Eradication of Japan’s Employee Pension Funds Continues

By Roy Maurer May 15, 2014

The Japanese government’s objective to phase out employee pension funds (EPFs) passed another benchmark when regulations providing for their dissolution were issued in March 2014.

Legislation to abolish the funds—supplementary defined benefit (DB) pension plans that allow employers to partially contract out of social security—passed the Japanese parliament in June 2013. The law prohibits the establishment of new EPFs, and encourages existing EPFs to dissolve and convert to other types of pension plans.

EPFs cover private-sector employees only. The funds were introduced by law in 1965 to offer an additional benefit to the government-run public pension system. Asset investment fraud and poor funding status in recent decades have weakened the financial position of many EPFs, and many are currently facing severe funding deficits, according to global professional services firm Towers Watson. Among Japan’s 34.5 million private-sector employees, 4.37 million (12 percent) were covered by EPFs as of March 2012. There were 560 EPFs as of March 2013, a significant drop from their peak use of nearly 1,900 in the late 1990s.

“Funding and plan conversion issues have slowed this transition [away from EPFs] … but the new regulations are intended to accelerate dissolutions by providing more favorable rules on the conversion to other types of plans,” said Jeff Howatt, a Tokyo-based director of Towers Watson’s benefits business in Japan.

Conversion Options

When EPFs are dissolved, plans must return assets to the government equal to their liability for contracted-out social security benefits. The regulations lay out an employer’s options for the conversion of remaining assets:

  • Transfer remaining assets to a DB corporate pension plan. Remaining assets can be transferred to existing or newly established DB corporate pension plans without inheriting the EPFs’ funding deficits, a change from the previous policy, which required plan sponsors to compensate for funding deficits.
  • Transfer remaining assets to a defined contribution (DC) plan. Remaining assets can be transferred to existing or newly established DC plans even if EPFs have funding shortfalls, a change from the previous policy, which required that EPFs be fully funded before transfer.

Companies also have the option of transferring remaining assets to smaller enterprise retirement allowance mutual aid plans, which are government-sponsored retirement plans for small to midsize employers such as manufacturers with fewer than 300 employees. Previously, EPF assets could not be transferred to these plans.

"Employers must obtain the consent of employees to transfer the remaining assets to other types of retirement plans,” Howatt said. “Requirements for consent vary depending on the type of new retirement plans under consideration.”

According to Towers Watson, DB corporate pension plan and DC plan regulations will be loosened to create a smooth transition.

“Multinationals with operations in Japan participating in EPFs should assess the impact of these changes by first obtaining information on the plan’s funding status and future options for conversion,” Howatt said.

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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