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 featured all chapters in the last several months. This is the last of nine.
Past, Present and Future Perspective of Japan's Corporate Pension Scheme
Emeritus Professor of Yokohama National University
Current situation of public pension reform and the role of corporate pensions
Based on the history, current situation and challenges of corporate pensions, mentioned in the previous chapters, discussions about corporate pensions are obviously closely linked to social security system including public pensions. This chapter will feature the current situation of public pension reform focusing on the relationship between public pension and private pensions including corporate pensions.
9.1 The public pension system as a base of corporate pensions
A report released by the Social Security System Reform National Council (Cabinet Office) in August 2013 pointed out the following considerations for pension scheme reform:
As an effect of the pension financing frame reformed in 2004, pension benefits and premium burden as a percentage of GDP will be maintained at a constant level. The frame basically guarantees long-term sustainability of pension finance although adequate reforms will be required from time to time.
Considering the defined-goal of the "Four Pension Related Laws", two issues remain:
These recognitions are based on an understanding that major problems have settled by the 2004 reform which secured long-term sustainability of public pension financing, and that the future task is to enhance safety net function by responding to specific problems such as low benefit level of pensioners while keeping the sustainability even stronger.
9.2 Result of a financial review and examination at Section of the Social Security Council Pension Committee
The 2nd verification of the 2004 reform on financing was conducted in 2014. In the discussion at the Social Security Council Pension Committee (Ministry of Health, Labour and Welfare (MHLW)), the majority recognized few serious problems in the sustainability of pension financing on the premise that the (so called) macroeconomics slide formula could function in the future. But so far as Basic Pension benefits goes, the adequacy of benefit level might be threatened by longer adjusting periods caused by the macroeconomics slide.
An idea among optional pro forma was brought in to compensate for the decrease of benefit. The aim of this idea was to widen coverage of Employees Pension Insurance (EPI) to as many as 12 million for those whom currently covered only by National Pension, such as students, employees on short-term contracts and employees at non-EPI-applicable workplaces.
However, widening the coverage of EPI so large to non-regular employees such as part-timers will most probably face strong objections from business communities who employ many part-timers etc. and insured persons themselves. Therefore, other practical plans excluding the idea to widen the coverage of EPI needs to be prepared for the decrease of Basic Pension caused by prolonged adjusting period of the macroeconomics slide. Otherwise, the pensioners of National Pension (the benefits are only Basic Pension) will suffer the relative reduction of benefit level.
9.3 Public pension policies shown in an OECD report
Organization for Economic Co-operation and Development (OECD) made a report reviewing and comparing pension policies and their achievements practiced in various countries.¹ The following three methods were suggested to make 'adequacy of benefits' compatible with 'sustainability of pension scheme' in the report.
(1) To prolong working years
(2) To focus public pension benefits to provide on the most vulnerable people
(3) To encourage savings for retirement to complement possible reductions of public pensions
These are common methods for pension reforms in advanced countries and can be applied to the problems that Japan is facing. Considering the current condition in Japan, method (1) is a solution to raise the pensionable ages to maintain the adequacy of benefits. Method (2) is a policy to improve benefits of public pensions to those who receive only Basic Pension and no earning-related pension, such as self-employers etc. Method (3) is an aim to complement insufficient benefits of public pensions and to encourage and support private pensions.
9.4 Income replacement rates of public and private pensions in various countries
In relation to method (3), the OECD report of 2013 edition indicated average income replacement rates (before tax and social security premiums) of a sum of public pensions and obligatory private pensions to incomes of working generation in each country.
Also, it specified income replacement rates of private pensions whose coverage are not obligatory but high (40-65% of working population). The income replacement rates of major countries in descending order with a total of public pension, obligatory private pension and non-obligatory but highly covered private pension are: Denmark 78.5% (herein 47.9% by private pensions), United States 76.1% (37.8%), Canada 73.1% (33.9%), United Kingdom 67.1% (34.5 %), Germany 58.0% (16.0%), Sweden 55.6% (21.7%), Australia 52.3% (38.7%), France 58.8% and Japan 34.6%. France and Japan do not have the highly covered private pensions, so the rates only reflect public pensions.
As we can see, it is necessary in Japan also to secure old age income level in a combination of public and private pensions by offering the obligatory and the non-obligatory but highly covered (more than half of workers) private pensions.
The revised DC law enacted in May 2016 provided an opportunity for all citizens to join some sort of DC plans (individual-type or corporate-type) no matter how different their life courses are. The revision was fruitful in a sense that it led the DC scheme to become universal.
Retirement benefits such as retirement allowances and corporate pensions are usually provided to permanent employees who are the core work force of companies. Therefore, tracing the history of retirement benefits is to verify transitions in personnel strategies of companies. Also, the premise of retirement benefits is closely related to the situation of social security systems such as public pensions.
As mentioned in the previous chapter, public pensions will inevitably lessen its role in the old-age income security due to the reduction of substantial benefits through the macroeconomics slide. Incidentally, private pensions will need to supplement the lessened role of public pensions. DC plans (corporate-type or individual-type) expanded universally to cover all citizens, as a counter measure against this situation. Now, will DC plans be the main streams of corporate pension scheme in Japan just as in the United States?
The review of the history of corporate pensions in Japan certainly reveals a shift to decrease risk that companies bear and to share it with their employees.
In business accounting, DC plans work only by dealing contributions as costs and reduce risk on companies. On the company side, incentive to shift to DC plans seems strong. There are also reports on movements to completely abolish corporate DC plans to shift to an individual DC plan by adding contributions on salary-gain- stream due to the coverage expansion of individual DC scheme.
However, is it right to judge strategies of corporate pensions only by reducing the risk burden of companies?
We must not forget that one of the factors for companies to establish corporate pension plans was originally to provide welfare benefit through old-age income security for employees.
Dr. Katsuhito Iwai introduced an interesting example of an advertising company in the United Kingdom as "a state of the company in post-industrial capitalism" in his book². It explained when it comes to companies such as advertising agencies that supply specialized and technical services, they ultimately depend on creativity of each employee and so shareholders cannot own them as human capital. (Ironically, a famous US pension fund among their shareholder.).
The case might be indicating the state of corporate community in the future. I believe that a certain level of company's paternalism in investing in human capital, especially a commitment in retirement benefit plans for permanent employees, will be a positive strategy to enhance value of a company.
¹ OECD (2011), "Pensions at a Glance 2011"
² Iwai, Katsuhiko (2003), "Where Companies Go?", pp 276-282: a case about Search & Search Co.: Heibonsha
References (excluding ones already referred in each chapter)
Murakami, Kiyoshi and Yamasaki, Chikao and Gotoh, Asao (1974), "Design and Management of Retirement Allowances and Corporate Pensions": Diamond
Tanaka, Shuji and Usuki, Masaharu (2007-06), 'Why Doesn't Life Annuity Become Popular? – A Survey of Annuity Economics and Suggestion for Japan', manuscript collection of "The 15th Japan Finance Academy", No.11
Asano, Yukihiro and Yamaguchi, Osamu (2002), "A to Z of Cash Balance Plans": Nihon Keizai Shimbun.
Yamaguchi, Osamu and Kubo, Tomoyuki (2004), "Revival Strategy of Corporate Pensions": Kinyu Zaisei Jijo Kennkyu-kai.
Yamaguchi, Osamu (2012), 'Role of Tax-qualified Pension Scheme'. "Trusts", 250th ed.: The Trust Companies Association of Japan.
Aoyama, Jun (2017), 'Making DB Pensions Flexible – Inducement of Risk Adjusted Contributions and Risk Sharing Plans'. "Mizuho Pension Report, No.122": Mizuho Trust & Banking Pension Research Institute.
Yamamoto, Susumu (2017), 'Current Situation and Problems of Corporate Pension Plans'. "Trusts", 270th ed.: The Trust Companies Association of Japan.
Yamaguchi, Osamu (2017), 'Current Situation and Problems of Retirement Benefit Plans'. "Pension and Economy", 36(3)
Emeritus Professor of Yokohama National University
Former Chairman of the Pension Academy of Japan
Emeritus Member (Former President) of the Japanese Society of Certified Pension Actuaries (JSCPA)
He started his career as a certified pension actuary at Sumitomo Trust and Banking (STB, now Sumitomo Mitsui Trust Bank) after graduating Osaka University with BS in mathematics. Later, he served as manager at divisions of business planning and pension investment, then as managing director at pension research center and STB Personnel Services. During his last days at STB, he started teaching at universities such as Tokyo Institute of Technology, Chuo, Waseda and Kyoto.
Then, he served as a professor of Yokohama National University in pension finance at its business school.
He writes for B2B magazines and lectures at various forums and universities. He has published books and research papers such as “Strategies for the introduction of Defined Contribution Pensions”, “Practice of Retirement Benefit Obligations”, “Defined Benefit: Introduction to Corporate Pension Law”, etc.
Translator of this series:
Teaching Professor of Nihon University (Pension system, Faculty of Economics)
Fellow of the Japanese Society of Certified Pension Actuaries (JSCPA)