A recent move by Japan's ruling Liberal Democratic Party apparently has speeded up decision-making on whether to have defined contribution plans in Japan.
Last month, the powerful LDP said it would study 401(k)-like plans for possible introduction in Japan. The announcement was part of an economic stimulus package unveiled Feb. 20.
As a result, some experts think the LDP might decide by midyear whether it wants to introduce legislation permitting 401(k)-type plans in Japan.
Even if the LDP chooses to move forward on allowing the plans, it could be another one to two years before any legislation passes. But the party's moves clearly will hasten the pace.
A study group comprising representatives of Japan's ministries of Health and Welfare, Finance, and Labor already was weighing the defined contribution concept as part of its wider consideration of implementing a corporate pension law in Japan.
That group's recommendations are not due until the end of March 2000. But because of mounting business and political interest in defined contribution plans, the group could accelerate its work. "We are now discussing our schedule" for making recommendations, Naohito Takahashi told Pensions & Investments last week. He is the director of corporate pensions in the Ministry of Health and Welfare pensions department.
In the meantime, a number of Japanese business groups -- including the Federation of Economic Organizations and the Japan Federation of Employers' Association -- have called for the introduction of defined contribution plans.
Moreover, 72 pension sponsors -- of non-financial companies -- have formed a study group, and hired a consultant, to help them weigh the merits of such plans, said a fund official who asked not to be named. The study's results are expected in April or May, and depending its findings, it could help the group to "push strongly" for the introduction of defined contribution plans, the official said.
Certainly, a host of issues/concerns surround the defined contribution plan concept. Among the chief problems is loss of tax revenue. To ensure the portability of plans, Japan would need to create a variation on America's individual retirement accounts. These would be used by the self-employed or by employees using defined contribution plans who switch to companies without them. But the creation of such tax-advantaged vehicles should mean lower revenue for government.
Other issues include: which ministry would oversee the plans; what kind of plans would best suit the Japanese culture; what type of systems would be needed for their administration; and how they would fit into Japan's existing pension system.
At least some governmental agencies sympathize with the plight of businesses. They recognize the new plans would reduce pension funding obligations of businesses.
In turn, business groups and consultants see benefits in defined contribution plans. "Many companies are asking" about such plans, said Masanori Tsuno, president of Frank Russell Japan Co. Ltd., Tokyo. One pension client this year asked him to make a presentation on the concept at its general meeting. Mr. Tsuno believes defined contribution plans would be most beneficial when used along with defined benefits plan, where they exist.
Especially among larger companies, defined contribution plans could be popular supplements. But "there are so many companies that have no DB plan. For them, the DC concept is very attractive," Mr. Tsuno said.
Hiroshi Nakagawa, managing director at InterSec Research Corp.'s Tokyo branch, cited the demographic benefits of defined contribution plans.
Japan's traditional practice of employment for life with one company is changing. "More people are willing to change their jobs these days," making pension portability important, he said.
"Last year, the collapse of two major financial firms, including Yamaichi Securities, changed people's thinking a lot. They recognized that" lifetime employment at one firm is no longer assured -- meaning "you must hedge your life," he said.
A number of Japanese pension sponsors are enthusiastic about defined contribution plans.
Noboru Yamaguchi, managing director and chief investment officer of the Pension Fund of Japan Travel Bureau, Tokyo, said he personally favors the concept -- although no discussions of it have taken place at his firm because the plans haven't yet been introduced.
Speaking generally, he believes Japan needs to permit 401(k)-like plans. As he sees it, "the Japanese economy may not recover dramatically for another 10 years."
That could make it difficult for funds to achieve the traditional 5.5% assumed rates of return "without taking big investment risks," he said.
But the alternative -- lowering assumed rates of return -- also would be a problem: it could force companies to raise their pension contributions.
A plan sponsor who asked not to be identified said employers see a range of benefits from having defined contribution plans. Not only could the plans help lower a company's funding liability, but they also could provide many more structural options for workers and employers. For instance, employees could be given choices of which plans to participate in; or older employees could be kept in defined benefit plans, while newer workers could be offered defined contribution arrangements. Moreover, the introduction of defined contribution plans should make it easier to create hybrid plans, such as the cash balance arrangements seen in the United States, he said.
However, some worry about objections to defined contribution plans from labor unions or other worker groups. And not all plan sponsors laud the concept.
For example, Tatsuo Narushima, executive director of Nagasakiya Pension Fund, Tokyo, said he personally wouldn't want a defined contribution plan. He thinks the concept collides with the Japanese way of thinking.
"Even if defined benefit plans are performing badly, (employees know) the company will take care" of the problem, he said.
But with defined contribution plans, workers assume more of the responsibility for asset accumulation. Given the weak performance of Japan's stock market in recent years, employees might be concerned about shouldering more responsibility for their pension provisions, he said.