TOKYO -- Pass the red ink.
Japanese companies are writing off their pension shortfalls and reducing pension benefits as they are being forced to declare the full extent of their liabilities for the first time.
New accounting rules, effective for the fiscal year that started April 1, will bring Japanese corporations in line with U.S. standards, requiring companies to recognize all retirement liabilities on their balance sheets.
The old accounting rules allowed Japanese companies to list a total of their monthly pension contributions on their balance sheets, without regard to the total level of funding. The new accounting rules, however, mandate Japanese firms to declare their pension underfunding in the balance sheet as well as pension expenses in the income statement.
The change is so severe it has been dubbed "another Y2K problem" by corporate Japan's financial managers.
"The pension shortfalls do not affect the stock prices very much, but it does influence each company's credit rating. In the bond market, the companies with a higher volatility on their balance sheets are considered a higher risk," said Hironobu Hatano of Jardine Fleming Investment Trust and Advisory Co. Ltd.
"Naturally, it will help improve a corporate image if a company opts to improve its financial position by writing off the pension and severance liabilities in one year or so. But in the end, each company must decide how to cover the shortfalls based on their business strategy."
But the real scope of the pension shortfalls with which Japanese companies are saddled won't be available for public scrutiny until March 2001, when the companies will disclose their pension and severance liabilities as required under the revised law, said an associate financial analyst of Nomura Research Institute Ltd. As of the end of fiscal 1997, Daiwa Institute of Research estimated that retirement fund liabilities of Japanese companies had topped Y60 trillion ($550 billion). The real damage is expected to be much larger, but no one knows exactly how big.
Some of the edge was taken off by a 20% rise in the Nikkei stock index in the last three quarters of 1999.
The average corporate pension fund investment return stood at 13% in the last three quarters of 1999, according to Japan Rating and Investment Information Inc.
This translates into an annualized 17.3% return for fiscal 1999, far surpassing the 2.5% seen in fiscal 1998.
Meanwhile, some of Japan's largest companies are unveiling the scope of their pension debt, and how they propose to deal with it. Here are some leading examples:
* Fujitsu Group, on a consolidated basis, is now saddled with staggering pension liabilities totaling Y660 billion, Y420 billion of which is held by parent Fujitsu Ltd., a computers, telecommunications and electronics company, a company spokesman said.
The flagship unit plans to set up a trust using equity holdings in affiliates to cover the entire shortfall in a single move, while the remaining Y220 billion pension shortfall held by subsidiaries will be covered over the next nine years.
* Nippon Telegraph and Telephone Corp. announced last November that it would post a Y720 billion extraordinary loss in fiscal 1999 to close the gap between its lump-sum severance liabilities and the allowances taken to cover those future benefits.
The telecommunications giant, which was split into a holding company and three core operating units last year, estimated in March that unfunded pension and severance liabilities of the pre-reorganization NTT will reach around Y320 billion as of April 2001, with less than Y15 billion of the total shortfall belonging to NTT itself.
* Tanabe Seiyaku Co., an Osaka-based pharmaceutical company faced Y5.9 billion worth of parent-company pension fund liabilities as of March 31, 1999. As of the end of March of this year, however, Tanabe's pension fund shortfalls amount to about Y34 billion on a parent-only basis. Tanabe plans to cover its entire group retirement benefit and pension fund shortfalls by the end of this fiscal year.
Meanwhile, Japan's top electronics manufacturers also were trying to close pension gaps this fiscal year by changing their retirement policies and writing off pension and retirement liabilities.
Mitsubishi Electric Corp. has trimmed pension benefits for older retirees, adopting a three-tiered system in which pension payments decrease as a retiree ages from a system in which payments increased by a small amount each year. To cover its Y539.1 billion unfunded pension obligations, as of March 1999, the company also plans to earmark special reserve funds to cover the shortfalls. "This will help narrow the gap by Y180 billion in 10 years or so," the company spokesman said.
At the same time, the company lowered the assumed rate of return to 4% from 5.5%, thus boosting its pension debt.
Toshiba Corp. also decided to reduce its pension payments and earmark special reserve funds, so that its group's unfunded pension liabilities should shrink by Y40 billion to Y50 billion from Y573.8 billion as of March 1999.
At the same time, it reduced its assumed rate of return.
The company plans to record a parent-only extraordinary loss of Y330 billion for fiscal 1999 to cover most of the Y400 billion in reserve shortage for its retirement and pension funds, while the remaining Y70 billion to Y80 billion gap will be closed this fiscal year by transferring stock holdings to trust banks handling pension assets for the firm.