June 2001 Defined Benefit Corporate Pension Law
Defined Benefit Corporate Pension Law
Government
No specific funding required
Starting April 2002
It is a way to correct the old remedy, which was put in place in an ad-hoc manner.
Detailed description of the reform
Previously, Japan had three forms of private pensions for employees: (1) Employees' Pension Funds, (2) Tax Qualified Pensions, and (3) individual pension plans including those offered by life-insurance companies. The first two are provided by the employer, and thus are called the "corporate pensions". They are under strict regulation and enjoy tax-preferred treatments. The first one, the Employees' Pension Funds have a portion of the public pension, since they take a portion of the premium for the public pension and manage that portion of the public pension together with the additional "private" part. This one done because the "private" portion of the funds were small, and in order to get a good rate in the market, a bulk sum of funds were thought to be necessary at the time.
The second one, the Tax Qualified Pension, also gets a preferential treatment in taxes, but less so than the Employees' Pension Funds.
Unlike the Employees' Pension Funds, the Tax Qualified Pensions were not required by the regulations to accumulate the fund necessary for the future payments of pensions. Many corporations do not have enough funds. Thus, when a corporation with the Tax Qualified Pension bankrupted, the employees were not guaranteed to receive the full amount of the pension. Recently, due to the economic recession and the fact that most of corporations that have the Tax Qualified Pensions were small and medium scale, an increasing number of the Tax Qualified Pensions have resolved, and there are cases of employer-employee disputes.
In addition, because of the low return on investment, both the Employees' Pension Funds and the Tax Qualified Pensions (both defined-benefit) are putting a severe financial pressure on companies. In response to this, a law regarding a new kind of corporate pension, defined-contribution pension, is also going to be pass the Diet this year (For detail, see previous Reform Monitors). Many corporations are expected to replace the defined-benefit pensions with the defined-contribution pension. Thus, there was a need to re-examine the old defined-benefit types of corporate pensions as well and see the smooth transition.
Because of the low return, the portion of the public pension which is now managed with the Employees' Pension Fund is causing corporations additional financial burden.
The basic approach is to phase out the Tax Qualified Pensions and introduce new corporate pensions, which have stricter restrictions.
Employees
Phase out of the Tax Qualified Pension in ten yearsl
A new type of the defined-benefit corporate pension will be introduced
The above pension is required to accumulate the funds enough for future payments of benefits.
The new pension must: (1) be provided for at least 5 years, (2) start the payment of benefits between ages of 60 to 65, (3) the minimum period of payment the premium in order to receive benefits must be less than 20 years, (4) be portable to defined-contribution plans.
The portion of the public pension which was managed under the Employees' Pension Fund can be transferred back to the public pension.
That the corporations transfer their corporate pensions into the new type, instead of resolving them all together.
Better management of the corporate pensionsMany corporations are expected to turn their defined-benefit plans to defined-contribution ones.
Not yet to be seen.
The advantage of the Tax Qualified Pension was that it had a tax preferential treatment without the strict regulations of the Employees' Pension Fund. However, now that the new type of the corporate pension is fairly strictly regulated, many corporations may simply resolve their pension plans or turn to defined-contribution plans. Some criticize that because pension plans are important element of the employee-employer relationship, there should be some measures which prevent worsening the pension options for employees.
The new law rectifies some unnecessary confusion such as the public pension portion in the Employee's Pension Funds.