TOKYO -- The Japanese government has clipped the wings of its defined contribution system even before the new plans have been hatched.
Lower-than-expected limits on tax-deductible contributions will reduce the attractiveness of the new plans, particularly to larger corporations. Instead, some experts think companies may turn to new cash balance schemes, which are expected to win governmental approval sometime this year.
"Many of our big corporate clients complain that the proposed annual cap for company-sponsored defined contribution plans is far too small," said Ayumi Sakaki, executive coordinator of Frank Russell Japan Co., which plans to offer multimanager funds to the defined contribution market.
In addition, the government last week postponed the introduction of the new plans until early next year from this fall, delayed by a scheduled merger of its health and labor ministries next January.
While draft legislation is not expected to be unveiled until March, wrangling among governmental ministries suggests lower tax-deductible contribution caps are in the works. And the types of plans are being scaled back as well: While previous proposals would have provided defined contribution plans for all citizens, including housewives, a December report by the ruling Liberal Democratic Party's tax panel would create both corporate and individual plans.
Here's the state of the current discussions:
* Deductions for companies without existing pension plans would be capped at 432,000 yen ($4,002) a year per employee. Companies that already have pension plans would see an annual cap on defined contribution of 216,000 yen; employees would not be allowed to make contributions.
* Workers at companies with fewer than 100 employees that do not have pension plans would be able to make tax-deductible contributions of only 180,000 yen per employee annually under the LDP proposal, down from 432,000 yen proposed by the Health and Welfare Ministry. They would join plans for the self-employed that are administered by the National Pension Funds Association.
* The LDP proposal also would ban matching contributions by companies that do not provide other pension plans when employees contribute to outside pension plans.
* The self-employed could make up to 816,000 yen in annual tax-deductible contributions under a system slated to start March 1, 2001.
* On a more positive note, returns in defined contribution plans would be tax-favored and benefits would receive more favorable lump-sum tax treatment, despite opposition from Ministry of Finance officials. Pending tax reforms, however, may impose a small tax on returns after two years.
"The smaller-than-expected annual caps will certainly make many companies seriously considering adopting a defined-contribution program to think twice, although the LDP's blueprint outlining tax breaks for 401(k)-style plans marks a step in the right direction," Ms. Sakaki added.
A spokesman for Pioneer Corp. said it makes no sense to shut down its existing defined benefit plan in order to get a bigger deduction for contributions to a defined contribution plan.
Many money managers who were gearing up for introduction of the new retirement system were not pleased with the lower annual cap. "We have already expected that at least 10 years will be needed for defined contribution plans take firm roots in Japan," said Tasaiju Toma, general manager of Nissei Asset Management Co.'s marketing department.
Experts said companies will be reluctant to switch to defined contribution plans. According to a simulation by Nomura-IBJ Investment Service Co., when a company with an existing pension scheme sets up a defined contribution scheme with the 216,000 yen cap, the total annual benefit each employee can receive would be about 10 million yen, based on an annual return of 3% over 30 years. That's only a third of the average retirement allowance big companies offer their workers today.
"This is too small to persuade companies to switch to defined contribution schemes," said Michinori Nishimura, chief researcher of Nomura-IBJ.
Mr. Toma emphasized the government should consider lifting the ceiling on tax exemptions for contributions because the acceptance of 401(k)-style plans depends on corporate sentiment toward them.
But he added that his company, an affiliate of Nippon Life Insurance Co., already has estimated that only about 20% of defined benefit funds will ultimately be switched to defined contribution. "We will use the lead time before the introduction of defined contribution plans to develop various investment tools and services," he said, including a cash balance plan.
The LDP's proposal to withhold permission for company matching contributions for employees who pick outside pension plans was considered a big blow to the development of the marketplace. Eiichi Yoshimitsu, general manager of strategic planning at Yasuda Kasai Cigna Securities Co., said the initial size of the defined contribution market will be smaller than expected.