Call for a rethink of the EPF framework as AIJ goes to court
13 Jul 2012
The AIJ scandal in Japan has entered a new phase with the arrest of the firm's president and others on suspicion of fraud. According to Shigeru Yamamoto, Professor at Waseda University School of Business, it is now vital the responsibility of all parties should be clarified within the system framework and that the final burden of pension fund losses be determined by law.
Yamamoto says the rules in relation to pension funds are not always easy to grasp. Many of the financial regulations established in recent years have switched from pre-emptive administrative guidance, to a structure based on rules and oversight by administrative institutions and the pursuit of legal responsibility after the fact. If a problem erupts, parties suspected of wrong-doing are thoroughly investigated in civil and criminal courts.
In the present case, says Yamamoto, the investigation should take in not only the AIJ advisors but fund administrators, auditors of fund benchmark assessors and others dealing with management of portfolio assets.
"This after-the-fact model does not mean that administrative agencies should simply wait for the next case. Their guidance and oversight are necessary to prevent the spread of damage when an irregularity is uncovered. That said, they must not be illogical in their pursuit of responsibility. They need to establish clear standards for judgment and correct flaws in the regulatory framework, such as stronger checks, to prevent a recurrence of any trouble."
Employee pension funds are particularly complicated, given that the same framework covers both public pensions and corporate pensions, two systems that are broadly different in nature. "This is not an issue when the operating climate is good and problems are few," says Yamamoto, "but during bad times, it is important to explain how the burden of responsibility is to be shared.
"For instance, we need to think how to deal with insufficient reserves in a struggling pension fund if the company goes bankrupt and the fund breaks up. JAL's rehabilitation plan aimed to maintain its fund, a defined benefit scheme, with both beneficiaries and company sharing the burden. However, there are no detailed regulations governing treatment of a bankrupt DB fund, and worker rights can differ legally in accordance with whether the scheme is a contract type or fund type.
"For EPF, there needs to be a clear distinction drawn between the "daiko" portion of public pensions managed by companies on behalf of the government and the portion closer to a corporate pension. These need to be dealt with through different frameworks, and if this is impossible, it may be time to consider eliminating the daiko system and therefore EPF entirely.
"There also needs to be more consistent thinking on linkages among participants in integrated funds. For instance, an enhancement of the specified fund system could encourage the breakup of funds whose daiko portions are underfunded. The funds can be cleared up immediately, and, taking past methods and the company's financial situation into account, public funds can be provided conditionally to avoid linkage issues, thus preventing the problem from spreading to the pension system as a whole."
In order to buoy worker pensions at small businesses, Yamamoto says a structure should be laid out that alleviates the impact of fund failures as much as possible, such as changing the system to facilitate joint fund management and expanding the payment guarantee system into this field.
A government committee is currently considering pension reform from various perspectives, but it should avoid a decision that focuses solely on the problem at hand. We believe changes in the environment have made the time ripe for a fundamental rethink of the system, and encourage committee members to return to the basics.
Author: Nenkin Joho