Takayama, Noriyuki

English

Research Papers in Economics

Hitotsubashi University Repository
Title
Rise and Fall of the Opting-out Plan in Japanese
Pensions: A Brief Note
Author(s) Takayama, Noriyuki
Citation
Issue Date 2005-09
Type Technical Report
Text Version publisher
URL http://hdl.handle.net/10086/14176
Right 1
Rise and Fall of the Opting-out Plan in Japanese Pensions: 
A Brief Note 
 
Noriyuki Takayama 
Professor of Economics, Hitotsubashi University 
e-mail: takayama@ier.hit-u.ac.jp 
website: http://www.ier.hit-u.ac.jp/~takayama/ 
 
September 2005 
 
1. Introduction 
 
  In February 2005, President G. Bush proposed a reform package of social 
security in the United States. It included an opting-out plan from social 
security.  
The United Kingdom and Japan have already had opting-out plans for 
social security pensions. People in the US currently seem to be getting more 
and more familiar with the UK experience of opting-out plans in pensions. 
Little have yet been known about the Japanese experience, however.   
 
    This short note gives a brief sketch of the rise and fall of the opting-out plan 
in Japanese pensions, providing some lessons from Japanese experiences.   
 
2. Brief Outline of Japan’s Opting-out Plan 
 
The opting-out plan in Japan was established in 1966. It is called the Kosei 
Nenkin Kikin (KNK, Employees' Pension Fund). The benefits of the KNK 
consist of two components: the equivalent benefit of the earnings-related 
portion of the social security (excluding the benefit resulting from indexing), 
and the supplementary benefit (see Figure 1). The latter is primarily financed 
by the employer.    The supplementary benefit can be received in a lump sum 
at the discretion of the employee, although in principle it should be in the form 
of a life annuity. The plan must be funded through a trust fund or an insurance 
contract. The employers’ contributions to the KNK are 100% tax deductible as 
a business expense. A special 1.173% corporate tax is levied annually on 
fund assets, though the KNK does not pay special taxes on accrued benefit 
liabilities up to 2.7 times the equivalent benefit of the earnings-related portion  2
of the State scheme (with only the undynamized benefit). Incidentally this 
special tax has been provisionally suspended since 1999.   
 
The KNK enjoys the contribution rebate (the payroll tax rebate) between 3.2 
and 5.0 percentage point from social security pensions, depending on each 
KNK’s average age of their participants (employees). A 5.5% rate of return 
from investment in nominal terms is assumed in setting the rebate.   
 
3. Changes in the Number of Opting-out Plans 
 
  The KNK started in 1966. Its number was 142 at the outset. It has once 
steadily increased up to 1883 in 1996, but recently it has been sharply 
decreasing to 746 in August 2005 (see Figure 2). The proportion of the 
participants in the KNKs over total number of the private sector employees 
was near 40% in 1996, but it fell down to around 18% in 2004. The 
requirements for the contracted-in to social security were relaxed 
considerably in April 2002, inducing a sharp decrease of the KNKs in number. 
This decrease is called a rash to “Daikou-Henjou”.   
 
(Figure 2 about here) 
 
4.    Why the KNKs Were Falling?   
 
  There have been several factors governing the KNKs since the bubble 
burst in the 1990s. Among others, the market rate of return from investment 
turned quite miserable, falling below the nominal rate of 5.5% per year. The 
annual rate of 5.5% return has been one of the basic assumptions for the 
KNKs. The assumption has been crucial in determining the contribution 
rebate. In the 1990s in Japan the 5.5% assumption seemed to force the 
KNKs to “walk on water”. Consequently the majority of KNKs began to suffer 
from huge amounts of unfunded liabilities, giving a serious impact on the 
mother company’s rating in the capital market.   
 
    Many mother companies were forced to pay considerable additional money 
to compensate for the under-funded portion for the social security equivalent 
benefit, which in turn induced a considerable downsizing of employment and 
curtailed new investments.   
 
  A downward change of the 5.5% assumption into, say, 3.0% will mitigate  3
the future funding problem for KNKs, while their net pension liabilities accrued 
from contributions made in the past automatically jump up fairly.   
 
  Thus, managements and trade unions were strongly demanding to abolish 
the opting-out or to drastically relax requirements for the contracted-in from 
opting-out plans by lowering the set rate of return used in calculating the 
asset amount to be transferred to social security.  The DB Occupational 
Pension Reform Act which took effect on 1 April 2002 relaxed requirements 
mentioned above.   
  
5.    Structural Difficulties in the Opting-out Plan 
 
  A proposal of the opting-out plan is like saying that one of three sons who 
have been sending money to support their parents would begin to save for his 
own, by partly stopping sending money to his parents. The two remaining 
sons will be adversely affected or the income level of their parents will be 
reduced accordingly, by his change of mind.   
 
  The PAYG supporting is based on a principle of mutual help, but the 
prefunded savings are essentially for his/their own interest. Their underlying 
philosophies are totally different, and thus the opting-out does not seem 
simple when it comes to technical matters. Indeed, the current opting-out 
plans in the UK and Japan are very much complicated and consequently very 
hard for most people to understand. Moreover their handling costs are quite 
expensive.  
 
  The most symbolic and shocking event in this field is that the group of 
security companies of Japan dismissed their KNK in March 2005, implying 
that the Japanese opting-out plan was not promising at all in the end even for 
the experts of asset management.  4
 
'JHVSF0QUJOHPVU4ZTUFNJO+BQBO
  
 ,/,


,/,	4VQQMFNFOUBSZ
#FOFGJUT

,/)
,/,	0QUJOHPVU

,/) 	&BSOJOHTSFMBUFE#FOFGJUT


/BUJPOBM1FOTJPO /BUJPOBM1FOTJPO
	#BTJD#FOFGJUT
 	#BTJD#FOFGJUT

ᴷᴷᴷᴷᴷ/POQBSUJDJQBOUTJOUIF,/,Tᴷᴷᴷᴷ ᴷᴷᴷ1BSUJDJQBOUTJOUIF,/,Tᴷ
  
* KNH is the principal social security program for the private sector employees (the Kosei Nenkin Hoken). 
   5
'JHVSF5IF/VNCFSPGUIF,/,T


 
 
 

















           	ZFBSʣ
 

Rise and Fall of the Opting-out Plan in Japanese Pensions: A Brief Note

http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/14176/1/pie_dp277.pdf

Rise and Fall of the Opting-out Plan in Japanese Pensions: A Brief Note

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics