Employer Action Code: Monitor
Earlier this year, the Japanese government organized a special committee to discuss broad issues surrounding employee pension funds (EPFs) and is expected to issue a new policy, following an incident of pension asset investment fraud.
This March, it was revealed that AIJ Investment Advisors Co., Ltd., which was actively collecting pension money and reporting “extraordinary higher investment returns,” was in reality reporting fraudulent figures to pension funds. Because 81 EPFs, many with poor funding status, have invested in AIJ products, this news attracted much attention in the pension community and led the Japanese government to form the committee to examine new guidelines for EPFs.
After several meetings, the committee issued a report in July 2012 that covers broad areas such as the investment and funding aspects of EPFs as well as the EPF system itself.
The following opinions were expressed in the report, although there were opposing opinions as well:
- Further diversification and governance, including use of outside experts by EPFs, are encouraged.
- Employee consent requirements for benefit reductions or dissolution of EPFs as a result of funding deficits should be scaled back (currently two-thirds of participating employees must consent for a benefit reduction to occur, or three-quarters of participating employees and three-quarters of participating employers must consent for a dissolution of the EPF). The government should be more proactive in mandating the dissolution of EPFs that hit certain unfunded levels.
- The EPF system itself should be abolished in the future.
The government is expected to issue guidelines based on these discussions sometime in fiscal 2012.
Implications for Employers
Some multinational companies operating in Japan participate in industry-wide EPFs or have done so in the past. Because the funding status of EPFs has been worsening and financial burdens on participating employers have grown over the years, some multinational foreign companies have already withdrawn from EPFs by paying a one-time withdrawal fee. Waiting for the dissolution of their EPF, rather than withdrawing, could be a more attractive option for some participating companies, depending on what action the government takes. Employers should closely monitor developments.
Meanwhile, employers with operations in Japan should determine whether those subsidiaries are participating in EPFs and, if so, review their funding status.
What Are EPFs?
- An EPF is a separate independent legal entity that may contract out part of the government-earnings-related social security benefits. It also provides company-sponsored supplementary benefits (called “α portion” benefits).
- EPFs are generally formed by single employers, group employers or industry-wide multiemployers. The majority are industry-wide today; most single-employer and group-employer EPFs have returned contracted-out benefits to the government and were thus transformed into employer-sponsored defined benefit plans.
- In the past two decades of low interest rates and equity returns, the financial position of many EPFs has worsened, and many are currently facing severe funding deficits. Of the 576 EPFs in Japan, 286 have smaller assets than liabilities for the contracted-out portion of their benefit liabilities as of March 2012.