Imagining the Ideal Pension System: International Perspectives

11 - How to Establish a Better Corporate Pension System in Japan

265 11 How to Establish a Better Corporate Pension System in Japan Noriyasu Watanabe Rissho University and International Pension Research Institute BACKGROUND In 2010, Japan had 22,219 private sector companies that had been in operation for more than 100 years, the largest number of any country. Of these, 39 companies had been in operation for at least 500 years, 435 companies for at least 300 years, and 1,191 companies for at least 200 years. The Kongou-Gumi Company, the oldest continuously operating company in Japan, was established in the year 578 as a construction company of temples and shrines. There are two primary reasons that so many companies have been able to remain in operation for so long in Japan: 1) Japanese companies have traditionally respected Wa (harmony) more than profits not only with their customers, but also with society and their employees, and 2) according to historical documents, they established severance lump-sum payment systems for the highly paid staff beginning in the seventeenth century. Because of these two features, they have been able to overcome many economic, social, and technological changes and have enjoyed long prosperity. Following the Meiji Revolution in 1868, the Japanese government opened Japan to the western world. Along with many other concepts, ideas about western corporate systems and corporate pension systems were introduced. The Kanebou Cotton Spinning Company voluntarily established the first western-style occupational pension plan in Japan in 1905. Soon after, the Mitsui Company, a trading company, and many other companies established pension plans for highly paid and middleincome employees. 266 Watanabe Development of Defined Benefit and Defined Contribution Plans In 1962, the corporate tax law and income tax law were amended, and the Tax-Qualified Pension (TQP) Plan was introduced to provide defined benefit plans to employees. Many large- and mid-sized employers changed all or some of their pension contributions from the severance lump-sum payment system to a TQP plan, which is a corporate pension contract between employers and financial companies. To receive favorable tax treatment, the content of the TQP contract must be approved by the Commissioner of the National Tax Agency. The postwar period of high inflation decreased the real value of pension benefits of the Employees’ Pension Insurance (EPI), which is Japan’s social security plan. Therefore, in 1965, the Employees’ Pension Fund (EPF) plan was established by amendment of the EPI law to allow employers to increase pension benefits. In 1967, the Employees’ Pension Fund Association (EPFA) was also established. Because the increase in EPF plan benefits increased costs for employers , sponsoring employers and their employees are exempted from paying a portion of EPI plan contributions to the government, and instead pay them to their EPF plan. The EPF plans also provide additional benefits on top of the portion that replaces EPI (social security) benefits. Compared with the TQP, EPF plans have received more favorable tax treatment because EPF plans act as a substitute for part of the EPI. EPF plans were mainly established by large employers (1,000 or more employees) to provide lifetime benefits. TQP plans were mainly established by medium and small employers, typically paying benefits for a limited number of years. Many employers that hoped to establish higher quality employee benefit systems established both plans, each of which is a defined benefit plan that played a major role in providing retirement income for private sector employees until 2001. As of April 2011, Japan had not enacted a basic corporate pension law establishing fiduciary responsibility, such as ERISA in the United States and Die Alter Renten Gesetz in Germany. Because of the collapse of Japan’s “bubble” economy in the 1990s and changes in the Japanese economy resulting from changing world economic conditions, however , the New Corporate Pension Amendment was established in 2001, which amended the EPF and TQP systems, which had huge deficits (20 trillion Japanese yen [¥]). In addition, the Defined Benefit Corpo- How to Establish a Better Corporate Pension System in Japan 267 rate Pension Law and the Defined Contribution Pension Law, the first law governing defined contributions in Japan, were enacted. Before the 2001 laws, many pension scholars had recommended the development of defined contribution plans, using terms such as “self responsibility,” but the recommendations did not include full disclosure of the financial risks associated with these types of plans. The Employers’Association and the Conservative government at the time accepted this idea, and the...