The Japanese defined contribution (DC) system, introduced in October 2001, is gaining recognition as an alternative to the embattled corporate pensions sector. The recent approval of diversified models in the DC system, including the cash-balance type (approved in April 2002), is widening the business opportunities. Given Japan’s pensions crisis, in which domestic players are often judged incapable of pro-viding reliable alternatives, foreigners could step into the breach.

The introduction of DC has been smoother than predicted—as of July 2002, the Ministry of Health, Labour and Wealth had approved 121 company schemes. The recent adoption of DC by big firms, such as Toyota and Hitachi, has encouraged others to examine more seriously the DC system. The introduction of corporate DC schemes is expected to peak during 2003.

For DC plans already approved, the average number of products is 14, including 11 toshin (retail funds), two bank deposit and one insurance product. (Under the relevant law, at least one principal-guaranteed product should be included in the choice.) Funds, which incorporate investing in the sponsoring company, are not popular for fear of the scheme collapse— especially in light of the Enron débâcle. They are provided only by Hitachi and restaurant chain Skylark Co.

Investor education is helping to allay typical Japanese concerns regarding investment risk. Hitachi, which has both DC and DB plans and is examining the introduction of a hybrid pension scheme, is a case in point. Over a two-year period, Hitachi held 700 seminars for its 60,000 employees. In addition, Hitachi has opened a call centre for employee questions and installed the DC website in the company’s Intranet, which employees can access from home. As a result, 73% of its employees chose the DC plan—of these, half chose toshin as investment tools.

More than 60% of the firms that have introduced DC are small- and medium-sized companies with less than 300 employees (80% of Japanese firms fall into this range, making them an attractive target). Of these, 40% are firms that previously did not have a corporate pension scheme. In its three-month existence, ING Principal Pensions, a joint venture between ING Groep and Principal Financial Group, has concluded contracts with three firms out of a potential target of 100 firms with less than 1,000 employees.

As Japanese insurers lose the loyalty of their customers, foreign entrants with qualified products could be well poised to exploit this opportunity. Another approach to small firms is the all-inclusive corporate pension, the so-called Sogo-gata, which enables small firms to introduce DC at reduced cost by using the same products with other small companies.

Insurers tap into this market segment thanks to existing relationships in pension provision. For example, Tokyo Marine and Fire Insurance Co. offers a plan with lower introduction costs (by 50% to 90%) than the usual DC plan. The firm has already received eight mandates.

The individual type of DC plan had attracted 1,312 subscribers in May, up from 859 in April, mainly following a campaign by regional banks. In addition, some firms, such as Japan Railways, that do not have corporate pensions have shown interest in the individual type because of cheaper set-up costs. Major financial companies, such as Nomura Securities and Nikko Cordial Securities, have recently showed more focus in acquiring more individual subscribers, hoping they will be a gateway to move inactive deposit accounts in universal banks or the post office into their investment products.

Source: Cerulli Edge Retirement Issue – August 2002