TOKYO - Fidelity, Goldman Sachs, State Street Global Advisors, Prudential and Merrill Lynch are ready whenever the Diet is.
Japan's parliament is expected to pass legislation allowing defined contribution plans next month after years of discussions and near misses. The law could go into effect as early as October.
Domestic and foreign money managers based there will compete for shares of what is expected to become a Y50 trillion market within 10 years.
The three largest securities firms in Japan - Nomura Securities Co., Daiwa Securities Group Inc. and Nikko Securities Co. - are preparing to develop their defined contribution businesses, making plan proposals to corporate clients and marketing investment trust products.
But they'll face stiff competition from the Japanese units of U.S.-based money management firms, which already are talking with their defined benefit plan clients and preparing to offer defined contribution plans, even though the investment limits are likely to be lower than the managers like.
"We've been in discussions with some clients for a long time and we're ready to go," said Makoto Takano, executive officer and general manager of institutional marketing for Goldman Sachs Asset Management Japan Ltd., which manages $8 billion for 35 pension fund clients in Japan, including Honda Motor Co. Ltd.
Fidelity Investments Japan Ltd. has a team of about 20 marketers prospecting for defined contribution clients and has several lined up, waiting for the legislation to pass, according to Jackie Kestenbaum, senior manager, corporate communications for Fidelity Japan, which manages $6 billion for 115 pension fund clients in the country.
"Companies who use us for their defined benefit plans are more willing to talk to us about DC plans," said Ms. Kestenbaum. She wouldn't identify any clients.
Fidelity also has set up a new defined contribution website to market to Japanese companies - www.Fidelity.co.jp. "It focuses on what DC plans are and the reasons to use DC plans," she said.
State Street Global Advisors (Japan) Co. Ltd.'s Citistreet joint venture with Citibank, which provides defined contribution services, "is considering what to do in the Japanese market. We are starting to design some strategies," said Eric Michel, president and representative director of the firm, which manages $18 billion for 40 pension fund clients in Japan. He would not name any clients.
The law as currently proposed has problems, according to these firms. The biggest is the low level of tax-exempt contributions that can be made per year. For firms that have corporate pension plans, employers can contribute Y216,000 (about $1,800) per year to each employee's account and the employee cannot contribute anything.
For firms that do not have corporate pension plans, the employer can contribute up to Y432,000 per employee per year and the employee can contribute 180,000 per year.
Non-earning spouses may contribute nothing; and the self-employed can contribute up to Y816,000 per year to individual accounts.
"What's most important is to successfully get the legislation through the Diet," said Mr. Takano. "We can get increases in the contribution levels later."
"There may be some problems here and the contributions now are not that big, but it's better to start (the DC plans) than not to," said Ms. Kestenbaum. "In the U.S., it took 15 years for DC plans to catch on."
Prudential Investments of Japan, a subsidiary of Prudential Life Insurance Co. of America, Newark, N.J., has "been preparing for the new law for the better part of a year," said Bob Lee, senior vice president and general manager of defined contributions. Prudential Japan plans to offer investment trusts, the Japanese term for mutual funds, that can be used by defined contribution plans. Prudential has been holding seminars for Japanese bankers and insurance company representatives who will be DC plan providers to inform them about the education materials that will be needed for communications with workers.
Merrill Lynch Investment Managers, Japan, also is active in the defined benefit market and plans to enter the defined contribution market. "We, like many other foreign companies operating in this country, believe that the contribution levels are low," said David Semaya, chief operating officer of Merrill Japan. "Low interest rates in Japan, coupled with relatively high administrative costs may result in lower rates of participation from the outset. However, we feel that the introduction of DC will ultimately raise consumer interest in investment products and will have a long-term positive effect on the mutual fund industry in Japan."
"The level of contributions for DC plans is very low and it's a problem," said Hiroshi Maruta, president and CEO of Hitachi Investment Management Ltd., which runs Hitachi Ltd.'s Y2 trillion defined benefit plan. "But it's important to introduce the plan. Once we introduce the plan and once people can invest through the plan, then the amount of tax-qualified contributions may be expanded."
The law's shortcomings aren't interfering with the company's plans. "Hitachi wants to be the first company in Japan to offer its employees a defined contribution plan," he said.
Hitachi has been laying the groundwork for a defined contribution plan for some time, having set up an in-house investment management subsidiary more than a year ago (Pensions & Investments, Feb. 21, 2000). The firm manages about 20% of Hitachi's pension assets in-house using a series of investment trusts for each asset class - a system that can easily lend itself to being used for defined contribution plans.
"If the legislation passes, we may be able to introduce it by December, depending on how quickly we can come up with a plan and get agreement from the union," he added.
The lower house of the Diet is considered likely to approve the bill in mid-June, before returning it to the upper house by June 29.