TOKYO -- The basic structure for tax-qualified defined contribution pension plans, which will be introduced in Japan in autumn 2000, has become clearer now that four key ministries and the ruling Liberal Democratic Party are in agreement.
One significant element will be universality; all adult Japanese will be eligible to participate in 401(k)-style pension plans. The self-employed and those who work for companies that do not set up programs will be able to start individual accounts. The LDP-devised framework even authorizes personal pension accounts for housewives, who in Japan traditionally control family finances.
One surprise in the framework approved in late July was the generous tax treatment proposal: no taxation at all on contributions or returns, with benefits taxed according to the same schedule used for lump-sum severance allowances, rates considerably lower than standard income taxes.
The Ministry of Finance, which along with Health and Welfare, Labor, and International Trade & Industry signed off on the framework, had lobbied energetically against tax breaks for defined contribution schemes. It remains to be seen if Finance bureaucrats will exert their considerable influence within the Diet, Japan's parliament, to water down the tax benefits when legislation required for implementing the framework comes up for approval.
Japanese legislators have a few other decisions to make, primarily maximum levels of monthly or annual contributions to individual accounts -- a percentage of salary or income for the working population; a cash figure for others -- and how funds remaining in an account will be treated should the account-holder die.
There will be some differences in how plans are administered, based mainly on whether a plan is company-sponsored, with employer contributions, or established by an individual. Each corporate plan will nominate an administrative organization to handle record-keeping, investment education and delivery of investment instructions to a trustee, who will then contract with money managers to execute the account holder's investment strategy.
NPFA to have control
For individual accounts, the trustee function will go through the National Pension Fund Association. This body, different from the umbrella Pension Fund Association, currently administers the mandatory national portion of corporate defined benefit plans. Given the increasing mobility of Japan's labor force and the large number of self-employed workers, this organization will likely come to play a huge role in the Japanese pensions industry.
The NPFA will contract with banks, trust banks, life insurers, investment advisory firms or securities firms to offer investment products to account holders.
These institutions will be required to provide account holders with maximum information on investments -- including risk/return profiles for each investment, its content, past performance, current market value and balance of assets -- but will be prohibited from recommending specific products. Depending on the account holder's instructions, the institution will then hire money managers.
For the first time, individuals will be solely responsible for investment decisions and results. They will be required, however, to maintain a mix of at least three asset classes, one of which must be principal-guaranteed. Permitted asset classes will include cash deposits, government and corporate bonds, mutual funds, insurance, equities and, for those in company-sponsored plans, shares in their company (although this class will not count as part of the minimum three).
Investment in real estate and movable assets such as artworks and precious metals or gemstones will not be permitted.
Account holders will be able to change their asset allocations on a quarterly basis.
Companies setting up defined contribution plans have the option of keeping existing defined benefit plans in operation, shutting off new contributions to them or rolling all assets of the defined benefit plan into the new defined contribution scheme. Opposition from organized labor will likely deter Japan's large industrial concerns from taking that third option, but it may prove attractive to both labor and management in newer companies. These firms do not have the huge shortfalls in pension plan and severance allowance reserves that will soon start showing up on the balance sheets of more established members of Japan Inc., said one observer of Japan's pension scheme, who preferred to remain anonymous. For employees the advantage comes in career options, since accounts in corporate-sponsored plans will be portable after three years.