A tale of two pension laws
A few weeks ago I was asked to participate in the fourth session of a study group
on corporate pensions. The group was established in the autumn of last year by the Japanese ministry of health, labour and Welfare (MHLW) to assess the workings of the defined benefit (DB) and defined contribution (DC) pension laws and propose any amendments. It is comprised of representatives from academic circles, Japan's business federation Keidanren, the Trade Unions Federation, the Corporate Pension Fund Association, the National Pension Fund Association, the Chamber of Commerce and Industry Pension Education Center and the Japanese Society of Certified Pension Actuaries as well as government officials, mainly from the Pensions Bureau of the MHLW.
It was quite an honour to be invited to speak about recent developments in the second pillar pension system in my home country, the Netherlands.
Traditionally Japan has always looked towards the US for best practice and examples in cases such as this, but recently interest in the Netherlands as one of the most advanced pension systems in the world is on the increase.
I covered the two main topics that top the pension news in the Netherlands currently: the new pension law, which came into effect this January, and the trend towards collective DC schemes which started in 2004 and which is gaining more attention as a third way in between traditional DB and individual DC in the style of the US 401(k) plans.
Japan appears to be searching for a third way between strict DB and individual DC. Sponsors are struggling with the accounting implications and controllability of contribution costs under the DB system.
o far, individual DC has failed to result in responsible investment choices by participants, with the average allocation to equity at only 20% and more than half of DC assets in bank deposits. In collective DC, the sponsor pays a fixed annual contribution but, once the money is received by the pension fund, it is collectively managed with the aim of realising a pension benefit in a DB fashion.
Under International Accounting Standards, if the combination of financing agreement, other agreements and participant communication indeed does not give rise to a constructive obligation for the sponsor, it can be accounted for as DC (the lack of explicit asset accounts means this probably does not hold under US Generally Accepted Accounting Principles).
Participants on the other hand benefit from collective risk sharing and do not choose their own investment funds but get a decent pension for life under the condition that the pension fund is sufficiently funded. If the pension fund reaches a situation of under-funding, pensions and pension rights are adjusted downward collectively.
Japan has in practice already seen many pension funds downwardly adjust pensions and accrued pension rights. However, under the current DB law, this can only take place if more than 67% of participants give their consent. Also, the situation must be quite desperate for this measure to be accepted by the MHLW. The case of NTT is an example of how awkward this can be. Despite the consent of scheme participants, NTT was prohibited from reducing pension benefits/rights, given the sponsor's healthy financial condition.
t remains to be seen to what extent Japan's DB law and/or DC law will be amended to allow for collective DC arrangements. In the Netherlands, collective DC came about as the result of negotiations between employers and employee representatives as a solution both parties could live with. This could occur because the government has always kept itself out of meddling with the contents of pension agreements. In Japan the tendency is to minutely legislate the type of agreements that are allowed rather than provide for a framework only. The question is whether Japan's institutions can work together to bring about a "CDC law".
Oscar Volder is head of institutional services at ABN AMRO Asset Management in Tokyo