igp country profile / 2004 japanuslabormarket.sakura.ne.jp/japanlink/040000 social... · igp is...

IGP Country Profile / 2004

JAPAN Prepared by

The Dai-ichi Mutual Life Insurance Company

John Hancock Financial Services P.O. Box 111, Boston, Massachusetts 02117 Tel. (617) 572-8677 Fax (617) 572-8628 e-mail: [email protected] Internet: www.igpinfo.com

© 2004 International Group Program

Preface

This Country Profile has been prepared by The Dai-ichi Mutual Life Insurance Company for the International Group Program (IGP). The International Group Program (IGP) is a leading network of life insurance companies (Associate Insurers), operating throughout the world to meet the group insurance and pension needs of multinational corporations, their branches, affiliates, and subsidiaries. Operating since 1967, the International Group Program is the industry leader in the field of international benefits management, serving more multinational companies than any other network. The financial arrangements are comparable to those that might be obtained by dealing with a single underwriter on a worldwide basis. IGP is known for its experienced and technically knowledgeable account executives who are backed by IGP-dedicated administrative, marketing, and technical teams located in Boston and Brussels. To ensure responsive and customized service, clients are assigned specific account executives to manage their account. IGP’s staff receives ongoing training to keep them current on new local issues and on new developments in international benefits and pooling.


Your Local Link to IGP in JAPAN:

The Dai-ichi Mutual Life Insurance Company

Company Background The Dai-ichi Mutual Life Insurance Company, founded in 1902, is the second largest life insurance company in Japan, with total assets of JPY 29.7 trillion (USD 285 billion), life insurance in force of JPY 257 trillion (USD 2.5 trillion) and 9 million policyholders. As of June 2004, the Dai-ichi has an A- rating from Standard & Poor’s for it’s financial strength and an A+ rating from the Japan Credit Rating Agency, Ltd. (JCR) for its claims paying ability. The Dai-ichi is a leading underwriter of group retirement and severance benefit plans, as well as group term life insurance. The Dai-ichi manages over 17,400 group pension plans and over 18,300 group insurance plans. The Dai-ichi is also known for its sophisticated financial services. All branch offices of the Dai-ichi have financial planners who are dedicated to providing advice to customers on insurance, retirement planning, asset management, and tax planning. The Dai-ichi also has a strong presence in the Japanese insurance and asset management markets through business alliances with Sompo Japan Insurance Inc., AFLAC Japan, and the Mizuho Financial Group. The Dai-ichi has several affiliated companies as a result of these alliances, including DLIBJ Asset Management Co., Ltd. and Mizuho DL Financial Technology Co., Ltd. In 2001, the Dai-ichi was one of only two organizations to win the Japan Quality Award (JQA), the Japanese version of The Malcolm Baldrige National Quality Award. The JQA was established in 1995 to recognize those organizations that demonstrate a commitment to providing quality products and services. Using the concepts and standards exemplified by this award, the Dai-ichi has created guidelines for customer service as well as policies for supporting community activities and environmental initiatives.

The Dai-ichi has been an IGP Associate Insurer since 1971. Key Products

Life • Life • Permanent and Total Disability • Life Cover for Retirees

Medical • Hospitalization

Pensions

• Managed Funds

The Dai-ichi is located on the internet at: http://www.dai-ichi-life.co.jp/ (Japanese only)


An English version of the Dai-ichi’s 2003 Annual Report is available on: www.dai-ichi-life.co.jp/gyouseki/english/


HIGHLIGHTS

Changes appearing in this update of the profile

are primarily the normal adjustments periodically

made in Social Security benefits, contribution

ceilings, tax tables or economic information.


JAPAN

Table of Contents

I. SUMMARY OF SOCIAL SECURITY AND PRIVATE EMPLOYEE BENEFIT PLANS

A. Social Security ....................................................................................................... 1

B. Customary Benefit Practice ................................................................................... 2 II. ECONOMICS

A. The Outlook for the Japanese Economy ............................................................... 4

B. Key Economic Statistics......................................................................................... 5 III. SOCIAL SECURITY IN JAPAN

A. Pension Scheme.................................................................................................... 6

B. Labor Insurance (Workmen's Compensation and Employment Insurance) .......... 8

C. Medical Care Insurance (Health Insurance) ........................................................ 11

D. Long-Term Care Insurance.................................................................................. 13 IV. PRIVATE EMPLOYEE BENEFIT PLANS - CUSTOMARY PRACTICES

A. Introduction .......................................................................................................... 15

B. Retirement Benefits ............................................................................................. 15

C. Death Benefits...................................................................................................... 20

D. Current Trends in Benefits ................................................................................... 21

V. SAMPLE PLANS

A. Company 1........................................................................................................... 23

B. Company 2........................................................................................................... 24

C. Company 3........................................................................................................... 25

C. Company 4........................................................................................................... 25


VI. TAX CONSIDERATIONS

A. Corporate Income Tax ......................................................................................... 27

B. Individual Income Tax .......................................................................................... 27

C. Tax Consideration for Social Security and Employee Benefits ........................... 27 VII. REFERENCE TABLES

A. Current Model Retirement Lump Sum Benefit Level ........................................... 28

B. Retirement Lump Sum Benefits and Pension Plans............................................ 29

C. Tax Qualified Pension Plans in Force.................................................................. 29

D. Employee's Pension Funds in Force ................................................................... 30

E. Normal Retirement Age ....................................................................................... 31

F. Group Insurance in Force .................................................................................... 31

© 2004 International Group Program 1

I. SUMMARY OF SOCIAL SECURITY AND PRIVATE EMPLOYEE BENEFIT PLANS

A. Social Security

1. Pension Scheme:

a) Eligibility: All residents who are ages 20 to 60 are eligible for the National Pension. All employees of private companies will also join the Employees' Pension Insurance.

b) Contribution: Contribution to the National Pension is a fixed

amount. Contribution to the Employees' Pension Insurance is determined based on each employee's remuneration, and such contribution includes a contribution to the National Pension.

c) Old-Age Pension: The National Pension pays a fixed amount old-age

pension to those who are age 65 or above. The Employees' Pension pays a remuneration-based pension in addition. A supplementary pension will be paid to those with eligible dependents.

d) Disability Pension: If a participant becomes disabled, disability

pension will be paid depending on the degree of one's disability. Supplementary pension will be paid to those with eligible dependent.

e) Survivors’ Pension: If a participant dies, a survivors' pension will be

paid to the participant's qualified dependents. The amount depends on the number of dependents.

2. Labor Insurance:

a) Workmen's Compensation: In principal, all employees are eligible for the

Workmen's Compensation. Benefits from Workmen's Compensation are:

- Medical care compensation; - Compensation for loss of income; - Compensation for continuous medical care; - Pension and lump sum compensation for

disability; - Compensation for survivor; - Funeral expense benefit.

b) Employment Insurance: In principal, all employees are eligible for the

Employment Insurance. Those who have been insured for six months or more within one year prior to the date of severance shall be entitled to unemployment benefits.


3. Medical Care Insurance:

a) Management: There are two major health insurance provisions: The National Health Insurance is managed by the

government. The Health Insurance for employees is managed by either the government or a health insurance society.

b) Eligibility: All residents in Japan are eligible for a Medical

Care Insurance. c) Contributions: The contribution amount for the National Health

Insurance depends on the region. The contribution amount for the Health Insurance is based on one's remuneration.

d) Benefits: Sickness and injury due to non-occupational

causes are covered. Medical care benefits cover 70% of medical cost for participants and dependents. Benefits for high cost medical care are also provided. Maternity benefit is a fixed amount of JPY 300,000.

B. Customary Benefit Practice

1. Severance Benefit Plans: Severance benefit plans are basic and standard employee benefits in Japan. The vast majority of Japanese companies have severance pay policies based on a labor-management agreement. Generally, it pays lump sum benefits to retiring employees, based on a certain multiple of final basic monthly salary. Typically, a multiple of at least one for each year of service. Lower benefit rates are provided for voluntary severance.

a) Lump Sum Benefit: Severance benefits are usually paid in the form of

lump sum by those employers who do not have a pension plan. Employers were allowed to set up a tax-deductible book reserve for the severance benefit. However, such favorable treatment ended in 2002.

b) Tax Qualified Pension Plan: Many employers have implemented tax qualified

pension plans to supplement the lump sum retirement benefit or to take its place. The pension benefit is determined by multiplying the final salary by benefit rates derived from length of service. A ten-year term pension is most common. Most plans are contributed to only by employers. Employer's contributions are fully tax-deductible, and not deemed as employee's income for tax purposes.


2. Group Life Insurance: A provision to pay a lump sum benefit in case of

an employee's death is a standard employee benefit. Most companies have group life insurance to cover employees for that purpose. Benefits may be a flat amount for all, or may be determined by rank or by seniority.

Multinational companies generally have a group life insurance the benefit of which is based on one's annual or monthly salary. Typically, two times annual salary. The minimum number of participants is ten, and the maximum amount of coverage is usually JPY 50 million per person, according to Dai-ichi’s underwriting standards. Employers generally pay all the premiums, which are fully tax-deductible.


II. ECONOMICS

A. The Outlook for the Japanese Economy Economic Prospects for 2004 and 2005 According to the economic outlook report by the Dai-ichi Life Research Institute, the real GDP growth rates of the Japanese economy for the fiscal years 2004 and 2005 are expected to be 3.0% and 2.2%, respectively. Nominal GDP is expected to turn to positive growth in 2004. The recovery has continued to substantially exceed expectations. Despite the appreciation of the yen, the recovery has been driven by exports, particularly to Asia, and by a rebound in private investment, aided by rising corporate profitability and the recovery in equity markets. The average unemployment rate is expected to go down to 4.9% in 2004 and 2005. Personal consumption for 2004 is expected to go up to 2.2% in 2004 and taper off to 1.3% in 2005. Corporate sector performance as well as its cash flow stream has improved, reflected in rising profitability and some decline in debt ratios. Enterprises are planning to increase their facility investment pulled by the upward demand of cyclical investment and upward expectation of corporate profitability. Banking system health is improving – reflected among other things in a sharp rise in bank stock prices – and major banks have strengthened their balance sheets in 2004, notably through reducing non-performing loans and reducing the share of deferred tax assets in capital. Deflationary pressures have eased recently, with core consumer price index (CPI) inflation rising to close to zero in recent months. An acceleration of structural reforms of the financial and corporate sector remains the key to a return to further sustainable growth in Japan.


B. Key Economic Statistics

Nominal GDP 1999 2000 2001 2002 2003 Unit: JPY trillion 508.00 513.20 500.96 497.68 501.35 (At Current Prices) Real GDP Growth (%) 0.9 3.0 -1.2 1.1 3.2 Interest Rates (%) 0.50 0.50 0.10 0.10 0.10 Official Discount Rate of Bank of Japan (at end of year) Call Rate, uncollateralized 0.05 0.20 0.002 0.002 0.001 (Period Averages) Newly Issued Government Bond 1.65 1.64 1.37 0.90 1.36 10 years’ duration (at end of year) Consumer Price Index -0.5 -0.6 -1.0 -0.6 -0.2 (General) Unemployment Rates 4.7 4.7 5.2 5.4 5.1 (Period Averages) Exchange Rate Yen

against U.S. Dollar 113.9 107.7 125.1 125.1 115.9 (Period Averages, Inter-bank Rates, Tokyo) USD 1.00 = JPY Source: Financial and Economic Statistics, Bank of Japan


III. SOCIAL SECURITY IN JAPAN

A. Pension Scheme

1. Pension Scheme and Types of Pension Insurance:

The pension scheme in Japan mainly consists of the National Pension and the Employees' Pension Insurance. The National Pension provides basic benefits to all. Employees' Pension Insurance provides additional benefits to employees of private companies. Both are administered by the government. The National Pension is common for all residents in Japan between the ages of 20 to 60. Participants are categorized by 3 classes. Class 1 participants are those not categorized in Class 2 or 3, such as the self-employed. Class 2 participants are participants of Employees' Pension Insurance or Mutual Aid Associations. Class 3 participants are dependent spouses of Class 2 participants. The Employees' Pension Insurance is mandatory for employees in private companies. Part-time employees and temporary workers are excluded. Mutual Aid Associations, whose benefits are similar to Employees' Pension Insurance, cover public servants.

2. Contributions:

a) Contributions to the National Pension

Class 1 participants: The contribution amount is JPY 13,300 (for 2004) per month per participant.

Class 2 participants: Contribution is only made to the employees'

pension insurance (or MAA). It is deemed to cover the contribution to the National Pension.

Class 3 participants: Specific contribution is not required. Contribution

made by their spouses is deemed to cover their contributions as well.

b) Contributions to the Employees' Pension Insurance

Contribution rate for general participants is 13.58% of Annual Salary (AS), which is borne equally by employer and employee (6.79% each). All contributions are fully tax-deductible for both employers and employees.

3. Old-Age Pension Benefit:

a) Eligibility:

Participants become eligible for the old-age pension benefit at age 65. A minimum participation period of 25 years to the National Pension is required.

b) Amount of Benefit:


i. Benefit paid from the National Pension (basic pension):

Participants with a full participation period of 480 months (from age 20 to 60), the basic old-age pension from the National Pension will be JPY 794,500 (for 2004). For participants with a shorter participation period, the amount will be reduced in proportion to one's participation period.

ii. Benefits paid from the Employee's Pension Insurance (welfare

pension):

The old-age welfare pension from the Employee's Pension Insurance is calculated by the formula below. AS X 0.5481% X Number of months participated The amount will be adjusted based on the price index of each year. A supplementary pension will be paid if one has a dependent spouse under age 65, or a dependent child under age 19.

c) Special Old-Age Welfare Pension for Participants Under Age 65: For those who were born before 1949 (for females, 1954), a special old-age

welfare pension will begin before one reaches age 65. Amount of the special old-age welfare pension is almost the same as the aggregate old-age pension (basic + welfare) after age 65.

For those who were born before 1961 (for females, 1966), a special old-age

welfare pension will begin before one reaches age 65, which consists of the old-age welfare pension part only.

4. Disability Pension:

a) Eligibility:

If a participant becomes disabled due to sickness or injury, a disability benefit will be paid. Disability is categorized by 3 classes, depending on its seriousness. A participant cannot receive such benefit, if he/she did not pay contributions for one-third or more of one's previous participation period.



Basic disability pension will be paid if one's disability corresponds to class 1 or 2. Amount of the basic disability pension is JPY 993,100 for class 1, JPY 794,500 for class 2. A supplementary pension will be paid if one has qualified dependent child (ren).

ii. Benefit paid from the Employee's Pension Insurance (welfare

pension):

Disability welfare pension will be paid if one's disability corresponds to class 1, 2 or 3. Benefit formula is as follows: Class 1: AS X 0.5481% X Number of months participated X 125%. Supplementary pension will be paid if one has a dependent

spouse under age 65.


Class 2: AS X 0.5481% X Number of months participated Supplementary pension will be paid if one has a dependent

spouse under age 65. Class 3: AS X 0.5481% X Number of months participated. A lump sum disability benefit will be paid for a certain, less serious disability of the participant. The amount payable is equal to two times the annual pension benefit for those under Class 3, with a minimum of JPY 1,192,000. If the actual number of months participated are less than 300, 300 will be used as a minimum figure.

5. Survivors’ Pension

a) Eligibility:

If a participant, who had an eligible dependent dies, a survivors' pension will be paid to the dependent. If a participant did not pay contributions for one-third or more of one's previous participation period, the survivors' pension will not be paid.



If a participant, who had a dependent child (ren) under age 19 dies, a basic survivors' pension will be paid to the participant's wife or to the child (ren). The amount of basic survivors' pension is JPY 794,500 plus an additional amount determined by the number of eligible children.

ii. Benefit paid from the Employee's Pension Insurance (welfare

pension):

Survivors' welfare pension will be paid to the participant's eligible dependents. A child, a spouse, or a parent at a certain age may be considered as an eligible dependent. The benefit formula is as follows: AS X 0.5481% X Number of months participated X 3/4 If the actual number of months participated are less than 300, 300 will be used as a minimum figure.

B. Labor Insurance (Workmen's Compensation and Employment Insurance) 1. Workmen's Compensation:

a) Administration: Administered by the Government.


b) Coverage:

Almost all employers must have the Workmen's Compensation Insurance to cover their employees, whether full-time or part-time. Representative directors of the company are excluded from the coverage.

c) Benefits under Workmen's Compensation Insurance:

Under the Workmen's Compensation Insurance, benefits are provided for medical care, loss of income, disability or death of an employee due to occupational causes or accidents during the commute.

i. Medical Care Compensation:

If an employee becomes sick or injured due to occupational causes or accidents during the commute, necessary medical care is provided. Out-of-pocket expenses by employees are not required if resulted from occupational causes, and a nominal amount is required for accidents during the commute.

ii. Compensation for Loss of Income:

In case an employee cannot work because of sickness or injury due to occupational causes or accidents during the commute, and loses his/her wages, 60% of his/her average daily wage will be granted. The average daily wage is calculated based on his/her wages paid during the previous three months. A three-day waiting period applies. The maximum payment period is 18 months. An additional special benefit up to 20% of the average daily wage may also be granted.

iii. Compensation for Continuous Medical Care:

If an employee does not recover from sickness or injury due to occupational causes or accidents during commute after 18 months and is still receiving medical care, and if such sickness or injury falls under a certain class, one may receive an annuity benefit. The amount of such annuity benefit is 245 to 313 times one's average daily wage, depending on the class.

iv. Pension and Lump Sum Compensation for Disability:

If an employee becomes disabled due to occupational causes or accidents during the commute, one may receive a disability pension (131 to 313 times the average daily wage) or a lump sum disability benefit (56 to 503 times the average daily wage), depending on the degree of disability. An additional special lump sum benefit may also be paid.

v. Compensation for Survivor:

Survivors' benefits will be granted if the employee dies due to occupational causes or accidents during the commute.


Survivors' pension benefit will be granted to eligible dependents of the deceased employee. The amount of pension ranges from 153 to 245 times one's average daily wage, depending on the number of survivors. Survivors' Lump sum benefit will be granted in case the deceased employee had no eligible dependents. The amount of the survivors’ lump sum benefit is 1,000 times the average daily wage. An additional special lump sum benefit of JPY 3,000,000 is also payable in either case.

vi. Funeral Expense Benefits:

If an employee dies due to occupational causes or an accident during the commute, JPY 315,000 plus 30 times the average daily wage, or 60 times the average daily wage, whichever is greater, will be paid as a funeral expense benefit to the one who administers the funeral.

d) Index-linking

Pension benefits payable under Workmen's Compensation Insurance may be subject to change in accordance with the change of average wage.

2. Employment Insurance

a) Administration: Administered by the Government. b) Coverage: Employment insurance covers basically all employees and provides an

allowance in case of unemployment. Temporary employees, part-time workers, and employees over age 65 may be excluded. Representative directors of the company are also excluded from the coverage.

c) Benefits:

Employees who have been insureds for six months or more within one year prior to the date of severance shall be entitled to unemployment benefits. When an insured becomes unemployed, approximately 50% to 80% of the average daily wage will be paid as the basic daily unemployment allowance for a certain period. Seven days' waiting period applies. Employees, who left their employment voluntarily, may have to wait for three months. The average daily wage is the average of the wages of the last six months of employment. Minimum and maximum amount of the basic daily allowance is based on one's age. The payment period for the basic daily allowance is 90 to 180 days, depending on the age and length of participation. For those with difficulties to get employed for specific reasons, the payment period may be extended up to 360 days.


Other benefits, such as a grant for training and incentive for re-employment, are also provided.

3. Contributions:

a) Workmen's Compensation Insurance:

Contribution rate ranges from 0.5% to 12.9% of the total remuneration paid to employees, depending on the type of industry. The employer solely pays the contributions to the workmen's compensation insurance. A favorable contribution rate may apply to companies with a low loss ratio ("Merit System").

b) Employment Insurance:

The contribution rate for general industries is 1.75% of total remuneration paid to employees. 1.05% is borne by employers and 0.70% by employees. Higher contribution rates apply to some industries, such as construction and agriculture.

C. Medical Care Insurance (Health Insurance)

In principal, all people living in Japan are eligible, and it is mandated to join one type of medical care insurance. The types of medical care insurance in Japan are: Health Insurance (Government-managed or Society-managed) for private company's employees, Mutual Aid Associations for public servants and private school teachers, Seamen's Insurance for seamen, and National Health Insurance for others, such as the self-employed and retired individuals. Dependents are covered by each insurance. The description below principally outlines Health Insurance. Medical care insurance provided by Mutual Aid Association and Seamen's Insurance is almost the same as the Health Insurance. 1. Eligibility:

Employers with one or more employees are obliged to have the health insurance in principal. All full-time employees will be covered and become participants. Temporary employees and part-time workers are excluded.

2. Management:

Either the Government or a Health Insurance Society manages the health insurance. A Health Insurance Society is a special entity to manage the health insurance. It may be set up by an employer with more than 700 employees, or by an association of employers with more than 3,000 employees in total. Advantages of having a health insurance society are as follows: (1) Rate of contribution may be determined discretionary with certain limits; (2) Supplementary benefits may be provided in addition to standard benefits; and (3) Peculiar facilities may be provided for the health care of the participants.

3. Medical Care Benefits:


The health insurance covers non-occupational sickness or injuries of participants and their dependents. Occupational sickness or injuries are covered by the workmen's compensation. a) Basic Coverage for Participants and their Dependents:

In the event of sickness or injury due to non-occupational causes, the participant is entitled to receive necessary medical care, such as medical consultation, supply of medicines, medical treatments, surgery and hospitalization. 70% of such medical care expenses will be covered by the health insurance. Participants are required to pay 30% co-payment of the medical care expenses. Medical care benefits are also provided for dependents. The benefits cover 70% of medical care expenses.

b) Benefit for High-Cost Medical Care:

In case the out of pocket medical expense in a particular month exceeds a certain limit, the excess amount will be reimbursed by the health insurance. Such limit, as described below, applies to each participant or dependent and will sum up at a medical institution.

General JPY 72,300 + (expense – JPY 241,000) x 1% High-income persons JPY 139,800 + (expense – JPY 466,000) x 1% Low-income persons JPY 35,400

High-income persons: those with AS of JPY 6,700,000 over. Low-income persons: those exempt from local residents’ tax.

c) Sickness and Injury Allowance:

When a participant is unable to work due to the necessity of medical treatment and loses his/her remuneration, an amount equivalent to 60% of the standard daily remuneration will be paid per day up to 18 months, after a waiting period of three days.

d) Maternity Benefits:

i. Delivery Benefit:

Maternity is not considered as a sickness, and normal delivery expenses will not be covered. However, when a participant or a dependent gives birth, the participant receives a fixed amount of JPY 300,000 per newborn child.

ii. Maternity Allowance:

When a participant leaves work to give birth and loses her remuneration, she is entitled to a maternity allowance. She may receive 60% of the standard daily remuneration per day, from 42 days before the anticipated delivery date to 56 days after the actual date of delivery. If she receives partial pay, the allowance will be integrated.


4. Contributions: Contribution to the health insurance is calculated based on each participant's annual income (AS). The contribution amount is the same regardless of the number of dependents.

The AS method for the health insurance is almost the same as that of the employees' pensions insurance, only that AS has additional 9 Classes (up to JPY 980,000). For the government-managed health insurance, the contribution rate is 8.2% of AS, which is borne equally by the employer and the employee (4.1% each). All contributions are fully tax-deductible, for both employers and employees. Contribution rates for the society-managed health insurance are set by each society.

5. Health Insurance Reform as of April 2003:

From April 2003, medical care coverage by the health insurance was reduced to 70%, for participants and dependents, in-patient or out-patient. 30% out-of-pocket expenses are required. Contribution to the health insurance is calculated based on each participant's annual income. Contribution rate for the government-managed health insurance became 8.2% of overall annual income.

6. National Health Insurance:

The National Health Insurance offers benefits similar to those of the health insurance. People not covered by the other scheme must join the national health insurance. The coverage level is 70% of medical care expenses. The contribution amount is determined by each municipal government, usually based on total income and number of persons in each household.

D. Long-Term Care Insurance

With the impending problem of an aged society and an expected increase in demand for nursing and medical care for the aged, the Long-Term Care Insurance started in Japan on April 1, 2000. 1. Insured:

All individuals who are age 40 or older will become an insured, and they will be covered for long-term care benefits. In case insureds, who are age 65 or older, are in need of care, the long-term care insurance will cover for care services, regardless of the cause for the need. Insureds aged 40 to 64 are covered for care service needs caused by symptoms of aging, such as dementia.

2. Care Service Benefits:


In order to receive the long-term care benefits, it is necessary to obtain an authorization from the municipality stating that one is truly in need of care or support. The municipality will determine the degree of care necessary for each case. The benefit level will be determined by said degree. Thereafter, one may choose which service to receive. One must bear 10% of the actual cost of those services.

3. Contributions:

Contributions to the long-term care insurance start at age 40. They will be collected together with the health insurance contributions, or one must pay in directly. Contribution rates or amounts vary for each health insurance. Contribution rates for the government-managed health insurance is 1.07%, borne equally by employers and employees.


IV. PRIVATE EMPLOYEE BENEFIT PLANS - CUSTOMARY PRACTICES

A. Introduction

Under traditional Japanese employment practice, an employer was morally bound to take care of the financial security of employees and their families. Employees had a strong sense of loyalty to their employer and stayed with the company until their retirement. In recent years, such tradition has weakened, as people change jobs more often and companies cut benefits due to financial difficulties. However, many aspects of the traditional practice still exist. The following are typical employee benefits offered by Japanese companies, in addition to legal employee benefits:

- Retirement lump sum and/or pension benefit plans; - Survivors' benefit plans (death benefits); - Housing assistance plans and company housing plans; - In-company saving plans; - In-company loan plans; - Company-owned recreational and sports facilities.

B. Retirement Benefits

1. Lump Sum Retirement Benefits:

a) Implementation of lump sum retirement benefits:

Together with an age-limit system, a large majority of Japanese companies pay a lump sum benefit to those employees retiring at a certain retirement age (usually age 60). A lump sum benefit is also paid for voluntary severance, usually to those employees who served three years or more.

b) Level of benefits:

Lump sum benefits are usually calculated by multiplying a final base salary by an applicable figure. Such figures go up in proportion with the length of service, typically, one for each year of service. Applicable figures for voluntary severance are lower than those for retirement at the retirement age. (Please See Reference Table A.)

c) Guarantee:

On April 1, 1977, a law became effective that a company has to make an effort to fund outside the company, or to otherwise be secured or guaranteed, at least 25% of voluntary severance benefit liabilities.

d) Tax benefit:

The tax benefit to set up a book reserve for voluntary severance benefit liabilities ended by 2002. Companies have to amortize the remaining balance of such non-taxable book reserves within 4 years (for smaller companies, within 10 years).


2. Tax Qualified Pension Plans:

a) Implementation:

To supplement the above lump sum benefits or to take their place, many employers have implemented tax qualified pension plans. (Please see Reference Table B.) Plans are managed by life insurance companies or trust companies. At least 15 participants are required as a minimum number. Investment advisory companies are allowed to manage qualified pension plans since October 1, 1997.

b) Conditions for qualification:

The following are the legal requirements for a tax qualified pension plan: i. The purpose of the plan must be to pay retirement pension

benefits. ii. The plan must be funded either with a trust company or a life

insurance company, (including an agricultural mutual aid association).

iii. Directors must be excluded from participation. iv. In calculating benefits and contributions, the assumed interest rate

must not be lower than the standard rate. The rate will be stipulated every year in the Finance Ministry Ordinance. (As of April 2002, the standard rate is 1.2%). Other actuarial assumptions must be calculated rationally on the basis of actual conditions.

v. Contributions must be calculated as fixed amounts, or at a fixed

rate of salary, or in a similar fashion. vi. Past service liabilities must be amortized according to a

predetermined schedule. The annual amortization rate must meet the following limit: A. Fixed Installment Method 35% or less B. Fixed Rate Method 50% or less

vii. Actuarial reevaluations of the pension plan must be made at

scheduled intervals of no longer than five years, at which time amounts in excess of necessary reserves must be returned to the employer.

viii. Necessary reserves may not be returned to the employer except

for transfer to another qualified pension plan or to the employees' pension fund.

ix. If the plan should be discontinued, the reserves become the

property of the participants.


x. The benefit level must not be reduced unless it is acknowledged that the employer cannot afford to continue the payment of present contributions.

xi. Discriminatory treatment of participants is prohibited. xii. The employer must not receive any favorable treatment from the

trust company or life insurance company in return for setting up the pension plan and must not make special instructions regarding the management of the funds in the case of a trust company.

xiii. The plan must be designed to be in force for a considerable length

of time.

c) In addition to the above 13 conditions, the National Tax Administration Agency has issued a "Guide to Procedures for Approval of Qualified Retirement Pension Contracts" which includes 23 paragraphs that elaborate the above conditions.

These conditions are further interpreted and expanded in the "Guide to Autonomous Inspection", which was issued jointly by the Pensions Department of the Trust Association of Japan and the Life Insurance Association of Japan. It is on the basis of all of these conditions that qualified pension plans are designed. i. Calculation of benefits:

The amount of the pension benefit may be uniform for all participants or a fixed sum for each year of service. However, the most common method of calculation is to multiply the final base salary by the benefit rate derived from the length of service. This is the same method as used for the lump sum retirement benefit described above.

ii. Type of pension benefits:

The most common type of pension has a 10-year term of payment. 5-year and 15-year terms also exist, as do life annuities with certain years of payment guaranteed. Recently, the number of companies implementing a whole life plan with a 15-year guaranteed pension has been increasing.

iii. Lump sum option:

It is generally possible for the retiring employee to elect to convert his or her pension to a lump sum.

iv. Payment of contributions:

Almost 95% of all qualified pension plans are non-contributory.

d) A compromise was reached with regard to the proposal to partially abolish Special Corporate Tax from Qualified Pension Plans. In the past, 1.173% of the Pension Fund Assets have been subject to Special Corporate Tax. Effective April 1, 1993, companies with less than 500 employees (therefore, not eligible to take out an Employees' Pension Fund) are exempt from


paying the 1.173% Special Corporate Tax. This is on the condition that they are covered by tax qualified pension plans that are similar in plan design to an Employees' Pension Fund (e.g., funds with whole life annuity, etc.). In addition, further compromise took effect, since the Special Corporate Tax was suspended for the period between April 1, 1999 through March 31, 2003.

e) The following regulations on qualified pension fund management that

applied to the pension separate account of a life insurance company and a trust bank were removed effective April 1, 1997. The general account of a life company must still follow the regulations.

Capital Secured Investment 50% or more * Stock not over 30% Foreign Currency Denomination Asset not over 30% Real Estate not over 20% * Applied only to trust companies 3. Contributory Pension Plan:

As a result of the amendments to the tax system in FY 1990, deductions of insurance fees for individual pensions were raised. After the amendments, rates for the insurance fees for individual pensions rose to JPY 50,000 for income tax and JPY 35,000 for residence tax. Deductions can be made on taxable income through year-end adjustments or a return on income tax and residence tax when filing the final income tax return. The contributory corporate pension scheme supplements public pension schemes and company annuities. Therefore, an increasing number of companies are implementing this scheme.

4. Employees' Pension Fund: a) Implementation:

If a company has 500 or more employees covered under the Employees'

Pension Insurance Scheme, it may partially contract out of the government plan and set up an independent Employees' Pension Fund to fund the earnings-related portion of the government plan and its own additional retirement pension benefits on an integrated basis.

The compulsory contributions under Employees' Pension Insurance are 17.350% of covered salary. When an Employees’ Pension Fund has been established, 3.2% to 3.8% out of 17.350% is contributed to the fund as part of the contributions. This rate is called the “exemption rate” and determined actuarially in the range of 3.2% to 3.8%, on a case by case basis. The remainder must be contributed to the government plan. About 11 million persons are covered under this type of plan (please see Reference Table D.). Employers' contributions are fully tax-deductible. Employees' contributions are also fully tax-deductible as social insurance premiums. Pension payments are taxable as miscellaneous income, but death benefits are completely tax-free.

The Government in its cabinet meeting on July 23, 1993, agreed to a

modification to the Employees' Pension Insurance Law, slashing the Guaranteed Interest Rate for asset management for the portion of


Employees' Pension Funds in life insurance companies' trusts from 5.5% to 4.5% on April 1, 1994. Since then, the Guaranteed Interest Rate has been cut down further, to 1.5% in April 1999. The rates for most qualified pension plans have been similarly reduced, now being at 1.5%.

b) Fund Management:

In addition to life insurance companies and trust banks, investment advisory companies have been legally allowed to manage employees’ pension funds (EPF) under certain conditions since April 1, 1990. Investment advisory companies have been allowed to manage the whole EPF fund since March 27, 1998. However, it is limited up to 1/2 of the fund for EPFs that are less than three years old. This limit has been abolished since April 1, 1999. In calculating benefits and contributions, the assumed interest rate must be fixed at over 2.0%. This floor rate is decided by the Ministry of Health and Welfare every year.

The investment portfolio regulation, the so-called “5-3-3-2 Rule” (see Item 2.

Qualified Pension Plans), was abolished on December 25, 1997. 5. Normal Retirement Age:

The number of elderly workers (55 years or older) has been steadily increasing since 1970. In 1985, workers between the ages of 55 and 64 accounted for more than 10% of the total workforce. As a result of the above situation, the Law concerning the Stabilization of Employment for Elderly People was enacted and became effective on October 1, 1986. Under this law, employers are requested to extend the existing mandatory retirement age from 55 to 60 or above. At present, most business firms have normal retirement age set at 60 or above, and 6.7% of firms apply the retirement age of 65 or above. (Please see Reference Table E.)

6. Property Accumulation Annuity:

The Property Accumulation (Zaisan Keisei, or "Zaikei") was introduced in 1972, for workers to accumulate interest-tax-free savings by a payroll deduction system. In October of 1982, the system was extended through the marketing of a Property Accumulation Annuity to allow similar savings, specifically for old-age income. The system provides for accumulation of funds while employed and payment of an annuity after retirement, with the special feature that interest on the funds may be tax-free.* Therefore, the Property Accumulation Annuity provides an ideal supplement to the basic government-sponsored pension and retirement benefit plans provided by employers.

* The revision of taxation included the abolition of the tax-exemption system on small personal savings accounts (effective April 1, 1988). As a result, a worker's savings account using the property accumulation system is now subject to taxation: 20% per annum on interest earned on the savings. However, the property accumulation savings specifically designed for old-age annuity benefits or for the purpose of purchasing a residence, etc., are still exempt from taxation.


C. Death Benefits

1. Group Term Life Insurance:

a) Spread of Group Life Insurance: Group life insurance continues to gain popularity in Japan. In 2000, the number of policies issued was 134,745, and the total sum insured was JPY 417 million. The sum has more than doubled in the past 20 years. However, in recent years, there has been a notable decline in both the number of policies and total sum insured. This is due to the fact that many existing policies were combined when they were converted to the ‘new’ group term life policy starting in 1996. At the same time, many policyholders revised the sum insured to cope with corporate regulations that stipulate the bereaved family plan, resulting in an extraordinary decrease of total sum insured. (Please see (b) and Reference Table F.)

b) Group Term Life Insurance:

The vast majority of group life policies in force are group term life insurance. The present group term life insurance product is called “General Welfare Group Term Life Insurance”. It was put on the market on November 2, 1996. The old policy was converted into this new product. i. Clarification of Insurance Purpose:

The new group term life insurance policy consists of the “Main Policy”, the “Human Value Rider”, and the “New Accidental Injury & Hospitalization Rider.” The employer is required to purchase these according to their real insurance purpose.

ii. Main Policy:

The payment of all the proceeds to the bereaved family must be stipulated in the corporate regulations. The maximum insurance amount per life is not legally regulated, but it is JPY 50 million for IGP clients according to the Dai-ichi’s underwriting standards. (The policyholder or employer can become a beneficiary on the insurance contract, and this is a customary practice in Japan.)

iii. Human Value Rider:

The policyholder (employer) can have a “Human Value Rider” in addition to the main policy. The employer is allowed to retain the proceeds from this rider to make up for the financial loss caused by an employee’s death. The coverage amount must not be larger than that of the main policy, up to a maximum of JPY 20 million.

iv. New Accidental Injury and Hospitalization Rider:

This rider covers disability and hospitalization due to accidental causes. The Accidental Death benefit is not included.


v. Announcement and Agreement to and from Employees:

The planned implementation of a group term life insurance plan must be announced to all the employees by a written document. A representative employee (e.g., chairman of the union) is required to acknowledge that the document has been distributed to all the employees.

c) Calculation of benefits:

Benefits may be the same for everyone or they may be based on some objective criterion such as seniority, rank, or salary. Generally speaking, rank is the most common basis for calculation, but the Dai-ichi's foreign clients have chosen salary-based plans in the majority of cases. In Dai-ichi’s survey, two times annual salary is most commonly implemented by multinational companies, followed by one times annual salary.

d) Payment of premiums:

The vast majority of group term life insurance policies are non-contributory with the employer bearing the entire cost.

D. Current Trends in Benefits 1. Defined Contribution Pension Plan:

Defined Contribution Pension Plan (DC Plan) became effective as of October 2001. DC has characteristics that are similar to a 401(k) plan in the U.S.. Thus, some people call this a Japanese 401(k). However, they are substantially different in concept. For example, matching contributions are not allowed. a) Outline of the Defined Contribution Pension Plan:

There are two types of DC plans: A corporate DC plan and an individual DC plan. Employers can implement a corporate DC plan for employees. Contribution to a corporate DC plan must be fully paid for by the employer. Employees and the self-employed may participate in an individual DC plan for employees; however, only if their employer does not offer them a corporate DC plan, Employees Pension Funds, or Tax Qualified Pension Plans. Contributions to an individual DC plan must be paid by the participant. Matching contributions (contribution from both employee and employer) are not allowed. For either type of DC plan, participants have the right to choose the investment product. The employer must offer at least three types of investment or saving products for employees to choose from. Among them, at least one must be a fixed-income type. Accumulated assets for each individual will be managed separately by the managing company. Portability is also a major feature of a DC plan. Employees are able to bring their accumulated assets to their new employer's DC plan when changing jobs, or to an individual DC plan, if the new employer does not offer a corporate DC plan. Thus, job switching will not interrupt the accumulation. Participants can claim their retirement allowance at age 60 or older, but before age 70. Benefits can be paid either as an annuity or lump sum. Benefit


payments before age 60 are not permitted, except in case of death or severe disability of the participant.

b) Eligibility and Contribution Maximum:

The following is a basic outline for eligibility and maximum contribution amounts to the DC plan:

Types of DC

Plans Participation in EPF or TQPP

Maximum AnnualContribution

Benefits

Yes JPY 216,000

Corporate DC (Corporate contribution only)

No JPY 432,000

No (employees of private company or public servants)

JPY 180,000

No (self-employed)

JPY 816,000

Lump sum benefit: Retirement income deduction applies for taxation Annuity benefit: Public pension deduction applies for taxation

Individual DC (Individual contribution only)

Yes Cannot participate in DC *Investment return will be subject to special corporate tax in both types of DC.

2. New Defined Benefit Pension Law:

The new Defined Benefit (DB) Pension Law became effective as of April 1, 2002. Along with the implementation of this new law, Tax Qualified Pension Plans cannot be newly implemented. Existing Tax Qualified Pension Plans are required to switch to new DB pensions and/or to DC plans, or to terminate by March 2012. a) Benefit Eligibility:

At the time of retirement, a lump sum benefit must be provided to employees who have worked for the company for three or more years. This will apply to involuntary retirements as well. If an employee has worked for over 20 years, he/she will be eligible to receive pension benefits. Existing Qualified Pension plans, which do not meet these requirements, will be forced to change the contents of their plans before 2012.

b) Financial Regulations:

Under the new DB pension regulations, financial conditions of the pension plans are checked once a year to ensure that the plan has a sufficient amount of assets to operate, and has no problems in paying forthcoming benefit payments. When the amount of assets is measured insufficiently, policyholders are required to increase their contributions in order to resolve the deficit within a certain period of time. If the pension plan has been over-funded, the surplus will be reserved in the plan and a “contribution holiday” is awarded.

c) Taxation:

The same tax treatment is applicable as the one pertaining to the current qualified pension plans. Premiums paid by the employer are fully tax-


deductible, and pension assets are subject to special corporate tax (temporarily suspended until March 31, 2005).

V. SAMPLE PLANS

A. Company 1

1. Group Term Life Insurance Plan:

Life Insurance: An amount equal to 24 times monthly salary Maximum: JPY 50,000,000 Minimum: JPY 5,000,000

2. Tax Qualified Pension Plan:

a) Types of Benefits: Annuity Payments for Retirees.

Withdrawal Benefits for Voluntary Severance. Survivors' Lump Sum Benefits.

b) Basis for Calculation of Benefits: Final Salary of Retirees (or

Withdrawees).

c) Eligibility Requirements: Service length of 15 years or more and age 60 (no cases of “age 65 for annuity”) for retirement annuity. More than three years of service for withdrawal benefits.

d) Benefits:

i. Retirement Pension: Final standard monthly salary times

rates derived from length of service, payable for ten years certain (may be converted to lump sum). Please see Table A. for sample benefits.

ii. Withdrawal Benefits: Lump sum payments. Calculation

formula is almost the same as for (i.) above.

iii. Survivors’ Benefits: Lump sum payments. Calculation


e) Financing Method: Pension funds are managed by life

insurance companies (and/or trust banks).

f) Employee Contribution: None.


B. Company 2


Life Insurance: An amount equal to 2 times annual salary Maximum: JPY 50,000,000 Minimum: JPY 3,000,000


a) Types of Benefits: Annuity Payments for Retirees.



Withdrawees). c) Eligibility Requirements: Service length of ten years or more

and retirement at age 60 for annuity. More than three years of service for withdrawal benefits.

d) Benefits:

i. Retirement Pension: Final standard monthly salary times rates derived from service length, payable whole life with 15 years certain (may be converted to lump sum). Please see Table A. for sample benefits.









C. Company 3


Life Insurance: A straight amount of JPY 10,000,000


a) Types of Benefits: Annuity Payments for Retirees. Withdrawal Benefits for Voluntary Severance. Survivors' Lump Sum Benefits.


Withdrawees). c) Eligibility Requirements: Service length of ten years or more

and retirement at age 60 for annuity. More than three years of service for withdrawal benefits.

d) Benefits:

i. Retirement Pension: Final standard monthly salary times rates derived from service length, payable 15 years certain (may be converted to lump sum). Please see Table A. for sample benefits.








D. Company 4


Life Insurance: An amount equal to 36 times monthly salary. Maximum: JPY 50,000,000 Minimum: JPY 10,000,000 Disability due to Accident: A lump sum payment up to 70% of the rider insurance amount

(maximum of JPY 10 million) according to a schedule.


Hospitalization due to Accident: A lump sum payment equal to the rider insurance amount times

0.15% for accidental hospitalization per day, over 5 days and up to 120 days.


a) Type of Benefits: Annuity Payments for Retirees.



Withdrawees). c) Eligibility Requirements: Service length of 15 years or more

and retirement at age 60 for annuity. More than two years’ service for withdrawal benefits.

d) Benefits:

i. Retirement Pension: Final standard monthly salary times

rates derived from service length, payable ten years certain (may be converted to lump sum). Please see Table A for sample benefits.









VI. TAX CONSIDERATIONS A. Corporate Income Tax

Corporate income tax rates range from 22% to 30% of taxable income, depending upon the size of a company's stated capital. A local tax, imposed by prefecture and municipal governments, also applies. A standard local tax rate ranges from 5.0% to 9.6%. Local governments may also levy per capita taxes, and prefectures are allowed to impose enterprise taxes.

B. Individual Income Tax

The national tax rates on taxable income up to JPY 3,300,000 range from 10% and up to 37% on taxable income in excess of JPY 18 million. In addition, a local resident tax is levied by the prefecture and municipal governments.

C. Tax Consideration for Social Security and Employee Benefits

1. Labor Insurance:

Contributions are fully tax-deductible for both employers and employees. Workmen's insurance benefits are non-taxable, and employment insurance benefits may be taxable.

2. Group Life Insurance:

Premium of the group term life insurance paid by an employer is fully tax-deductible. A death benefit is subject to a special tax deduction of JPY 5 million times the number of legal heirs of the employee.

3. Pensions:

Employer's contributions to tax qualified pension plans or to an employee's pension fund are fully tax-deductible. Such contributions will not be included in employee's income for tax purposes. An annuity from such a pension plan is considered as taxable income for each year. A lump sum payment from such a plan is also taxable; however, some tax advantages apply. An employer was allowed to set up a tax-deductible book reserve for pension benefits with certain limits. Yet, such advantage ended in 2002. The remaining balance of the tax-deductible book reserves must be amortized within 4 to 10 years. The duration depends on the size of the company.


VII. REFERENCE TABLES

A. Current Model Retirement Lump Sum Benefit Level Figures for male university graduate employees. Companies with 1,000 or more employees Service Years (JPY 10,000) Value convertible to monthly salary

20 - 24 1,298 25.0 25 - 29 2,699 41.0 30 - 34 2,841 45.0 over 35 2,808 45.8

Companies with 300-999 employees Service Years (JPY 10,000) Value convertible to monthly salary

20 - 24 1,314 27.8 25 - 29 2,118 40.2 30 - 34 2,054 39.8 over 35 2,566 43.4


20 - 24 1,276 23.2 25 - 29 1,321 31.4 30 - 34 1,693 32.7 over 35 1,954 39.8


20 - 24 821 23.4 25 - 29 1,452 39.4 30 - 34 1,408 30.1 over 35 1,445 28.2

Average of all companies

Service Years (JPY 10,000) Value convertible to monthly salary 20-24 1,121 24.8 25-29 2,207 39.3 30-34 2,510 42.6 over 35 2,612 44.2

Source: Survey conducted on December 31, 2002 by the Ministry of Labor, with companies with 30 or more employees.


B. Retirement Lump Sum Benefits and Pension Plans Year Survey Lump Sum Pension Both Was Conducted Only Only 1978 62.1% 16.4% 21.5% 1981 55.4% 18.5% 26.2% 1985 51.9% 14.3 33.8% 1989 49.3% 11.3% 39.3% 1993 47.0% 18.6% 34.5% 1997 47.5% 20.3% 32.2% 2003 46.5% 19.6% 33.9% Number of Lump Sum Pension Both Employees Only Only 1,000 or more 11.0% 19.1% 69.9% 300 – 999 22.7% 26.4% 50.9% 100 – 299 34.7% 21.6% 43.7% 30 – 99 54.1% 18.3% 27.7% Note: The ratio of companies, which only have lump sum retirement benefits, is

decreasing. Yet, the ratio of companies that have both lump sum and pension plans is increasing.

Source: Survey conducted on December 31, 2003 by the Ministry of Labor, with companies with

30 or more employees.

C. Tax Qualified Pension Plans in Force

(as of March 31, 2003) Managed by Number of Plans Funds (JPY billion) % of Funds Life Insurance Companies 57,433 8,783 40.9 Trust Companies 8,787 12,391 57.8 Mutual-Aid Associations 532 272 1.3 Total 66,752 21,446 100.0

Sources: "Fact Book 2003", by the Institute of Life Insurance.


D. Employee's Pension Funds in Force Number Number of Persons Covered Funds of Funds (thousand) (JPY billion) March 1982 1,014 6,079 6,031 March 1983 1,024 6,280 7,308 March 1984 1,043 6,456 8,766 March 1985 1,063 6,730 10,462 March 1986 1,091 7,100 12,348 March 1987 1,134 7,405 14,488 March 1988 1,194 7,631 16,908 March 1989 1,259 8,410 19,649 March 1990 1,430 9,325 22,488 March 1991 1,474 9,842 25,580 March 1992 1,593 10,722 28,820 March 1993 1,735 11,701 32,183 March 1994 1,804 12,114 35,416 March 1995 1,842 12,233 38,426 March 1996 1,878 12,343 41,775 March 1997 1,883 12,100 47,778 March 1998 1,874 11,930 48,695 March 1999 1,857 12,110 51,281 March 2000 1,835 11,890 55,485 March 2001 1,798 11,546 57,800 March 2002 1,737 11,040 58,297 March 2003 1,656 10,386 57,199

Remarks: Includes funds with trust companies and with life insurance companies. Sources: "Fact Book 2003", by the Institute of Life Insurance. Pension Fund Association.


E. Normal Retirement Age

Age % Under 59 1.1 60 89.2

61 – 64 2.7 65 or over 6.9 Source: Survey conducted by the Ministry of Health, Labor, and Welfare, with companies with

30 or more employees, July 2003.

F. Group Insurance in Force

Number of Number of Insureds Total Sum Insured Policies (thousands) (JPY million)

March 1965 13,919 16,710 3,312,700 March 1975 122,364 87,790 92,362,700 March 1985 174,255 257,760 270,139,300 March 1994 226,844 490,970 562,654,700 March 1995 223,757 535,690 582,238,600 March 1996 221,660 564,160 595,877,100 March 1997 213,973 599,830 591,748,700 March 1998 170,004 611,540 423,326,000 March 1999 149,181 597,410 418,623,600 March 2000 134,745 633,660 417,256,900 March 2001 122,047 616,620 415,985,800 March 2002 109,590 550,490 408,995,500 March 2003 98,198 522,770 396,658,900

Source: "Fact Book 2003", by the Institute of Life Insurance.

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