Japan’s long-awaited defined contribution (DC) pension system has made steady progress this year, according to Yasuteru Aizawa, president of the International Pension & Economic Research Institute in Tokyo. More than 100 companies have moved to introduce DC pension schemes, 70 of them small companies. Aizawa hosted a recent conference attended by more than 100 senior Japanese industry executives.
Aizawa is one of many pension industry experts who are calling for a more radical change that would encourage more companies to move to DC. The larger corporations are positioning themselves for the change, but are not yet convinced that the new system is particularly advantageous, either for them or their employees. Aizawa said: “Pressure for change is great, but so is resistance”. Bigger companies are willing to make the change he said; they see the advantages in terms of reduced cost and balance sheet risk, but the system as it is only offers marginal cost advantages, and possibly higher costs initially.
At the moment, for pension fund managers, the challenges are not which type of funding system they use, but how they reconcile their investment policy with the historic return assumptions. Hideo Suzuki, managing director of the Tokyo Taxi Drivers Pension Fund highlighted the problem facing many funds. The expected average yield for Japanese pensions is currently around 3%. The actual returns for the last three years are as follows: 2000: -10%, 2001: -5%, 2002: -4% (to end June). The Japanese equity portion has been -3%. Suzuki said, “We are now having to look five to 10 years ahead and develop new numbers.”
Shozo Tokuzumi, an adviser to Nippon Steel said, “We are now in a low growth economy following Japan’s lost decade. From 1993 onwards, Japanese corporate pension schemes assumed a rate of return of 5.3%, based on the high growth era of the past. Against the backdrop it is painful process to restructure the pensions system. Too many pension funds are being dissolved. What we need is more positive restructuring of these schemes.”
The development of Japan’s fund management business on the back of pension initiatives, is fraught with problems in the near term.
Although mobility of labour has increased in Japan, it is still low compared with other countries, especially for anyone over 40. This highlights another factor that may hamper the development of DC pensions; that the people with most of the money are the over 50s. Younger people, even those with good jobs, do not have the disposable income to put into investment trusts.
Paul Klug, managing director of Morgan Stanley Investment Management in Japan suggested that employers will take a long time to adapt to the new opportunity. “It will take a generational change before we see the DC market really take off, in much the same way as it took at least 10 years for the US 401k market to reach a critical mass. The new generation of young Japanese will be able to deal with the concept, but at the moment they have no wealth to manage.”
The truth is that the asset management industry is no longer rushing headlong to meet the pension initiative, as they realise that it may take 10 years for them to start making a profit from it. Klug expects to see the market for variable annuities develop much quicker. In October, Japanese banks will be able to market them and there is expected to be a large uptake because of the strong cross-selling relationship between the banks and the trust companies. This Klug saw as the key to the wider acceptance of retirement savings: “The more the banks and post offices develop products, the more we are likely to see sales pick up.”
So the market is starting slowly, which is unfortunate for the fund management groups, all of whom launched new funds in 2000 and 2001 in anticipation of a flood of money freed up from postal savings accounts, as a precursor to breaking into the pension market. The foreign players were beguiled by the idea that Japan was going to have its own 401k type boom, and that trillions of yen were going to flood the equity market. Some of it did, of course, with disastrous consequences. Nomura Securities started the biggest of the new funds, raising some ¥1.5trn in 2000, which looked rather impressive until asset values of the fell by 40%.