Some major Japanese companies are taking a look at the cash balance pension plan concept, seeing it as a transition between their familiar but financially teetering defined benefit plans and the free-for-all investment climate of defined contribution.
Facing accounting reforms that will force disclosure and resolution of massive shortfalls in retirement plan funding, Japanese corporations are eager to get on with defined contribution plans, which are to be introduced next year.
Shifting employees into a defined contribution program would alleviate the drag on earnings that's inevitable if a firm has to top-up pension funding. But it's not a strategy that will solve every problem, and it introduces some new difficulties -- particularly the shift in investment responsibility to employee from employer.
Cash balance offers an "attractive alternative" to switching suddenly to defined contribution from traditional defined benefit plans, according to Matt Siegel, a principal at PricewaterhouseCoopers. For one thing, because a cash balance is a hybrid defined benefit plan, the transition is easier. "One of the major factors that could impact employers' decisions between cash balance and defined contribution is that the investment risk is generally borne by the employer in cash balance plans and by the employee in defined contribution plans," Mr Siegel said.
That theme was echoed by Kiyoaki Fujiwara of the economic policy bureau of Keidanren, the premier Japanese industrial lobbying organization. "We like the idea of defined contribution, but how to structure such plans is a problem. Obviously, a move away from defined benefit programs would help companies solve their financial difficulties, but there has to be a positive side to the equation for employees, who can't just out of the blue be handed all the investment risk. Because they leave the risk on the employer side and provide workers with a more stable benefits environment, the hybrid structure of cash balance plans is attractive to many companies, especially those with large and aging work forces," he said.
Individual investing is rare among all but the most wealthy Japanese, and the typical company employee is not prepared to suddenly take on responsibility for investment decisions. "The key to successful introduction of DC programs is going to be education, for both employer and employee, as to what they have now and what would be offered under a DC or cash balance program," Mr. Siegel said. "I think it is very important that both Japanese companies and employees become well educated about their existing programs and their alternatives before making important decisions."
PricewaterhouseCoopers is working with one major Japanese financial services company, which Mr. Siegel declined to name, to identify potential issues and explore alternative designs for their retirement program, including both defined contribution and cash balance plans. Mr. Siegel also pointed out another factor that could spur movement away from defined benefit programs -- the need for greater job mobility. "Japan's economic crisis is breaking down the old pattern of lifetime employment at one company," he said.
One company that is taking a close look at cash balance is Nippon Steel Corp., for precisely the reasons given by Mr. Siegel and Mr. Fujiwara. "Our employees are going to feel much safer if the company takes responsibility for investing their pension assets," insisted Shozo Tokuzumi, general manager of the accounting and finance division. "They won't want to accept the risk all on their own. So we are certainly taking an interest in the cash balance concept, and we're making some prototype plans although we have not made any decisions."
NEC Corp. is considered by some observers of Japan's pension scene as another prime candidate for a cash balance plan, but officials at that company declined to respond to questions on possible changes to its pension system.
But Japanese pension regulators, busy finalizing next year's introduction of defined contribution plans, aren't prepared to add another facet to an already complicated environment. The Ministry of Health and Welfare is not looking at cash balance plans, and won't until at least the new year, according to Naohito Takahashi, director of corporate pensions at the ministry.
There is some interest within the foreign asset management community, but "no clients are beating on the door asking us to develop products for cash balance," said Clifford Shaw, president of Merrill Lynch Mercury Asset Management Japan.
George C. Olcott, managing director of UBS Brinson in Tokyo, agrees: "Cash balance could be an option, but we are not moving in that direction at present."
Japan is going to need some legal changes to make a success of either defined contribution or cash balance plans. The parliament will have to authorize portable individual retirement accounts if an increasingly mobile Japanese work force is to take advantage of corporate pension programs.
In any event, nobody in Japan is going to be able to make firm plans on pension reform until the financial authorities come up with tax rules on transforming defined benefit plans. The Liberal Democratic Party, the dominant political force, has promised specifics on taxation of defined contribution plans by December, but no movement by the Ministry of Finance is discernible yet, complained Mr. Fujiwara. "Everyone -- Keidanren, companies, trust banks, insurance companies -- is waiting to see what kind of tax treatment the ministry comes up with, but as of now there isn't even a firm schedule for new tax rules except the LDP's pledge of something by December," he said.
In one sense, Japanese firms are already moving in the direction of cash balance, Mr. Fujiwara said. Many companies have instituted regular reviews at three- to five-year intervals of the guaranteed investment returns for their defined benefit plans.
"This brings them very close to the cash balance concept," he added. If companies begin to peg their return guarantees to some clear standard, such as the yield on 10-year government bonds, they effectively will be operating as cash balance plans.