Seeking a Fundamental Reform of the Corporate Pension System

— To Provide Freedom of Life Planning and Comfortable Post-Retirement Life —

December 16, 1997
(Japan Federation of Economic Organizations)


In December 1996, Keidanren issued a proposal for pension reform entitled "Seeking the Rebuilding of a Transparent and Sustainable Pension System." In that proposal, we indicated the direction that public pension reform should take, including a switch of the Employee's Pension Insurance (public) to a funding scheme and privatization. With regard to corporate pensions, we pointed out that even though such pensions are becoming increasingly important, they are enforced by a rigid system design and irrational taxation. To solve these problems, we called for legislative reform relating to corporate pensions.
Concerning corporate pension system, although we appreciate the fact that some deregulation efforts have been made through the cabinet's decision of March 28, 1997, "Further Revisions to the Deregulation Action Program" and the fiscal 1997 revision of the Employee Pension Funds system and the Tax-Qualified Pension Plans, the basic problems have not yet been solved. Therefore, Keidanren has formulated this opinion paper calling for a fundamental reform of the corporate pension system.

  1. The Need for Corporate Pension System Reform
    1. To enable people to enjoy comfortable post-retirement lives in the aged society of the twenty-first century, in addition to public pensions under the social security system, it will be important for each and every individual to secure a post-retirement income through their own self-help efforts. In this sense, it will be necessary to promote a better corporate pension system.

    2. Japan's economic structure, employment structure, and working habits are undergoing rapid changes. The establishment of a flexible system design and a changeable system to enable speedy responses to these environmental changes will produce desirable results for both labor and management.

    3. In accordance with the diversification of people's values, their lifestyles are also diversifying. Regarding the methods of receiving corporate pensions, options should be made available to meet the needs of individual employees.

  2. Problems of the Current Corporate Pension System
  3. Despite these increasing demands of the times, various problems have been cited in the current corporate pension system, including (a) the lack of flexibility in system design and asset management; (b) ambiguity of the positioning of corporate pensions; (c) differences in treatment among corporate pension systems; and (d) inadequate portability.

  4. Basic Ideas on Corporate Pension System Reform
  5. In order for employees in the economic society of the twenty-first century to provide the freedom of life planning and comfortable post-retirement life on the basis of two pillars--public pensions as social security and corporate pensions through their own self-help efforts--it will be necessary to carry out a fundamental reform of the present system. In doing so, the following three basic ideas will be important:

    1. In order to create a dynamic economic society in the twenty-first century, it will be essential for private entities to achieve independence through liberal ideas and varied creativity under the principle of self-responsibility. Corporate pensions also should be clearly defined as a private system, and public involvement should be kept to a minimum.

    2. A free system design for corporate pensions should be permitted as far as possible. At the same time, in the operation of the system, it will be necessary to establish minimum necessary common rules, such as the securing of recipient rights.

    3. In order to secure a comfortable post-retirement life in the aged society of the twenty-first century, the improvement of private pensions will be essential. To secure and improve post-retirement incomes through the self-help efforts of individuals, the government should also provide a favorable tax treatment to support these efforts.

  6. A New Framework for Corporate Pensions Under the Principle of Liberalization
    ( "New Retirement Pension System--tentative name" )
  7. The framework for corporate pensions for the twenty-first century that we are aiming for--the New Retirement Pension System (tentative name)--is as follows:

    1. Free system design based on labor-management agreement
    2. Regarding system design, such as benefit levels and basic rates, rational and liberal designs based on labor-management agreements should be permitted to enable employees to choose, for example, whether to receive an annual pension or a lump sum at one time. In doing so, employee pension funds should also be given the choice of returning the substitutional benefit to the government-run employee pension insurance system. Also, in order to broaden the range of options relating to system design, a defined contribution plan, like the 401(k) plans in the United States, should be introduced. Such free system design will lead not only to the betterment of corporate pensions but also to the realization of an affluent long-life society.

    3. Securing recipient rights as the premise for liberalization
    4. Through such measures as external funding, information disclosure to employees, the satisfaction of funding criteria (for defined benefit plans only), and the clarification of trustee responsibility, necessary conditions for recipient rights will be fully met.
      Accordingly, if we recognize that corporate pensions are basically private pensions, then the payment guarantee scheme is not only unnecessary but also, would bring some harmful impacts, such as moral hazards of companies and the unreasonable transfer of corporate income between companies, forgetting that the operation of corporate pensions is based on the principle of self-responsibility.

    5. Support for a common system of taxation and retirement pensions
    6. Differences in tax measures resulting from differences in system design should be eliminated. Also, from the standpoint of promoting self-help efforts for the securing of post-retirement income, any contributions and funding should be made exempt from taxation, benefits should be solely taxed, and the special corporate tax should be abolished immediately, without waiting for reform to be accomplished. Furthermore, so as to promote funding efforts by companies, special tax treatment should be provided to permit flexible contributions of companies.

    7. Ensuring portability
    8. Amid changes in the economic structure, ensuring the portability of corporate pensions has become increasingly important. To ensure portability, the lump-sum payment received at the time of retirement should be transferred to an "individual account (tentative name)", and measures should be taken to defer taxation (rollover).

  8. The Road to the "New Retirement Pension System (tentative name)"
  9. This "New Retirement Pension System (tentative name)", described above, will be able to take over the existing Employee Pension Funds system, the Tax-Qualified Pension Plans, the lump-sum retirement allowance system, and so on. At the time of the public pension system reform in fiscal 1999, we should not stop at a minor revision of the existing corporate pension system but should enact legislation providing the minimum necessary common rules and tax measures required to back up the "New Retirement Pension System (tentative name)" that we have proposed here.

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