TOKYO -- Looking at defined contribution plans as a "cure" for the financial woes of Japanese corporations ignores a vital point -- that pension programs are run for the benefit of participants, said Noboru Terada, executive director for pension investments at the umbrella Pension Fund Association.
With government authorization of defined contribution pension schemes widely expected next year (despite a worrying vagueness about what form they might take), Japanese plan sponsors were eager for information at the 1999 Japanese Pension Fund Symposium sponsored by Pensions & Investments this month in Tokyo.
High economic growth rates are gone forever; the country has the most rapidly aging society in the industrialized world; and lifetime employment at one company is not just dying out, it is no longer seen as preferable, said Ryu Jubishi, chief supervisor of corporate pension investment activity, Japan's Ministry of Health and Welfare.
Indeed, for some employees who had been counting on the sort of corporate paternalism Japan has been famous for, reality has hit hard. No fewer than 26 defined benefit plans have been dissolved in the past five years, said Hiroshi Maruta, deputy general of the finance department at Hitachi Ltd.
A strong voice in favor of defined contribution plans within Japanese industry, Mr. Maruta said that while such plans require employees to accept market risk, they also eliminate the very real risk to the employee of plan bankruptcy.
Tax treatment is, of course, the key to successful introduction of defined contribution schemes. Ministry of Health and Welfare officials Mr. Jubishi and Naoto Takahashi, director, spoke of the need for a coherent and equitable tax approach to defined contribution plans. The ruling Liberal Democratic Party favors such assets as pension money, not as savings, for the purpose of taxation, Mr. Takahashi said.
While not touching on the sensitive and controversial policy battle involved, he did say that the LDP is insistent on extending defined contribution schemes to Japan's large pool of self-employed. That is a major stumbling block in the way of getting the Ministry of Finance to sign off on defined contribution legislation, because it would be costly to give such plans equal tax treatment with corporate pension plan participants.
Learning from others
Several speakers pointed out that Japan has one great advantage in coming so late to defined contribution retirement plans: It can avoid many of the growing pains that showed up in the early years of defined contribution plans elsewhere.
Japan also has the chance to look at the significant differences between implementation of defined contribution in the United States and Europe, and opt for the structure that best suits its needs.
American 401(k) participants heavily influence the availability of investment choice within their plans, said Masanori Tsuno, president, Frank Russell Japan Co., which co-organized the seminar. In contrast, sponsors make most of the investment decisions in European defined contribution plans, although that doesn't eliminate the need for guidelines to help participants take best advantage of what choices they do have.
"Participants must know how to recognize future liabilities and base investment decisions on their life cycle, and this can only be done by encouraging clear, simple education on investment options," Mr. Tsuno said.
Something like ERISA
It's also important for Japanese sponsors looking at defined contribution to understand that "you don't need to get it perfect from the start, because everything will change," said Philip J. Lussier, head of defined contribution sales and marketing for State Street Global Advisors, Boston. "But you do need a very strong regulatory and legal environment, and you need the kind of fiduciary framework which ERISA provides in the U.S."
ERISA -- the Employee Retirement Income Security Act -- was a key theme for many of the speakers.
"Movement toward drafting a Japanese version of ERISA has been much too slow," said Kenichiro Urata, managing director of the employee pension fund at Tokio Fire & Marine Insurance Co. "It is vital we have such a law to assure that pension fund managers feel very strongly the fiduciary responsibility they have to plan participants. This holds true for both defined benefit and defined contribution plans. Participant views have not been well-represented in recent discussion of defined contribution. Rightly or wrongly, individual Japanese tend to be allergic to risk and will not accept vagueness in the delineating of fiduciary responsibility. It's going to take a lot of time and education to change their ideas."
The need for thorough and continuing education of employees about risk, return and asset classes was emphasized by many of the speakers.
It will be important for Japanese companies initiating defined contribution plans to match investment sophistication to the needs of their participants, said Raymond J. Marcinowski, president, Fidelity Group Pensions-Japan. Limiting options initially to seven or eight would be ideal because it would simplify education and communications requirements. He also offered suggestions on how sponsors should communicate with participants.
"The Internet has become the channel of choice in the U.S., partly because of the large number of options now offered in a lot of plans, and partly because of the speed of change in investment environments," he said.
Because participants must have access to investment information when and where they want it, in a form useful to them, he said, it is important for sponsors to shift education and communication functions from paper to high-tech wherever possible.
Japan has the opportunity to choose from a wide range of communications channels, and will have to use those channels to transform plan participants from savers into investors, Mr. Marcinowski said.
Technology also will play an important role in the spread of defined contribution schemes in other ways as well. In terms of account portability and service cost, sponsors will have to take the fullest possible advantage of high-tech support, said Hitachi's Mr. Maruta.
"This will provide a good opportunity for service providers to distinguish themselves with high-value-added products," he said.