corporate pension social security in japan 11.12.2015
DESCRIPTION
Beginning of Corporate Pension the retirement lump-sum; a onetime payment on reaching the retirement age limit At Edo era, in Mitsui Corp., “Noren Wake”TRANSCRIPT
Corporate Pension
Social Security in Japan 11.12.2015
Beginning of Corporate Pension?
• The retirement lump-sum set up first, the corporate pension second. Why?
• Today, it is critical to answering this question.
Beginning of Corporate Pension
• the retirement lump-sum; a onetime payment on reaching the retirement age limit
• At Edo era, in Mitsui Corp. , “Noren Wake”
http://rekishi-roman.jp/page-1-5.html
Beginning of Corporate Pension
• “Noren Wake” – “ 暖簾 Noren” is not just a shop curtain,
including the credit and the reputation.– reward for “a good job”– opening a franchise, to set one up in business
• Times goes by, “Noren” had changed to “Money”, Retirement Lump-Sum.
Beginning of Corporate Pension
• After the WWII, the retirement lump-sum was the labour custom.
1952 Reserves for Retirement Allowances Act• An advance accumulating the reserves for
retirement allowances makes the cost into the financial loss.
Beginning of Corporate PensionCurrent deduction for retirement income
Less than20 years • \400 thousands ×working years Over 20 years• \ 8million + \700thousands × （ working years - 20years ）• In this way, the retirement lump-sum was so popular in Japan, however,
…
• If the retirement lump-sum is increasing, what is the problem?
Beginning of Corporate Pension
In 1950’s, some corporations made some portion of the retirement lump-sum into annuity. Because,
• Stabilizing the corporate finance
• Making the healthy relations between labour and management
• Enclose the good employee• Improving the productivity
Beginning of Corporate Pension
• April, 1962, the Corporate tax law and the income tax Law were revised and the tax-qualified pension plan was initiated.
• The Employees’ Pension Fund System was introduced. (Enforced in October 1966)
By the way…DB & DC
• A defined benefit (DB) pension plan promises to pay you a certain amount of monthly retirement income for life.
• A defined contribution (DC) plans guarantee the contributions to your account, but they don’t provide a guaranteed income in retirement.
DB & DC4 things to know about DB plans1. The amount of your pension is based on a formula that usually takes
into account your earnings and years of service with your employer.
2. In most plans, both you and your employer contribute.
3. Your employer is responsible for investing the contributions to ensure there’s enough money to pay the future pensions for all plan members.
4. If there’s a shortfall in the money needed, your employer must pay the difference.
DB & DC3 things to know about contributions1. Usually, both you and your employer contribute to the plan.
Your employer may match some of the contributions you make.
2. You are responsible for investing all contributions to grow your savings. In this way, it is similar to an RRSP*.
3. The amount available for your retirement depends on the total contributions made to your account and the investment returns this money earns.
*RRSP A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government, that you use to save for retirement. There are a number of benefits to saving in an RRSP.
DB & DC
DB DC
The DB Benefits go up along withthe period of working. To work longperiod, to get much pension benefit.
The DC Benefits are stable after retirement.
priceperiod of serviceyields
price
retirement
price
retirement
No one knows what is the extent of thecompany’s liabilities of pension benefit.
On the contrary, DC type benefit is more clearthe company’s liabilities of pension benefit than the DB plan.
yields
Guaranteed by the company Education of investment
Beginning of Corporate Pension
In 1950’s, some corporations made some portion of the retirement lump-sum into annuity. Because,
• Stabilizing the corporate finance
• Making the healthy relations between labour and management
• Enclose the good employee• Improving the productivity
Demands for the Well trained labor -> seniority-based wage system -> DB type corporate pension
Time line Corporate pension in Japan[History of the Pension System in Japan]From the end of Increased number of private companies introduced the retirement lump-sum systemTaisho Era onwards1936 The Law for Retirement Reserve and Retirement Allowance enacted:
Factories and companies having 50 or more employees were required to introduce this system.1944 The Employees’ Pension Insurance Law was enacted. (1942 Workers Pension Insurance
Law was revised.): The retirement lump-sum system was designated as voluntary system again.
1952 The Retirement and Remuneration Reserve System was introduced. (The taxation system)April 1962 The Corporate Tax Law and the Income Tax Law were revised and the Tax-qualified
Pension Plan was initiated.June 1965 Amendment of the Employees’ Pension Insurance Law
The Employees’ Pension Fund System was introduced. (Enforced in October 1966)February 1967 The Employees’ Pension Fund Association was started.November 1973 The price indexation of pension benefits for the Employees’ Pension was introduced:
All the expenditure deemed to have accrued as a result of price fluctuations, including one related to the substitutional portion of the Employees’ Pension Fund, is paid by the Government-managed Employees’ Pension Insurance and therefore the Fund only provided the conventional substitutional portion. It was also admitted for the Fund to operate welfare facilities.
April 1986 The Services Commission Corporation (called Designated Corporation) System of theEmployees’ Pension Fund was introduced.
May 1988 Amendment of the Employees’ Pension Insurance Law: Goals of amount of pension benefit to be achieved set. The transportable system related to those withdrawn from EPP after short participation and the payment guarantee system were started.
December 1989 Amendment of the Employees’ Pension Insurance Law: Management of pension asset in Employees’ Pension Fund and The Employees’ Pension Association were augmented.
April 1991 Establishment of the National Pension Fund SystemNovember 1994 Amendment of the Employees’ Pension Insurance Law:
The calculation methods of exemption premium rate was improved. Scope of assets subject to the Self-management Services was expanded.
March 2000 Amendment of the Employees’ Pension Insurance Law: Deregulation pertaining to business management and asset management, payment of contributions through listed stock, etc.
June 2001 Defined-Benefit Corporate Pension Law was enacted: New corporate pension without substitution (Contract type, Fund type). Protection of eligibility was strengthened. Substitution of Employees’ Pension was returned (voluntary). Abolition of the tax-qualified pension plan (in 10 years)Defined-Contribution Pension Law was enacted.
October 2001 Defined-Contribution Pension Law was enforced.April 2002 Defined-Benefit Corporate Pension Law was enforced.June 2004 Amendment of the Employees’ Pension Insurance Law, Defined-Benefit Corporate Pension
Law, and Defined-Contribution Pension Law Exemption of employees’ pension funds, Lifting of the freeze on insurance rates (Scheduled to be enforced in April 2005) Preferential measures for dissolution of the employees’ pension funds (installment payment and reduced payment of the minimum actuarial liability) (Scheduled to be enforced in April 2005) Raising of the maximum contribution amount of the defined-contribution pension (Scheduled to be enforced in October 2004) Securing of portability of the corporate pension (Scheduled to be enforced in October 2005) Relaxation of the conditions for midterm withdrawal of defined-contribution pension (To be
put into effect in October 2005)
Before beginning of 2000’s corporate pension in Japan
Big Companies• the retirement lump-sum • Employees Pension Fund
Middle and Small Companies• the retirement lump-sum • Tax-Qualified Pension Plans
Outline of the Employees’ Pension Fund SystemI. Structure of the Pension System
Personal Pension
DBCorporatePension
(8.01 million persons)
The National Pension (Basic Pension)
(Substitutionalportion)
The NationalPension Fund
(approx. 520,000persons)
Defined-Contribution
pension(Personal type)
(approx. 130,000persons)
Employees’ Pension (34.51 million persons)
(Workplace-based portion)
The Mutual AidAssociations
Wives of salariedworkers, etc.(No.3 insured
persons)(9.78 million
persons)
Self-employmentpersons etc.
(No.1 insured persons)(19.04 million
persons)
Salaried workers for private companies(No.2 insured persons, etc.)
(approx. 38.92 million persons)
GovernmentEmployees etc.(No.2 insuredpersons, etc.)(approx. 4.41
million persons)
Approx. 67.75 million persons
Note: The numbers of participants are as of the end of March 2012.
Note: The No. 2 insured persons, etc. are persons insured for employee pension (including persons eligible for benefits of any pension system that should provide for a person of 65 or more years old who retired due to age limit or any other reason, in addition to the No. 2 insured persons).Note: The parenthesized figures are tentative values obtained simply by totaling figures at different points of time.
The Employees’Pension Fund(approx. 4.37
million persons)
DCCorporatePension
(4.21 million persons)
The EPF; changes in Number of Funds and Other Particulars from FY 1992 to 2011
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
0
10
20
30
40
50
60
70
02004006008001,0001,2001,4001,6001,8002,000internal investment management Investment Advisors Life Insurance Trust
Number of Funds
Trill
ion
yen
Source)Pension Fund Association(2011) 『 The newly Corporate Pension Basic Data 』
deregulation
The EPF; changes in Pension Finances from FY 1994 to 2011
-2000
-1500
-1000
-500
0
500
1000
1500
2000
-25
-20
-15
-10
-5
0
5
10
15
20
25Funds with deficits Funds with surpluses Yield (%)
Source)Pension Fund Association(2011) 『 The newly Corporate Pension Basic Data 』
The transition of long term interest rate‐
10year government bonds
Outline of the Employees’ Pension Fund System
1. Purposes and History The Employees’ Pension Fund Scheme has been employed in Japan to offer part of services of
the Old-Age Employees’ Pension System, among the Employees’ Pension Insurance Services operated
by the Government of Japan. Further, it is aimed at to secure the pension benefit in addition to the
Old-Age Pension of the Employees’ Pension Scheme, and then to adjust the differences in functions
and costs that the participants bear which the Corporate Pension Schemes/retirement allowance give
rise to as against the public pension schemes. The Law on the Employees’ Pension Fund System came
into effect in October 1966.
2. Organization The Employees’ Pension Funds are public corporations subject to the approval of the Minister of
Health, Welfare and Labour, and operated through democratic consultation by the delegates who are
elected in the same number of persons from both the companies’ employers and the participants of the
scheme. Each of the Funds has chairman of the board of directors, directors and secretary that provides
necessary services including the payment of pension benefit.
In addition, they also engage in the welfare facility service, such as the establishment and the
operation of rest homes etc.
3. Requirements for the Establishment of the Employees’ Pension Funds(1) Forms of the Funds
1) Independent typeThe Funds established independently by respective companies
2) Joint typeThe Funds established jointly by affiliated companies, such as parent company and its subsidiary(ies)
3) General typea. Same or similar business-based type:
In the case where there are organizations that integrate the companies within the same type and field of business, a fund is established for each business field comprised of those organizations.
b. Community-based type:In the case where there are organizations that integrate the companies within the same type and field of business, a fund is established for each business field comprised of those organizations.
(2) Required Numbers of Participants1) Independent type: 1,000 or more insured persons of the Employees’ Pension Insurance whoare full-time employees (for funds established by March 2005: 500 or more insured persons)2) Joint type: 1,000 or more insured persons of the Employees’ Pension Insurance whoare full-time employees (for funds established by March 2005: 800 or moreinsured persons)3) General type: 5,000 or more insured persons of the Employees’ Pension Insurance whoare full-time employees (for funds established by March 2005: 3,000 or more insured persons)
[Employees of Company withoutEmployees’ Pension Fund]
The Employees’ Pension System(the Old-Age Employees’
Pension System)
The National Pension Scheme(the Old-Age Basic Pension)
[Employees of Company withEmployees’ Pension Fund]
Substitutional portion
The Old-Age Employees’Pension System
(Wage indexation and price indexation)
The National Pension Scheme(the Old-Age Basic Pension)
Addedbenefit Paid by the Funds
Paid by the NationalGovernment
4. Benefit Provision Services and Premium
(1) Benefit Provision Services The Employees’ Pension Fund provides in proxy the services (except the payment born by theimprovement of the wage indexation and price indexation) for a part of the Old-Age Employees’Pension in the Employees’ Pension Insurance Scheme. The amount of pension benefit paid by theFunds is 50% higher than that paid under the Old-Age Employees’ Pension. The Employees’ Pension Association has been established which provides in block the service to pay pension benefit to those withdrawn from the Employees’ Pension Fund after short participation or to those who have participated in a dissolved Employees’ Pension Fund.
(2) Premium
Each Fund collects premiums from employers of its participant companies and allots the moneyfor operating projects such as pension benefit services carried out thereby. As a general rule, thepremiums shall be shared by employers and employees, but for the added benefit portion, the sharingrate of the employers may be able to be increased. The company employers are exempted from paying the Government the premiums to be used forthe pension payment and other services made in proxy by the Funds (exemption premium rate), andthey pay the Funds the premiums to be used for the pension payment, including substitutional portionis included, and other services made by the Funds. In April 1996, the method to determine the exemption premium rates was improved as follows:
Former method: A uniform rate (35/1000) was used, which was set to meet the possible costsfor the service provision made in proxy by the Funds in assumption that theFunds are established by all of the insured persons of the Employees’Pension Scheme.
Revised method: A rate which meets each fund’s substitutional costs (a premium rate requiredfor the payment of each fund’s substitutional benefits) was adopted. As aninterim measure, however, the upper and lower limits that range from32/1,000 to 38/1,000 were set to avoid radical changes.
* Because at the time of the revision a 60% majority of all the funds’participants fall within the upper and lower limits and the number ofparticipants in the funds which exceed the upper limit and that in thefunds which fall below the lower limit remain in equilibrium, the upperand lower limits were adopted.
Also, following the introduction of the Total Remuneration System on April 1, 2003, the rangewas revised to range from 24/1000 to 30/1000.
Current participants in the funds Method to determine the exemptionpremium rate
- 3.2% (14.5%)Nov. 1994 - 3.5% (16.5%)Apr. 1996 - 3.2-3.8% (17.35%)Apr. 2003 - 2.4-3.0% (13.934%)Apr. 2005 - 2.4-5.0% (13.934%)Sep. 2006 - 2.4-5.0% (14.642%)
Figures in parentheses representcontribution rates for theEmployees’ Pension
(Figures in parentheses are based on annual income.)
Substitutional portion
The Employees’Pension Scheme
(payments due to theincome reassessment,
price indexation formula)
National Pension(Basic Pension)
<Premium rate> <Benefit provision>
Added benefitPaid by the Funds
Paid by theNational
Government
2.4-5.0%
14.720-12.120%
17.120%
The substitution costs increased drastically from April 2005 mainly because of the reduction of theassumed interest rate (5.5% → 3.2%). Just as the revision in April 1996, it was decided to set a certainbound pair to avoid radical changes.Specifically, the upper and lower limits of 2.4% to 5.0% (based on annual income) were set afterensuring that the difference between the upper or lower limit and the average is nearly equal and thatthe limits maintain well-balanced relations with the distribution of each fund’s substitutional costs.
Upper limit 5.0% ・ Difference 1.3%Average 3.7% ・ Difference 1.3%Lower limit 2.4%
* At this time, every fund falls within the upper and lower limits.
Changing the circumstance
• Weak money market
• Weak corporate finance
• Financial liberalization
• International Accounting Standards
After bubble economy
Changing the circumstance• In the periods of postwar economic reconstruction and high
growth, Japan introduced the systems of specialization and division of work into its financial sector, maintaining strict walls between the banking and securities businesses and between the long-term and short-term financing businesses.
• Financial liberalization
• International Accounting Standards
• corporate finance
Changing the circumstance
Financial liberalization• Before 1980’s
– the regulation on interest rates– the regulation on the businesses of financial institutions
• the separating short- and long-term investment• the separation of trust business from banking business• the separation of securities business from banking business
– the severe management of the international capital flow
• Protect the domestic financial institution from the foreign menace• Avoiding the useless competition between the domestic financial
institution• This strategy is common to every industry
• Basically, domestic savings go to domestic industry except buying the bond of U.S.
• Protect the foreign fund flow for preventing the take-over of the domestic company
Postwar Recovery 1945-49• The Japanese economy collapsed due to
input shortage. Inflation surged. Livingstandards plummeted.
• The US occupied Japan and forceddemocratization and demilitarization(but later partly reversed).
• Subsidies and US aid supported the war-torn economy.• The priority production system, based on economic
planning, contributed to output recovery (1947-48).• Inflation was ended by Dodge Line stabilization (1949).
Army GeneralDouglas MacArthur,
head of GHQ
Changing the circumstance
• The PPS tried to start reconstruction process by concentrating available resources on two critical industries, coal and steel.
• The recovery plan was called ‘inclined production system’
• i.e., almost entire production of coal was put in steel production, and almost entire production of steel was put in coal production.
• The process was repeated until two vital industries revived.
The Priority Production System (PPS) in 1946
Figure 2: Real GDP Growth Rate of J apan
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
year
perc
ent
Table 1: National Income of Selected OECD Countries
GDP GDP per capita (Value, in $billions) (Value, in $)
Japan USA UK Germany Japan USA UK Germany1950 109 2883 377 234 131 1897 744 4681960 440 5153 727 722 468 2852 1390 13021970 2033 10155 1249 1846 1949 4952 2254 30411980 10632 27319 5353 8185 9103 11996 9567 132961990 30522 58033 9946 15470 24718 23209 17377 244582000 47661 98247 14409 18752 37574 34796 24571 22844
(Index, USA=100.0) (Index, USA=100.0)Japan USA UK Germany Japan USA UK Germany
1950 3.8 100.0 13.1 8.1 6.9 100.0 39.2 24.71960 8.5 100.0 14.1 14.0 16.4 100.0 48.7 45.71970 20.0 100.0 12.3 18.2 39.4 100.0 45.5 61.41980 38.9 100.0 19.6 30.0 75.9 100.0 79.8 110.81990 52.6 100.0 17.1 26.7 106.5 100.0 74.9 105.42000 48.5 100.0 14.7 19.1 108.0 100.0 70.6 65.7
(Source) IMF
Figure 3: Share of J apan in World Export
0
1
2
3
4
5
6
7
8
9
10
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000year
perce
nt
Table 2: Trade Balance of J apan (hundred million yen)
Year Export Import Balance Year Export Import Balance1945 0.4 1.0 -0.6 1975 16,545 17,170 -6251946 2.3 4.1 -1.8 1976 19,935 19,229 7061947 10.1 20.3 -10.2 1977 21,648 19,132 2,5161948 52.0 60.3 -8.3 1978 20,556 16,728 3,8281949 170 284 -114 1979 22,532 24,245 -1,7131950 298 348 -50 1980 29,383 31,995 -2,6121951 489 737 -248 1981 33,469 31,464 2,0051952 458 730 -272 1982 34,433 32,656 1,7771953 459 867 -408 1983 34,909 30,015 4,8941954 587 864 -277 1984 40,325 32,321 8,0041955 734 890 -156 1985 41,956 31,085 10,8711956 900 1,163 -263 1986 35,290 21,551 13,7391957 1,029 1,542 -513 1987 33,315 21,737 11,5781958 1,036 1,092 -56 1988 33,939 24,006 9,9331959 1,244 1,296 -52 1989 37,828 28,979 8,8491960 1,460 1,617 -157 1990 41,457 3,385 38,0721961 1,525 2,092 -567 1991 42,360 31,900 10,4601962 1,770 2,029 -259 1992 43,012 29,527 13,4851963 1,963 2,425 -462 1993 40,202 26,826 13,3761964 2,402 2,858 -456 1994 40,498 28,104 12,3941965 3,043 2,941 102 1995 41,531 31,549 9,9821966 3,520 3,428 92 1996 44,731 37,993 6,7381967 3,759 4,199 -440 1997 50,938 40,956 9,9821968 4,670 4,675 -5 1998 50,625 36,654 13,9711969 5,756 5,408 348 1999 47,548 35,268 12,2801970 6,954 6,797 157 2000 51,654 40,938 10,7161971 8,393 6,910 1,483 2001 48,979 42,416 6,5631972 8,806 7,229 1,577 2002 52,109 42,228 9,8811973 10,031 10,404 -373 2003 54,549 44,319 10,2301974 16,208 18,076 -1,868
(Source) Ministry of Finance, J apan
Development of a product with additional value.
Some Secrets behind the Miracle
A puzzle – export incentive under import restrictions
• In early years, Japanese imports were heavily restricted to protect domestic producers.
• When domestic market is protected from foreign competition, domestic price of a good is higher than international price.
• So, producers have incentive to sell to the domestic market for higher price than to foreign market.
• However, Japanese producers made every effort to export their products (e.g., textiles, TVs and cars) to the world.
Various support programs for exports
• Export-promoting tax system– Special deduction of export income– Import tariff refund
• Export-promoting financing– Pre-shipment export bill discount– Japan Export-Import Bank
• Established in 1951 to provide medium and long-term loans for exports, import and foreign direct investment.
Favorable foreign exchange rate
• In 1949, the yen-dollar rate was set at 360 yen to one dollar.• The rate was maintained until August 1971, when the world
currency system experienced major earthquake.• At the rate, Japanese yen was generally undervalued, which
contributed to the expansion of Japanese exports.
• However, it is dangerous to maintain undervaluation of own currency, because such a policy makes eventual adjustment more drastic and painful one.
• Japan was just lucky.
Export contest
• In order to encourage exports, the Japanese government set up many ‘export contests’ among firms to combine the benefits of competition and cooperation.
• Rewards, rules, and referees– Rewords: preferential access to credit and foreign exchange– Rules: the one who achieved the largest values of exports is the
winner of the contest– Referees: government officials who have designed and supervised the
contest (generally very competent and impartial)
Manufacturing sector – scale economies
• Japan put an emphasis on exports of manufactured goods, such as cars.
• Production technology of manufacturing sector is often characterized as scale economies (the more you produce, the less is your average production cost)
• So, Japanese producers had incentive to produce more, not only for domestic market but also for foreign market.
• Thus, for example, Toyota produces cars for both domestic and export market.
Coal
PowerShipping
Fertilizer
TextileSteel
Other
132 bil yen(3.9% ofGDP)
Mil yen % of GDP1946 9,011 1.9%1947 22,511 1.7%1948 62,499 2.3%1949 170,213 5.0%1950 60,161 1.5%1951 30,261 0.6%1952 27,000 0.4%
0
500
1000
1500
2000
2500
3000
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
Million USD
Imports
Exports
US aidKorean War
demand
Price Gap Subsidies
Fukkin Loan Balance, Mar. 1949
US Aid and Korean War Boom
Two ArtificialSupports 竹馬経済(Subsidies & US Aid)
Changing the circumstance
Financial liberalization• Before 1973
– the regulation on interest rates– the regulation on the businesses of financial institutions
• the separating short- and long-term investment• the separation of trust business from banking business• the separation of securities business from banking business
– the severe management of the international capital flow
Changing the circumstance
• Introducing the financial regulation of restricting competition between banks, life-insurance company, trust bank…
• Specialized Banks– Variety of Banks for various financing
requirements (short term, mid-long term, middle-small company, Agriculture, forestry, and fishery)
Changing the circumstanceBefore 1980’s
• After the WWII in Japan, production capital was destructed, firms had not accumulated enough capital, securities markets had not developed sufficiently.
⇒ commercial banks gathered small deposits from all over Japan and bundled them to finance indirectly to business companies
⇒Indirect Finance Dominating System based on Main Bank System … similar to West Germany ⇒in the 80’s the progress of financial liberalization caused a retreat in indirect
financing ⇒the bubble economy promoted an increase in corporate equity financing in the
late 80's. Business companies began to think direct financing increasingly important At the same time, bank lending had surged and caused indirect financing to
comeback ⇒In the 90’s the bubble economy collapsed and a stock market slump became
serious and direct financing detracted
Changing the circumstanceBefore 1980’s
the Household Saving
The Postal Saving
The Bank
The government-affiliated financial institution
The public corporationsintegrated network infrastructure
guidance policy finance the regulation on interest
rates
The rest of saving went to
Changing the circumstanceAfter 1980’s
Main Bank
Corporation A
Corporation B
・・・
The rest of saving went to
• business advice• commercial paper• introductions to business partners• personnel administration dispatch the executive or president
Keiretu (industrial groupings)
Former zaibatsu financial combine
The transition of long term interest rate‐
10year government bonds
Changing the circumstanceFinancial liberalization
The ends of 1970 Introduction of CDs (with liberalized interest rate) (May 1979) (start of deposit interest rate liberalization) Issuance of euro-yen bonds by non-residents (Dec. 1984) (thereafter, euro-yen transactions gradually liberalized) 1980’s Introduction of Money Market Certificates (MMC) (Mar. 1985) Yen-denominated BA market established (Sep. 1985) Liberalization of interest rates for large time deposits (Oct. 1985) Tokyo offshore market established (Dec. 1986) Introduction of CPs (Nov. 1987)
Changing the circumstance1990(and later) Establishment of Law Relating to the Reform of the Financial System (Jun. 1992) (enables banks,
securities firms, and trust banks to enter each other's businesses through establishment of subsidiaries)
Complete liberalization of interest rates for time deposits (Jun. 1993)
Liberalization of interest rates for liquid deposits (Oct. 1994)
(completion of liberalization of interest rate (with exception of current deposits (interest prohibited)))
Ordinary banks and others able to accept mid to long-term deposits of five years duration (Oct. 1994)
Ordinary banks allowed to issue bonds (Oct. 1999) (abolishment of separation system between long-term and short-term financial institutions)
Elimination of restrictions on business by securities subsidiaries established by banks and others, and trust subsidiaries established by banks and securities firms (Oct. 1999)
Changing the circumstance
• Indirect finance → direct finance– Management of procurement of market-based
funds• Foreign pressure typically by U.S.
– postal saving– post office life insurance
Resource of guidance policy finance
U.S. shifted production industry to finance business.
GM’s profit by business section
Total
profit of the finance business
profit of the automobile and others
Changing the circumstanceInternational Accounting Standards
After the world wide financial liberalization, the new trend emerged.
• Basically, any corporations must book the retirement allowance and corporate pension liability on the financial statements.
• Why?
Corporate finance
• Aging in employee
• Abolished the Long-Term Employment
Where has gone skilled work?
Controlling the temperature
Controlling the humidity
Minute rolling methods
IT
skilled work
http://www.spray.co.za/steelmaking.php
Changing the circumstance In the end, …
• DB to DC
• Even the corporations which no corporate pensions has emerged since 2000.
• And, there are not many companies which have introduced the advanced payment system for retirement benefits. However, Panasonic(1994) and Kawasaki Heavy Industries, Ltd.(2003) introduced such the system.
Outline of the New Defined-Benefit Pension System
Under the severe economical environment in recent years, problems are emerging on theCorporate Pensions with Defined Benefit such as the Employees’ Pension Fund and the Tax-qualifiedPension Plan. There are cases in which pension assets are not assured enough at the time ofbankruptcy, and an adjustment of the system to protect the rights to receive benefits (eligibility) isbecoming necessary. In order to deal with these kinds of situations, the Defined-Benefit Corporate Pension Lawdetermines standard measures for eligibility protection such as reserve obligations. In addition, it isaimed to reorganize Defined Benefit type Corporate Pensions and reconstruct a new system which willwin public confidence.
1. Scheme of the System<Basic Mechanism>Contract-type corporate pension Based on the pension agreement between labour and management, the company will make acontract with trust companies, life insurance companies, etc. Management and operation of pensionfunds will be handled outside the mother company.
Fund-type corporate pension A fund will be established as corporate entity independent of the mother company. Managementand operation of pension funds as well as benefit payment will be handled by the fund. (Substitution ofEmployees’ Pension will not be done.)
* See attached for schemes of the Contract-type and Fund-type pensions.
(1) Commencement of the System
• Companies planning to enforce the corporate pension system must prepare a pension rule regulating the details of the system based on the agreement between labour and management, and obtain approval from the Minister of Health, Labour and Welfare. (In case of fund-type, approval for establishment.) Regulations may be established by multiple companies.
• For Contract-type corporate pension system, the company must make a contract with trust companies, life insurance companies, etc. regarding payment of premiums, management of revenue, etc.
<Details to be prescribed in pension contract>• Qualification for receiving benefits• Content of benefits and method of receiving benefits• Premiums, etc.
(2) Eligible Persons and Qualifications for Participants
①Eligible personsInsured persons of Employees’ Pension covered workplaces
②Qualifications for participantsQualifications for participants may be determined in the pension regulation.In this case, it should not be unfairly discriminatory to a particular person.
(3) Benefit Provision
① Contents of benefits and necessary conditions for payment (Old-Age Pension)
• Pension provided for aging of participant, etc.• Old-Age Pension should be paid for at least 5 years from the age the participant began receiving benefits.• In principle, the age participants begin receiving benefits will be between 60 and 65 years old, and it shall be determined in
the pension regulation.• The required period for pension benefits must not exceed 20 years.• If the participant chooses, he or she can receive a lump-sum instead of pension benefits.
(Lump-sum withdrawal benefit)• If the subscription period is 3 years or more, and pension benefits cannot be received, a lump-sum withdrawal benefit
should be paid.• Starting in October 2005, it became possible to transfer the lump-sum withdrawal benefit to another Corporate Pension or
the Employees’ Pension Association upon the application by the beneficiary.
(Disability Pension, Survivors’ Benefit)• If the insured person, etc. has a high degree of disability or is dead, disability pension and survivors’ benefit shall be paid.
② Benefits Standards• Pension benefits and the amount of lump-sum must be a fixed amount or an amount calculated based on rational foundation
such as wages, subscription period, etc.• Benefits must be determined in accordance to the number of years participated, wage, etc., and must not be discriminatory
unfairly to a particular person.
(4) Premium
• Employers must pay insurance premiums to meet expenses required for the payment of pension benefits and lump-sum benefits.
• In principle, premiums shall be paid by employers. When defined in the pension rule, employees can pay the premium if he or she agrees to.
(5) Operation of Assets
• Operation of pension assets must be done safely and efficiently.• In principle, operation of assets shall be handled by trust companies, life insurance companies, investment
advisory companies, etc.• The funds may invest by themselves under the condition that the investment management system of assets is well
adjusted, etc.
(6) Termination of Pension System
• The pension system shall be terminated (dissolved) in the following cases.1) The employer and participants agree on the termination of the system with stated procedures and is approved by the Minister for Health, Labour and Welfare.2) Continuation of the system is impossible due to bankruptcy of the mother company etc.3) The Minister of Health, Labour and Welfare withdraws the approval of contract or establishment of fund.
• Remaining assets shall be divided among participants, etc. It cannot be returned to the employer. Starting in October 2005, it became possible to transfer the residual assets to the Employees’ Pension Association upon the application by the beneficiary.
2. Protection of Eligibility
(1) Reserve Obligations
(Reserve Obligations)• Employers or the Fund must accumulate pension assets so that they can pay promised benefits in the
future. (Recalculation and verification of budget)• Employers or the Fund shall be recalculated at least once every 5 years in order to balance pension budget
in the future.• Employers or the Fund will verify the following at the year-end settlement: If pension assets are ①
changing as planned. If assets equivalent to past subscription period benefits are assured in case the ②corporate pension dissolves right now.
(Solution for shortfall in reserve, etc.)• When there is a shortfall in pension reserves, premiums must be paid to cover the shortfall within a given
period.• When there is a surplus in pension reserves, it will be kept in the system in the view of stabilizing the
finance operation. It will not be returned to the employer.If the reserve exceeds the limit set for safety in case there is change in operation environment, etc., premiums should be reduced or payment should be stopped in accordance to the exceeded amount.
(Special Measures)• For corporate funds with participants less than the given number, a simple standard for recalculation of
finance, etc. will be set from the viewpoint of reducing clerical work.
(2) Obligation of Trustee
In order to protect the eligibility of participants etc., responsibilities to participants, etc. and obligations for diversified investment shall be regulated for persons involved in the management and operation of corporate pension, such as employers. Also, there will be clear principles prohibiting actions that would be contrary to the aim of generating profits.
(3) Disclosure of Information
• Employers or the Fund must make the details of the pension rules well known to their employees.• Employers or the Fund must disclose the situation regarding premium payment, investment of assets
and financial situation to participants and report the same to the Minister of Health, Labour and Welfare.
3. Shifting from One System to Another(1) Transfer between Different Defined-Benefit Pension Systems
• One can switch between Contract-type Corporate Pension, Fund-type Corporate Pension, and Employees’ Pension Fund, and transfer their share of pension assets.
• When switching from the Employees’ Pension Fund to the Contract-type or the Fund-type Corporate Pension, the duty to pay the benefit for the portion operated by the Employees’ Pension (the substitutional portion) shall be transferred to the government with the proportional assets.
Duty to pay the added benefit will be transferred to the employers of Contract type of Defined-Benefit Corporate Pension or the Corporate Pension Fund. Duty to pay benefit for the substitutional portion will be transferred to the government.* As of September 1, 2006, the number of funds that returned their substitutional portions amount to 773.
Added benefits
The substitutional portion
Defined-Benefit Corporate Pension (Contract type and
fund type)
Benefit payment by the Employees’
Pension owned by the government
[The Employees’ Pension Fund]
Return of the substitutional portion
Insu
red
pers
onsChange of the
benefit payer
To thegovernment
(2) Transfer to Defined-Contribution Pension System The Pension can be distributed personally and transferred to Defined-Contribution Pension System (Corporate type).
4. Treatment for Tax Purposes
Treatment for tax purpose shall be the following:• Time of contribution: The total amount paid by the employer shall be treated as loss. Participants’
contributions are subject to life insurance premium deduction.• Time of asset management: Special corporate taxes are levied on the reserve fund.
Note: Freeze of Special Corporate Tax is suspended until FY 2007.• Time of pension provision: In case of the Old-Age benefit, public pensions deduction, etc. applied for
pensions, and Retirement Income Deduction applied for lump-sum.
5. Treatment of Existing Systems
(1) Tax-qualified Pension Plan
• New Tax-qualified Pension contracts will not be approved.• Existing Tax-qualified pension Plan shall be transferred to other systems including the defined-benefit
corporate pension until March 31, 2012.
(2) Review of the Employees’ Pension Fund System
With the enactment of the Defined-Benefit Corporate Pension Law, rules for the protection of Employees’ Pension Fund eligibility, etc. were reviewed.
6. Enforcement Date
Enforced on April 1, 2002. Regarding the transfer from the Employees’ Pension Fund (return of the substitutional portion), the date of enforcement was September 1, 2003.
7. Existing State of the Defined-Benefit Corporate Pension (Number of the defined-benefit corporate pensioners)
Fiscal year Contract-type Fund-type Total
2003 168 148 3162004 484 508 9922005 834 596 1,4302006 1,335 605 1,9402007 2,479 619 3,0982008 4,395 611 5,0062009 6,797 610 7,4072010 9,436 608 10,0442011 14,377 612 14,989
Contract-type Corporate Pension SchemeCompany
Employer
Pension Contract
Labor Union(or Agent for the majority of the
employees)
Beneficiary
Determination
Clai
m
Trust company,Life Insurance
Company,etc.
Insurance Premium
Trust Contract, InsuranceContract, etc.
Payment Instructions
Benefits
Fund-type Corporate Pension SchemeCompany
Employer
Pension Contract
Labor Union(or the
representatives of the Majority)
Beneficiary
Trust company,Life Insurance
Company,etc.
Insurance Premium
Agreement toEstablish Fund
Benefits
Claim
Determi-nation
RepresentativeCommittee
Executive Institution(Chairman of the
board of directors,directors, secretary)
Contract
Fund
Scheme for Revenue Accumulation○ Reserve Obligations
○ Creation of longterm plan
○ Operation of Corporate Fund
○ Annual checkup
○ Conclusion
○ Countermeasures
Revenue must be accumulated to make certain pension benefit payments.
Make a long-term plan on revenue at least once every five years based on the company’s present situation (situation of employment, retirement, wages, etc.) and outlook of asset management, etc. (Recalculate finance)
Payment of premiums, management of pension assets,payment of pension benefits, etc.
Is the reserveaccumulating according to the long-term plan?
If the corporate pension isdissolved right now due tobankruptcy, etc., is it possible to pay pension benefits equivalent to the subscription period?
Check annually at year-end settlement.
Resolve shortfall by raising premiums, etc. within a certain period
Shortfall of revenue Well managed
Overview of Defined-Contribution Pension Plan
With the Defined-Contribution Pension, the contributions paid are clearly specified for each employee, and benefits are determined based on the sum of the contributions and its investment profit. Defined-Benefit Corporate Pensions until now had not been adopted to a sufficient degree by small and medium sized companies and self-employed persons. Also, the transfer of pension assets when changing jobs was not assured, which complicated measures to respond to labour shifts. In order to cope with these problems, the introduction of the Guaranteed Contribution-Based Pension had been examined and was introduced in October 2001.
1. Defined-Contribution Pension With Defined-Contribution Pension, the contributions paid are clearly specified for each employee, and benefits are determined based on the sum of the contributions and its investment profit. Current corporate pensions, etc. are Defined-Benefit Pensions whereby companies and other employers guarantee the amount of annual benefits received in retired life.
2. Necessity for Defined-Contribution Pension• Because the problems given below are associated with current Corporate Pensions, etc., Defined-
Contribution Pension that participants manage at their own responsibility was introduced to provide a new pension option.① Current Corporate Pensions, etc. have not been adopted to a sufficient degree by small and medium
sized companies and self-employed persons.② The transfer of pension assets when changing jobs (portability) is not assured, which complicates
measures to respond to labour shifts.③ Since pensions are affected by company performance during major economic fluctuations, retired life of
employees’ cannot be provided for with sufficient stability by means of current Corporate Pensions, etc. alone.
• In view of the above problems, the use of Defined-Contribution Pension which can be easily adopted by small and medium-sized companies improves and stabilizes the system of assuring the income of employees’ life after retirement.
3. Overview of the System
(1) Participants (persons that can participate in the system)
①Corporate type Pensions (contributions by company only)• Company employees (No.2 insured persons of the National Pension)
② Personal type Pensions (contributions by participants only)• Self-employed persons (No.1 insured persons of the National Pension)• Company employees (Limited to the insured persons who cannot participate in the Employees’
Pension Fund, Defined-Benefit Corporate Pension, Corporate-type Pensions of Guaranteed Contribution-based Pension, or others)
③ Persons less than 60 years of age
(2) Participation and Payment into the System
① Participation• Participation in Corporate-type Pensions Participating companies establish Defined-Contribution
Pension rules (determined by agreement between labour and management and approved by the competent minister), and employees participate in the system based on that rules.
• Participation in Personal-type Pensions Participation in the system through application to the National Pension Fund Federation.
② Contribution The company or the participant pays into the system within the maximum contribution amount.
Maximum contribution amount• Contribution of companies using Corporate-type Pensions
Maximum contribution amount paid by entities not participating in the Employees’ Pension Fund or the Defined-Benefit Corporate Pension, etc.:
¥612,000 annually (¥51,000 monthly)Maximum contribution amount paid by entities participating in the Employees’ Pension Fund or the Defined-Benefit Corporate Pension, etc.:
¥276,000 annually (¥23,000 monthly)• Contribution of Self-employed Persons, etc. using Personal-type Pensions:
¥816,000 annually (¥68,000 monthly)(For participants in the National Pension Fund, the amount remaining after deducting the contribution to the National Pension Fund.)
• Contribution of employees of companies using Personal-type Pensions:¥216,000 annually (¥18,000 monthly)
* The maximum contribution amount is to be raised in October 2004 as requested by the business community.
③ Portability and other characteristics of the system• Records of the asset balance (the sum of contributions and the investment profit) are maintained for
each individual participant.• Pension assets are transferred to the pension system of the new employer when a participant is
transferred or dismissed.• For persons who cannot participate in the system such as No.3 insured persons, assets associated with
said participants are transferred to the National Pension Fund Federation.
(3) Management
① The participants choose the financial products and give directions to the pension management institutions for the management.
② Financial products include savings deposits, public corporation bonds, mutual funds, stocks, trusts and insurance products, etc. The pension management institutions offer three or more choices of financial products to participants.
③ Pension management institutions provide participants with opportunities to change financial products at least once every three months while at the same time providing information concerning financial products.
(4) Benefits
① Form of benefits• Benefits include old age benefit, disability benefit and lump-sum death benefit; participants can
receive old age benefit and disability benefit as pension or as a lump sum.• Former participants, who have become housewives, etc. and cannot enter the system, can receive a
lump-sum withdrawal benefit from the personal pension when the participant’s past number of years of contribution was three years or less, or the amount of the total assets is equal to or less than 500,000 yen. Additionally, upon withdrawal from a corporate pension, a person can receive a lump-sum withdrawal benefit when the amount of the total assets is equal to or less than 15,000 yen. (The requirement for receiving benefit was introduced in October 2005.)
② Conditions of benefit provision• Old age benefit can be received from age 60 where ten or more years have passed since the initial
contribution, including the period during which assets were only managed.• For disability benefit and lump-sum death benefit, benefits are provided upon occurrence of major
disability or death of the respective participants.
(5) Taxation system① Contribution stage: Taxes are deducted from income for participants’
contribution, added to losses for company’s contribution.② Asset management stage:Special corporation taxes are levied on pension assets (a freeze had been
placed on these taxes up to fiscal 2007)③ Pension provision stage: In case of the Old-Age benefit, a public pension deduction applies for
pensions. For lump-sum payments, retirement income deduction applies.
(6) Protection of Participants For the purpose of protecting participants, companies, the National Pension Fund Federation, pension management institutions and asset management institutions must comply with laws and defined-contribution pension agreements and are regulated by law to bear the responsibility of executing pension services faithfully for participants.
Note: Pension management institutionsGeneral corporations, such as financial institutions, should be registered by the Minister of Health, Labour and Welfare and Commissioner of the Financial Services Agency, and present the individual financial products, provide information on the individual financial products, etc., coordinate participants’ investment orders, and maintain records regarding the asset-sharing of each participant, etc.
(7) Transfer from the Existing System Companies that provide the Defined-Contribution Pension (corporate type) may transfer into Corporate-type Pension plans the pension assets of past periods of the retirement lump-sum system or existing corporate pensions as determined by labour-management agreements.
4. Enforcement Date Enforced on October 1, 2001.
5. Existing state of the Defined-Contribution Pension
Fiscal Year
Number of authorized corporate-type pension
contractsNumber of corporate-type pensioners (10 thousand)
Number of personal-type pensioners (10 thousand)
2001 70 8.8 0.042002 361 32.5 1.42003 845 70.8 2.82004 1,402 125.5 4.62005 1,866 173.3 6.32006 2313 218.7 82007 2710 271.1 9.32008 3043 311 10.12009 3301 340.4 11.22010 3705 371.3 12.42011 4135 421.8 13.8
Relationship Between Participants in and Maximum Contribution Amounts of Defined-Contribution Pensions and Participation in Existing Pension System
Basic pension
Employees’ Pension Insurance, Mutual Aid Pension
NationalPension
Fund(approx. 493
thousand individuals)
Corporate Pensions, etc.Employees’ Pension Fund,Defined-Benefit Corporate
Pension, etc.(Approx. 16.59 million
persons)
National MutualAid Regional Mutual Aid
(Approx. 4.41million persons)
Maximum contributionamount
¥23,000 monthly(¥276,000 yearly)
Maximum contribution
amount¥51,000 monthly
(¥612,000 yearly)
Maximum contributionamount
¥23,000 monthly(¥276,000 yearly)
Self-employedpersons, etc.
When neither existing corporate pensions (defined-benefit type) nor corporate type defined-contributionpensions are provided
When corporatepensions (defined-benefit type) are not provided
When corporatepensions (defined-benefit type) are provided
Personal Type Corporate Type
Amount remaining afterdeducting contribution to
the National Pension Fund, etc. from the
maximum contribution amount of ¥68,000
monthly(¥816,000 yearly)
(Contribution by participants only) (contribution by company only)
¥68,000 m
onthly
3rdpillor
2rdpillor
1stpillor
Dependent spouse of insured
(wife of salaried workers, etc.)
(No.3 insured persons)(Approx. 9.78 million
persons)
Self-employed persons, etc.(No.1 insured persons)(Approx. 19.04 million
persons)
Insured (salaried worker)(No.2 insured persons)(Approx. 38.92 million
persons)
（※） Not eligible for Defined-Contribution Pensions
Conception Diagram of Defined-Contribution Pension Schemes(Corporate-type Pensions)
Beneficiaries
Asset managementInstitution
An entity that managescontributions as theassets ofdefined-contributionpensions
Banks
Credit unions
Securitiescompanies
Life insurancecompanies
Non-life insurancecompanies
Agriculturalcooperatives, etc.
Post offices
Database
Company
Employer・ Establishesdefined-contribution pensionagreementthroughagreementbetween laborand management・ Managesmaximumcontributionamounts
Employee
Employee A
Employee B
Employee C
Selection and assignment
Contribution (contribution by company only)
Selection andassignment
Individual assetmanagementinstructions
Application for benefits
Determination ofbenefits
Payment of benefits
Instructions topay benefits
Investmentinstructions
Pensionmanagement
institution
A type of agent thatacts in behalf ofemployeesparticipating in apension plan
・ Organizes investmentInstructions
・ Maintains records
・ Presents financialproducts to participants・ Provides informationconcerning financialproducts, etc.
Financial institutions that manage pension assets
Note: The pension management institution and the asset management institution, or the assetmanagement institution and the financial institution that manages pension assets may be thesame institution. In addition, the company may act as the pension management institution.
Depositagreement, etc.
Depositagreement, etc.
Trade agreement,etc.
Insuranceagreement, etc.
Saving agreement,
etc.
Savingsagreement, etc.
Conceptional Diagram of Defined-Contribution Pension System (Personal Type)
Self-employedpersons, etc.
Self-employedpersons, etc.
Beneficiaries
Pension managementinstitution A
(5 financial products)
Pension managementinstitution B(10 financial
products)
Pension managementinstitution C
(8 financial products)
Pension managementinstitution D
(4 financial products)
Banks
Credit unions
Securitiescompanies
Life insurancecompanies
Non-life insurancecompanies
Agriculturalcooperatives,
etc.
Post offices
Employer
Employee AEmployee B
Deductionfrom salary(in principle)
Application for participation,payment of contribution
(contribution by employee only)
Individualinvestmentinstructions
Application forbenefits
Determination ofbenefits
Payment of benefits
Pension management institution
* The participantselects fromseveral pensionmanagementinstitutions theinstitution he orshe will use.
・ Organizes invest-ment instructions
・ Maintainsrecords(database)・ Presents financialproducts
・ Provides informationconcerning financial products, etc.
National Pension Fund Federation・ Establishes defined-contribution pension agreement・ Manages maximum contribution amounts・ Verifies payment of national pension insurance premiums (only self-employed persons, etc.)
Financialinstitutionsentrusted with fund operation
Investment instructions
Investment instructions
Investment instructions
Instructions to paybenefits
Deposit agreement,etc.
Deposit agreement,etc.
Trade agreement,etc.
Insurance agreement,etc.
Savings agreement,etc.
Saving agreement,etc.
The corporate pension scheme wasamended in the 2004 amendment in order toflexibly respond to the labour shifts, i.e. jobseparation and change of individual pensioners,between systems under the current trend ofemployment liquidation.Specifically, from October 2005, thepension assets can be transferred between theEmployee’s Pension Fund and theDefined-benefit Corporation Pension at the timeof separation and job change. The assets can bealso transferred from the Defined-benefit
Corporate Pension to the Employees’ PensionAssociation, whereby enabling a pensioner toreceive the pension in the future in addition tothe lump-sum withdrawal benefit, which is anoption made available to a pensioner at the timeof withdrawal from the Defined-benefitCorporate Pension or the termination of thesystem. In addition, the assets can be alsotransferred from the Employee’s Pension Fundand the Defined-benefit Corporate Pension tothe Defined-contribution Pension System.
＜ Reference ＞ Portability of the corporate pension (pension summation system)
Employee’s Pension Fund(EPF)
Image of portability of the corporate pension
EPF
EPF
Defined-benefit CorporatePension
DB
DBEmployees’
PensionAssociation
Defined-contribution Pension Corporate type
Personal type
Corporate type
Route of assets transfer that has been available Route of assets transfer enabled from October 2005
Quiz for Graduate School Students1. In the most advanced country, the fact that the younger people
prefer to DC than DB is observed. How do you account for the fact?
2. What is the problem of the advanced payment system for retirement benefits?
• Max 250Words, MS-Word or Text, Dead Line Dec. 1st 0:00 am• Post; [email protected]• Including the mail title, “W Univ. Quiz Your ID and Date”.• Under Graduate Students challenge is welcomed.