Accounting changes are pushing Japanese companies to DC plans

New accounting rules effective this year are prompting a growing number of companies in Japan to add defined contribution plans to their retirement programs or to expand existing ones.

At the same time, the Tokyo stock market's recent revival could make it easier for those companies to garner the approval of employees they'll need to make those changes.

Panasonic Corp., the Osaka-based electronics giant, and Tokyo-based All Nippon Airways Co. Ltd. are the latest high-profile companies to confirm plans to make DC a bigger part of their retirement programs. Firms that have added DC plans in recent years include Sony Corp., Tokyo, and Chubu Electric Power, Nagoya.

The same accounting rules that led U.S. companies to freeze or close defined benefit plans over the past decade look set to weigh on their Japanese counterparts as well.

The international accounting standards coming into effect for Japan's fiscal year ending March 31, 2014, have become a “huge issue” for corporate management, said Haruka Urata, a Tokyo-based director of Towers Watson & Co.'s benefits business in Japan.

Those accounting changes — which disallow deductions that had shielded corporate balance sheets from the full impact of pension funding shortfalls — are making ditching DB plans a higher priority in the face of growing risks from interest-rate fluctuations, low investment returns and longevity issues, said Mr. Urata.

In Japan, unlike in the U.S., DB assets accumulated on behalf of active employees can be converted to DC assets, provided employees approve.

In an e-mailed response to questions, Ryosei Nomura, a Tokyo-based spokesman with ANA, called the goal of minimizing balance sheet risks posed by rising retirement benefit obligations “the most important point” driving the company's efforts to shift retirement assets into a DC plan.

The move would only involve the DB assets ANA has slated for annuity payouts for active employees. It wouldn't affect DB assets for retired ANA employees, or a lump-sum payment segment of its retirement program for active workers.

For the fiscal year ended March 31, 2013, on a consolidated basis, ANA and its subsidiaries had retirement plan assets of roughly 110 billion ($1.1 billion) and retirement benefit obligations of roughly 300 billion, leaving unfunded obligations of 190 billion. Of that 190 billion, 130 billion is recognized on ANA's balance sheet under the accounting rules that have prevailed until now. Under the accounting rules coming into effect this year, the remaining 60 billion would have to be recognized as well.

If ANA is able to restructure its retirement program, it could lessen the impact on the company's balance sheet by roughly 10 billion, Mr. Nomura said.

Another question

How quickly the ripple effects of the accounting rules will be felt in terms of shifting DB assets into DC plans is another question.

Twenty years from now, defined contribution plans will be “all over the place in Japan,” predicted Shintaro Kitano, principal and Japan retirement business leader with Mercer Japan Ltd. in Tokyo. The shift to DC will be driven by the same concerns over heavy defined benefit plan obligations that prompted U.S. and U.K. companies to shift to DC, he said.

However, the pace of change could remain slower in Japan, Mr. Kitano said. That's because external pressure from shareholders, stock analysts and credit agencies on companies taking DB risks hasn't emerged to the extent it has in the U.S. or U.K., he said.

Corporate DC assets in Japan, at roughly 6.6 trillion as of March 31, 2012, are about a tenth of the 62.1 trillion DB market, according to Towers Watson's data.

Even so, market veterans spy signs of building momentum.

The proportion of listed Japanese companies offering DC plans has risen to almost 40% now from 30% two years ago, said Joji Hata, chairman of the newly launched NPO DC Research Institute, Tokyo.

Mr. Urata, meanwhile, said the more important trend could be growing moves by companies that added supplementary DC plans earlier — for new employees or a portion of new corporate contributions — taking the next step of shifting accumulated DB assets to those DC plans.

The shift to DC has been a quiet one, noted Mr. Hata, reflecting the delicate task for companies of winning the approval of the two-thirds of employees needed to shift some or all of their retirement assets to DC. Mr. Kitano said such negotiations can be “very difficult.”

Mr. Hata said Japanese companies facing the toughest competitive environments have been at the forefront of introducing DC plans, and employees have proven willing to accede to changes if they believe the move will leave their employer better positioned to pay higher salaries and bonuses.

Panasonic, which has struggled through a period when the yen's strength has posed competitive challenges, might prove to be one such company. “After reaching an agreement with the union, the company plans to apply for approval for the shift (to a defined contribution plan) to the Ministry of Health, Labour and Welfare,” James Bell, a Tokyo-based spokesman, said in an e-mailed response to questions.

Panasonic had a reported 1.7 trillion in pension assets as of March 31, 2012.

Especially pressing

If Japan does see a pickup in moves to defined contribution plans, the task of ensuring plan participants have the necessary financial savvy to make sensible investment choices — a challenge in DC markets around the globe — could become an especially pressing one in a country where risk has been a dirty word for decades.

As of March 2012, corporate defined contribution plan participants invested more than 40% of plan assets in time deposits yielding 0.03% returns and another chunk of just more than 20% in guaranteed investment contracts offered by insurance companies — good for sleeping soundly at night but not a recipe for long-term retirement security, Mr. Urata said.

Still, the recent bull market for Japanese equities — since Shinzo Abe became prime minister in December, promising a tidal wave of stimulus policies — might be providing an improved backdrop for that shift to DC.

Since mid-November, just before Mr. Abe assumed power, the Nikkei 225 stock index has surged more than 60%, while the yen has depreciated by roughly 30%. n

This article originally appeared in the May 13, 2013 print issue as, "Accounting changes are pushing Japanese companies to DC plans".