Late last year, annual statistics for the defined contribution (DC) pension system in Japan were released.
Kayo Oe, a longtime DC watcher, explains how Japan’s DC market has grown and notes where improvement is needed to ensure future growth.

Investment
Japan(IJ):

Some Japanese pension organizations, such as the DC Asset Administrator Liaison Council and the National Pension Fund Association, released their annual data on DC.  Would you summarize the data, beginning with corporate pensions?

Oe:

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.

IJ:

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

Oe:

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 competitor 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.

IJ:

Do you have any preference among DC products?

Oe:

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.

IJ:

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

Oe:

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 plans they 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 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 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.

The primary issue for iDeCo administrators, however, is recruiting more young investors.  Although iDeCo participation is growing, almost half of Japanese in their 20s and 30s remain unaware of or uninterested in the plan.  Young people familiar with online services have opened iDeCo accounts at online institutions, but often choose deposit products without a clear understanding of the plan or its products.  These investors would be better off starting with a face-to-face service and moving to online services later, once they’ve attained a certain level of financial literacy.  New participants should receive constant follow-up services, for example, alert-mails directed at non-active contributors and participatory online seminars held at night when young workers are at home.

IJ:

Thank you very much.

Kayo Oe

DC Analyst (Certificated 1st degree DC Planner, Affiliated Financial Planner)

Member, Pension Academy of Japan

Member, Corporate Pension & Individual Pension Team, Social Security Committee, Ministry of Health, Labour and Welfare (MHLW)

Director, Office Libertas / Commissioner, 401k Educational Society / Commissioner, Foster Forum

Kayo joined Nomura Securities in 1990 after graduating Tsuda University.  She was assigned to operations for corporate employees’ asset building, such as Employees’ Savings Scheme and Employee Shareholding Associations.  Even prior to enactment of the Defined Contribution Pension Law in October 2001, Kayo was involved in administration, education, and consulting for DCs, and helped listed companies adopt DC.  Since 2010, she has managed life-planning services for employees at listed companies and officials in the public sector, and lectured at various seminars. 

In 2012, she left Nomura and co-established Office Libertas, a company that supports asset-building for employees.  She also works to promote DC for individuals through “iDeCo Navi,” her website which receives 150 thousand monthly visitors.  She has spoken at symposiums and workshops, contributed articles to magazines, and published books including, The Beginner’s Guide to iDeCo: Starting from Scratch.