June 2000 Defined Contribution Pension Law (Proposal)
Defined Contribution Pension Law (Proposal)
Government, backed by employers.
None
The proposal was submitted to the Diet in March 2000, but, due to political reasons, the Diet was resolved and an election was held in June. Thus, the discussion on the proposal was temporarily postponed until the new Diet is established.
It is a way to alleviate the pressure of future pension payment liabilities from enterprises by changing from defined-benefit to defined-contribution systems.
Detailed description of the reform
Private pensions offered by employers to employees form the third layer of the Japanese pension system: The first layer is the flat-rate Basic Pension, and the second layer is the income-related Employees' Pension Insurance, both are public.
Enterprises (i.e. employers) in Japan, especially large corporations, had expanded its employee benefits, including retirement packages, to attract work force during the time of labour shortage in the 1970's and 1980's.
Thus, currently 90% of Japanese enterprises offer retirement packages for its employees. Of them, about a half offer pension schemes, and about 90%, a lump-sum retirement allowance.
Most of the enterprises have not stocked the fund for the future pension payment. The recent change in the accounting regulations have forced them to disclosure the future pension payments as liabilities. In addition, Japanese economy has been experiencing a near-zero interest rate for some time.
Thus, enterprises are eager to introduce a defined-contribution pension which might partly replace the defined-benefit pensions.
Also there have been a demand from employees side to create a portable pension which can be transferred to a different firm when he/she changes his/her job.
The objective of the reform is to create an alternative third layer of pension in the private sector which is defined-contribution, not defined-benefit. The defined-contribution schemes, in a way, give a leeway from the future pension liabilities to firms which currently have defined-benefit schemes. However, by introducing "individual type" as well as "firm-based type", it creates an additional choice for those who are self-employed or whose employers do not offer the third layer of pensions.
All population except non-working spouse of employees and public employees
Two types of defined-contribution pensions will be introduced. One is a firm-based type offered by firms to its employees. Premium is paid by employer. Another is an individual type for self-employed and those employees whose employers do not offer the defined-contribution pensions, offered by financial companies. Premium is paid by subscribers themselves.
Subscribers have individual account and can choose from a variety of investment choices. Schemes must offer a minimum of three investment choices.
The benefits can be either pension of lump-sum, and can be offered after the age 60. Withdrawal of funds before age 60 is not allowed, and minimum of 10 years of participation is necessary to receive benefits.
After three years of participation in a firm-based defined-contribution pension, it can be transferred to another firm-based fund or to an individual fund. Premiums can be deducted from income for tax purposes. Benefits are tax-exempt up to some amount.
Since the law only stipulates the framework of the defined-contribution pensions, it is now up to each firm and financial companies to offer such type of pensions to its employees and to its customers. It is said that some firms are not eager to introduce a defined-contribution scheme, considering strong opposition from labour unions. Also, financial companies may be reluctant to offer such scheme because of the small market and profitability.
The pressure of pension liability of firms will decrease.
People might have additional safety-net for their future.
It might facilitate an influx of private money into stock market which might revive the economy.
On the other hand, too much reliance on defined-contribution schemes might create a false sense of safety-net, where, actual benefit may or may not be what subscribers speculate.
Not yet implemented
Not clear.
The labour is against such schemes because a shift from a defined-benefit scheme to a defined-contribution scheme transfers the risk of the pension fund investment to employees from employers, and it might also reduce the amount of pension benefit for some. The "Rengo (labour union)" refused to participate in the governmental committee on defined-contribution pensions.
In my opinion, the introduction of the defined-contribution schemes requires still more discussion and to reach a common consensus among parties, including Rengo. Japanese public is not as familiar with investment in stock market, so forth, as the American public as in the case of 401K, that more time and education is necessary. Moreover, the inflexibility of the current system such as age restriction on withdrawal needs to be relaxed in order for it to be more accepted by the public and to work as a third safety-net.
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