A growing number of multinationals with pension operations in Japan - among them DuPont, Johnson & Johnson and Hewlett-Packard Co. - have made changes to those pension funds' investment strategies, in step with changing financial conditions and revised pension rules.
Other sponsors, including Exxon Corp., expect to examine opportunities to make investment improvements for their pension funds in Japan.
Exxon, with close to $300 million of pension assets in a Tax-Qualified Pension Plan in Japan, "would like to see if there are some ways to liberalize the investment practices of these pension assets," said James E. Bayne, Exxon's manager-benefits finance and investments, Irving, Texas.
An executive of yet another U.S. multinational, which could not be identified, was planning to travel to Japan two weeks ago to explore prospects for liberalizing the investments of its Japan funds.
Sponsors of the larger Employees' Pension Funds want to take advantage of the ongoing liberalization of investment rules. And, the deregulation of EPFs coincides with the growing concern about the financial health of some of these plans. Experts fear the depth of their underfunding should become more apparent next year when Japanese EPFs switch to market-value accounting from book-value accounting.
For some U.S. multinationals, the underfunding problem already is a concern, said Sandy Chotai, global asset consultant with Towers Perrin in New York. Because U.S. companies must comply with Financial Accounting Standard 87 - which says companies must account for worldwide pension assets and liabilities on their balance sheets - some already have noticed the underfunding in their Japanese pension fund. In fact, companies have "found out that, of all countries, Japan tends to have the most serious pension underfunding problem," said Mr. Chotai.
To resolve the problem, companies either can make larger contributions to the fund, or try to increase its investment returns - certainly the preferable alternative.
But that option has become all the more difficult, particularly for funds with hefty allocations to general accounts managed by insurance companies. This year, Japanese insurers reduced the guaranteed yield on these accounts to a paltry 2.5% from 4.5%.
For these and other reasons, more companies in Japan are examining their funds' asset allocations and their manager lineups.
"In Japan, pension assets and liabilities are calculated and contributions governed by regulations that do not reflect economic reality," said Mr. Chotai. "As a result, funds need to measure assets and liabilities on a realistic, economic basis and a select an asset allocation mix that enables them to address their real liabilities. This is what an asset liability study can help them with," he pointed out.
Masanori Tsuno, president of Frank Russell Japan Co. Ltd., Tokyo, said all of the firm's clients - which tend to be the larger Japanese companies - have been exploring ways to take advantage of EPF rule changes. "It's fair to say that in the past year, clients have done maybe two to three times as many asset studies" vs. prior years, he said. Although changes take time, "clients' asset mix has changed a lot compared with three years ago," said Mr. Tsuno, who did not elaborate.
Among multinationals with EPFs in Japan, Hewlett-Packard, Palo Alto, Calif., has attempted to take advantage of increasing deregulation. In 1995 the firm finished and updated an asset study that was begun in 1992. In March 1996, the company implemented what Jean-Claude Gauthier, global benefits financing manager, called "significant changes" for the Japanese plan, whose size was not revealed.
In general, the fund shifted from insurance general accounts to more active management, meaning increased use of trust banks and the addition of investment advisers. H-P is awaiting governmental approval on its new pension arrangements, including asset allocation.
The reasons for the changes now: freer investment rules coupled with a more attractive stock market.
The new investment liberties are being announced frequently. This month, in fact, Japan's Pension Fund Association, which has roughly $26.5 million of assets, became the first of the Employees' Pension Funds to be exempted from the 5-3-3-2 investment rule. That regulation says funds must have a minimum of 50% of assets in principal-guaranteed investments, a maximum of 30% in Japanese stocks, a maximum of 30% in foreign securities and no more than 20% in real estate.
While no other EPF has been granted the same freedom, some funds "are preparing to apply (for it) and expect to get (permission) within a year," said Naohito Takahashi, the PFA's general manager-investment research department in Tokyo.
Earlier this year, the government decided to allow independent investment advisers to manage up to one-half of the assets of EPFs, up from the previous one-third limit. It also was decided that trust banks in Japan individually no longer would have to comply with the 5-3-3-2 rule; but EPF sponsors would have to make sure their overall funds abided by the rule.
Then, late last month, a study group within the Ministry of Health and Welfare wrapped up its year-long work with a set of recommendations. Among the more dramatic ideas put forth: a suggestion of more flexibility in setting actuarial assumptions for plans, including allowing them to set their own interest rate assumption instead of the current 5.5% assumed interest rate; early abolition of the 5-3-3-2 rule and adoption of flexible asset investment rules like the "prudent man" rule; and partial introduction of a defined contribution concept. The concept would be "part of (a) more flexible benefit design, while regarding the defined benefit design as the basic approach," the study group suggested.
But unlike rules governing EPFs, regulations that apply to Tax-Qualified Plans (which usually are smaller than EPFs) in Japan have not been liberalized. Even so, some T-Q plan sponsors - such as Johnson & Johnson and DuPont - have been seeking ways to maximize returns, even if it only means moving out of general accounts and into separate accounts.
Johnson & Johnson, New Brunswick, N.J., has $45 million in Japanese pension assets that fall into the T-Q category. Last fall, the assets were shifted from one insurance general account into trust accounts. J&J hired Mitsubishi Trust and Banking Corp. bank as the lead bank and J.P. Morgan Trust Bank Ltd. as the co-investment adviser, said William E. Rauh, J&J's director, pension funds.
DuPont K.K., the Japanese subsidiary of Wilmington, Del.-based DuPont, just finished an asset allocation study.
After completing the study, DuPont made a number of managerial changes involving its $50 million in Japanese pension assets. Until three years ago, all pension money was handled by Meiji Insurance Co., Tokyo, in a general account, said Jack Stair, senior consultant with DuPont in Wilmington. Then, the company decided to put half of its Japanese assets into insurance general accounts and half into separate accounts. To handle the arrangement, the company hired two trust banks and four insurance companies.
At that time, the company decided to do another asset study in three years, when more assets could be allocated to separate accounts. That expectation is about to bear out. The 1996 study convinced DuPont executives that all of the Japanese assets should go to separate accounts. As a result, DuPont has chosen four trust banks - including two from its previous line-up.