Employer Action Code: Monitor
The Ministry of Health, Labour and Welfare (MHLW), the authority in charge of the social security system and private pension schemes in Japan, recently announced that it plans to submit a bill to abolish employee pension funds (EPFs) in the next Diet session in January 2013.
Following the government committee report of July, which examined EPF’s in the wake of the investment fraud scandal involving AIJ Investment Advisors Co., Ltd. (AIJ), the MHLW announced in late September that it will start examining measures to abolish EPFs.
The following issues will be discussed and may become a part of a bill:
- A private pension plan vehicle that is sustainable and easy for small to medium-size companies to adopt in place of EPFs will be promoted.
- The amount of money that needs to be returned to the government when EPFs are dissolved will be reduced, thus facilitating dissolution of existing EPFs.
- The current rule that participating companies must jointly and severally compensate for the funding shortfalls when EPFs are dissolved will be removed to avoid chain-reaction bankruptcies.
- The EPF system will be completely abolished in about 10 years.
The question of who will eventually cover the loss of EPFs will be controversial if the EPF system is abolished. One idea is to use funds from the social security system to cover EPF shortfalls, but some argue that using social security money is not fair to citizens who are not EPF participants.
Abolishment of EPFs is consistent with the policies of the Democratic Party, which is currently in power. However, the opposing Liberal Democratic Party is against it. Moreover, some EPFs are financially sound. Because a general election is slated for the near future, the ultimate fate of EPFs is still not clear.
Implications for Employers
Some multinational companies operating in Japan participate in industry-wide EPFs or have done so in the past. Because the funded status of EPFs has been worsening and financial burdens on participating employers have grown over the years, some foreign multinationals have already withdrawn from their EPFs by paying a one-time withdrawal fee. Now waiting for the dissolution of their EPF, rather than withdrawing and paying a fee, could be a more attractive option for some participating companies. 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 funded status.