TOKYO - In an effort to deal with the growing burdens of defined benefit pension plans on their sponsors' bottom line, some Japanese companies have switched to cash balance plans and many others might join them.
The actual size of the shift among Japanese pension plans is in question. In an October 2002 survey by the Pension Research Institute of The Sumitomo Trust and Banking Co. Ltd., Tokyo, 47% of 104 pension funds surveyed were considering introducing cash balance plans, according to Katsutoshi Endo, senior manager in the pension investment department of Sumitomo Trust. However, according to a survey at the same time by Japan's Pension Fund Association, 28% of plan sponsors contacted were seriously considering replacing their defined benefit plans.
Still, some major Japanese pension funds have made the switch since the Defined Benefit Corporate Pension Act, which allows companies to switch to cash balance plans, went into effect in April 2002.
IBM Japan Ltd., Tokyo, introduced separate cash balance and defined contribution plans in January for all workers under age 50. Workers older than 50 will stay in the traditional defined benefit plan.
Hiroyuki Fuse, a spokesman for IBM Japan, said the company is introducing a system that combines a defined contribution pension plan with a cash balance plan. Under the defined contribution plan, each employee will open their own account in an investment management organization and the company will uniformly contribute Y18,000 ($150) to each employee every month. The employee will get to choose from several choices on the "financial product menu" provided by the investment management company and invest the contributions in the chosen strategy.
Under the cash balance plan, each employee will open a "virtual account," according to Mr. Fuse. Every month, IBM Japan will contribute to the account 7% of the basic salary on which the calculation of the retirement allowance is based. Also, the plan will add interest based on the average rate for government bonds over the past year, with upper and lower limits to the interest rates set at 5.5% and 2.5%, respectively, to the balance of the account.
Mr. Fuse said the company wanted "to provide employees with a choice of pension plans to design their own post-retirement life." He declined to reveal the size of the defined benefit plan or the cash balance plan. However, a source with knowledge of the IBM Japan plan, who declined to be named, said the defined benefit plan is slightly more than Y400 billion.
Koji Yamamoto, president and representative director of State Street Global Advisors, Tokyo, and who is familiar with the IBM plan, pointed out that IBM Japan wanted to avoid the criticism and employee anger International Business Machines Corp. encountered when it attempted to switch its U.S. employees to a cash balance plan.
Matsushita Electric Industrial Co., Tokyo, was the first Japanese company to introduce a cash balance pension fund, starting it right after the new law went into effect. The $8 billion Hitachi Ltd. pension plan and the $5.4 billion NEC Corp. pension plan, both of Tokyo, have announced they are considering switching to cash balance plans.
Rika Fukuda, manager, social insurance and pension team, Industrial Relations Group, of Matsushita, said the defined benefit plan, which was Y830 billion at the end of March 2002, had been "getting more difficult to sustain, especially due to the recent significant change in the interest rate market environment in Japan."
Reflect change in rate
She said Matsushita wanted to make the benefit amount reflect the change in the discount rate. Part of the defined benefit plan was switched to a cash balance plan in April 2002. Ms. Fukuda declined to say how much money was put into the cash balance plan.
IBM Japan, Matsushita, NEC and Hitachi are all pension fund clients of Sumitomo. Sumitomo now has about $300 million in assets it manages for cash balance plans.
The bank conducted the consultation for the Matsushita plan and is asset manager and trustee for the plan, according to Mr. Endo.
According to Sumitomo's survey, 45% of companies considering the switch to cash balance plans said reducing investment risks is the main reason, while 41% said they want to reduce administrative costs.
Mr. Endo said it is the restructuring of human resource and financial management divisions that are the major driving factors behind the move to cash balance plans. Other "driving factors" are companies gaining control over their pension benefit obligations, the lower volatility of cash balance plan returns compared with defined benefit plans, and the heavy reliance of fixed-income investments in cash balance plans, which "matches the current market environment," he said.
Mr. Endo said the growth of Japanese cash balance plans could be slowed because firms considering the shift need to clear up underfunding problems with existing defined benefit plans before changing. He also said concern about locking in their pension benefit obligations now, with interest rates at historical low levels in Japan, could keep companies from making the switch.