TOKYO - Daiwa Securities Group has shut down its defined benefit pension plans and set up a stopgap performance-based retirement system, a move that could be copied by other Japanese financial services companies.
The defined benefit plan terminations represent the first time a big Japanese company has abolished its tax-qualified pension plan while the company continued operations. And more may follow suit: Nikko Securities Co. is rumored to be planning a shift to a defined contribution-like system, while Konami Co., a game-software maker, already has shut down its defined benefit plan. A spokesman for Nikko Securities declined to comment.
More than 40 other companies have queried Daiwa on how it liquidated its fund said Koichi Matsushita, deputy general manager of the firm's personnel department. The company employed an unusual tax-avoidance strategy involving laying off its existing employees and rehiring them under a newly created holding company structure.
Japan is moving toward adopting a law creating 401(k)-type plans. While the legislation has been delayed to March 1 from its originally planned startup date of Jan. 10, 2001, industry sources expect a further delay to April or May.
However, Daiwa's contributions will be limited. It faces a maximum tax-exempt contribution of Y216,000 ($2,008) per employee, because it also has Y44 billion in the Japanese Securities Industry Pension Fund, a member of the Pension Fund Association, the umbrella organization that regulates and administers the national pension scheme.
Daiwa's move to liquidate its Y21 billion retirement allowance plan and Y20 billion tax-qualified plan, which occurred in April 1999 but became public only recently, does not necessarily presage a broad shift toward defined contribution-like plans. While Daiwa's move is not likely to set off a broad trend of closing tax-qualified plans, it does offer an option for companies looking to adopt similar stop-gap plans while they wait for defined contribution legislation to be passed, said Tsuneo Kobayashi, a consulting adviser at William M. Mercer Ltd. of Japan.
Daiwa, which will become one of the major vendors of defined contribution vehicles, wanted to set an example by liquidating two major pillars of its defined benefit plans ahead of other firms, said Naru Ishida, a consultant at Towers Perrin in Tokyo.
Historically, Japanese companies have shuttered their defined benefit plans only when faced with bankruptcy. In fiscal 1999, 3,581 plans were terminated, reducing the total number to 81,466, spurred largely by bankruptcies among small and medium-sized firms. Pension shortfalls generated by lower-than-expected returns have hastened that trend, Mr. Kobayashi said.
Daiwa Securities officials acknowledge that a pension shortfall was one reason for dissolving its pension plan, although Mr. Matsushita said the main reason behind the shift was to provide incentives for employees. He declined to disclose the shortfall, but stressed that it was not a substantial sum.
"Our precedent-setting move was in line with our effort to switch to the performance-based pay system to stir up morale of employees, which we believe is vital for the group to survive in the increasingly competitive business environment," Mr. Matsushita said.
The traditional pension plan, which is geared to long-term workers, had become an obstacle in Daiwa's move toward merit-based pay, he said.
The most difficult part was wrangling with the tax authority, and not with Daiwa's labor union, Mr. Matsushita added. Workers were alarmed by the 1997 failure of Yamaichi Securities Co. Ltd., Daiwa's next-door neighbor.
How Daiwa effected the transition from a defined benefit plan was key to avoiding a hefty tax burden. If the company simply had shut down the tax-qualified plan, it would have had to pay income taxes. Instead, all group workers technically were laid off, entitling them to receive lump-sum retirement payments. (Only parent company employees incurred taxes, which Daiwa is paying on their behalf.)
The closed plan was kept for Daiwa's current retirees, and its assumed rate of return was reduced to 3.5% from 5.5% a year for those who are between ages 55 and 60.Then, a new system was set up in which each employee will receive a retirement allowance based on job performance at the end of each year.
The biggest plus, Mr. Matsushita said, is the company will know how much it needs to contribute to the new plan each year, avoiding the uncertainties of the defined benefit plan.Daiwa employees will be free to choose between two schemes: an "advanced payment" scheme, in which they will receive a retirement allowance in cash at the end of each year; and a "withholding" scheme, in which the company pools the yearly retirement allowances and manages them conservatively.
The cash payments do not get preferential tax treatment because the government considers them part of employees' year-end bonuses.
Under the withholding system, the annual yield is set at that of a bond investment trust, or 1.2% in fiscal 2001. When defined contribution plans are introduced officially next spring, assets managed under that scheme will be transferred to a new defined contribution plan, Mr. Matsushita said.
Workers who opt for taking the money upfront can make a one-time switch to the longer-term withholding system, although they cannot move from the withholding system to the advanced system.
While Daiwa has not fleshed out how the assets of the new plan will be invested, about 70% of the investments will be through Daiwa products.
