC scheme since January 2017.

"iDeCo" is the nickname (an abbreviation of "I-ndividual De-fined Co-ntribution") of this expanded Individual-type DC plans. iDeCo enables participants to support their self-help effort for old-age and by combining this with public pension, participants are entitled to wealthier retirement.

Hereon, simple methods for individuals outside organizations is anticipated to improve DC investment such as the reduction of investment products or setting a default investment method with diversified investment effects as in Corporate-type DC plans.

< Translated by Tomoyuki Kubo >

 

Overview of Japan's Corporate Pension Scheme, 8 of 9: https://investmentjapan.jp/japansbasic/1270/