Employment issues

Author: | Published: 5 Jan 2004
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Elderly people are expected to account for around one-quarter of Japan's population by 2014. But this rapid transition to a society with a large proportion of elderly individuals has meant that government-administered pension plans such as, the National Pension Plan (Kokumin-Nenkin) and the Welfare Pension Insurance Plan (Kousei-Nenkin-Hoken), are struggling to keep up. Further, Japan's economic downturn has extremely impinged on traditional private company pension plans.

Retirement

Japanese law lets companies set an internal mandatory retirement age (teinen) at which employees are deemed to compulsorily retire irrespective of their will. Unless the mandatory retirement age set by a company is lower than 60, there will not be deemed to be age discrimination under the Aged People Employment Stability Act (Kounenreisya-Koyou-Sokusin-Hou). The Act also stipulates that a company is under an obligation to make an effort to continue to give employees work until they are 65, although most companies fail to do this. Some employees may choose to resign at the mandatory retirement age, while others may quit earlier than that.

Whether retiring at or before the mandatory retirement age, employees use their personal savings to finance their lives after this point. At the same time they are entitled to receive money in the form of pension benefits (Nenkin-Kyuuhu) from the government or other organizations, as long as premiums have been paid either by or for them.

Private pension plans

Many private companies provide employees with their own retirement allowance/pension plans, consisting of the Welfare Pension Fund (Kousei-Nenkin-Kikin), the Tax-Qualified Retirement Pension Plan (Zeisei-Tekikaku-Taisyoku-Nenkin), and the Small and Medium-sized Enterprises Retirement Allowance Mutual Aid Plan (Chuusyoukigyou-Taisyokukin-Kyousai).

(A Welfare Pension Fund is an independent legal entity from the company that sets it up. It partially substitutes the benefits paid by the government in the form of old-age welfare pension payments. It also provides top-up pension benefit payments. Employees who are not subscribers to the Welfare Pension Fund are not entitled to these payments.)

The Ministry of Health, Labour and Welfare (Kousei-Roudou-Syou) governs almost all the pension plans, whether government-administered or private. The Tax-Qualified Retirement Pension Plan is the only exception. The National Tax Agency governs this.

Private retirement allowance/pension plans are premised upon a system in which premiums that are wholly or partially paid by companies for the benefit of their employees are pooled and then deposited in an interest-bearing savings account, or are otherwise invested. Benefit payments are paid out from the pooled premiums. The pools should continue to increase as a result of interest earnings or investment.

However, Japan's prolonged economic downturn has failed to guarantee an increase, making it difficult for private companies to retain their traditional retirement allowance/pension plans. Consequently, the Japanese Diet enacted two statutes regarding new pension plans in 2001: the Defined Benefit Pension Plan (Kakutei-Kyosyutu), in force since October 2001; and the Defined Contribution Pension Plan (Kakutei-Kyuuhu), in force since April 2002. In exchange for the new statutes, the Tax-Qualified Retirement Pension Plan will be abolished in March 2012.

The substance of the two new statutory plans will also affect non-Japanese companies with a Japanese subsidiary or branch. We hereby outline each of them.

Defined benefit pension scheme
The government's recent adoption of the Retirement Allowance Accounting Standard (Taisyoku-Kyuuhu-Kaikei-Kijun) highlighted the fact that any shortage of the premiums reserved for pension benefit payments to employees of a private company will unambiguously be treated as a liability of the company.

(Previously there was a difference between the treatment of retirement allowances and the treatment of pension plans on a company's balance sheet. The Reserve for Retirement Allowance (Taisyokukyuuyo-Hikiatekin) was treated as a liability whereas pension plan liabilities where not. The new standard requires companies to give the same treatment to retirement allowances and pension plans.)

But it has become apparent that such shortages are not small, leading subscribers (Kanyuusya) to become more interested in - or to be exact, sceptical about - whether they will receive their pension benefit payments. In addition, companies are seeking flexible pension schemes to prepare for possible mergers or spin-offs in the economic climate.

The Corporate Defined Benefit Pension Plan
The Corporate Defined Benefit Pension Plan was drafted similar to the US statute, the Employee Retirement Income Security Act 1974 (Erisa). Under the US plan, employees, as subscribers, are entitled to obtain a designated amount of pension benefits on reaching a certain age. The Japanese statute defines two types of Defined Benefit Pension Plan - the agreement plan (Kiyaku-Gata) and the pension fund plan (Kikin-Gata). A company cannot set up both.

In the agreement plan, the company is responsible for the management and administration of the entire plan. A company will set aside premiums as reserve with an external organization, in accordance with an agreement between the company and its employees. In the pension fund plan, a company will set up a corporate pension fund as an independent legal entity to manage and administrate the pension fund. This requires more than 300 subscribers, meaning most non-Japanese companies, which seldom have more than 300 employees in Japan, would choose the agreement plan.

The agreement plan
A company will either enter into the agreement plan with a labour union that represents more than half of its employees or, in the absence of such a union, a representative of more than half of the company's employees. The company must obtain authorization for the agreement from the Regional Welfare Bureau (Tihou-Kousei-Kyoku), under the umbrella of the Ministry of Health, Labour and Welfare.

The agreement must contain the following information:

  • the name and address of the company carrying out the plan;
  • the name and the address of the external organization appointed by the company to manage and administrate the contributions and assets (Sisan-Kanri-Un'you-Kikan);
  • qualification conditions for subscribers;
  • matters concerning the benefits package (such as the nature of the benefits, qualification required to become a recipient, method of calculating the size of the benefit payments and method of distribution); and
  • matters concerning the contribution of premiums.

Only trust companies, life insurance companies and agricultural cooperatives are statutorily qualified to act as asset managing and utilizing organizations for the plan.

As a rule, everybody insured under the government-administered Welfare Pension Insurance Plan must subscribe to a Defined Benefit Pension Plan. Directors of a company are therefore entitled to be insured under this type of plan. This is different from the Tax-Qualified Retirement Pension Plan.

However, as an exception, it is possible for a company to stipulate added conditions in the pension agreement to limit the number of subscribers to its Defined Benefit Pension Plan. For example, a company might limit subscribers to employees with more than five years of service, employees who are at least 30, or employees who want to be insured.

It is statutorily required that old-age benefits (Rourei-Kyuuhu) and lump sum withdrawal benefits (Dattai-itijikin) be provided. It is also possible to provide for disability benefits (Syougai-Kyuuhu) and survivors' annuity benefits in the agreement.

The specific substance of the right to receive benefit payments hinges upon the agreement made between the company and the labour union/employee representative. Yet an agreement may not unjustifiably discriminate against certain subscribers, nor is it permitted to impose, as a condition of entitlement to benefits, any requirement that exceeds 20 years in duration. The right to benefits is deemed non-transferable. The asset managing and utilizing organization for the plan is responsible for paying benefits directly to the subscriber, who is entitled to the benefits in instalments upon reaching a certain age. Payment may also be made in a lump sum if the agreement specifically provides for this.

The premium is borne by the company at regular intervals, at least once a year. A company is allowed, in exceptional circumstances, to have a subscriber bear less than half of the premium amount, subject to the subscriber's consent.

At the end of every business year, the company must calculate the amount of the premium reserve (Tumitate-Kin), which is pooled for the purpose of paying benefits. The amount must be at least equal to the amount of the actuarial reserve (Sekinin-Junbi-Kin) and the minimum funding requirement (Saitei-Tumitate-Kijungaku). If not, the premium amount must be adjusted or an additional amount paid as a special premium.

The company is under a fiduciary duty with respect to the pension plan, and assumes responsibility to act loyally and only for the subscribers' interests. The company is prohibited from acting for the purpose of benefiting itself or any third party.

The company must submit its business report and financial statements within four months of the end of every business year to the Regional Welfare Bureau.

The substitutional part of welfare pension funds
A remarkable feature of the Defined Benefit Pension Plan is that it provides for the return of the substitutional part (Daikou-Bubun) of a welfare pension fund. A welfare pension fund includes and manages the substitutional part, which would otherwise be managed by the government.

Because of Japan's poor economic situation, the substitutional part is often regarded as a heavy burden by welfare pension funds. The Defined Benefit Pension Act provides these welfare pension funds with a method to return the substitutional part to the government, thereby allowing them to carry out either an agreement or a pension fund Defined Benefit Pension Plan.

Defined contribution pension scheme
The growing amount of benefits paid to subscribers coupled with a continuing obligation to contribute premiums for current employees has proven an increasingly heavy burden for companies. In addition, traditional private pension plans have not allowed subscribers to transfer premium payments made on their behalf from one employer to another. Subscribers are therefore seeking a flexible and portable plan if they choose to change employers or to leave their career.

The Defined Contribution Pension Plan in Japan was drafted along the lines of a US statute, the Internal Revenue Act, Section 401(k), as amended. Under the plan, employees are unable to predict the exact amount of pension benefits they will receive when reaching a certain age (though they do have influence over this), but the premium payments borne by the company remain fixed. The statute provides for two types of Defined Contribution Pension Plan - the corporation plan (Kigyou-Gata) and the individual plan (Kojin-Gata).

In the corporation plan, the company prepares the pension plan together with a labour union representing its employees (or another employee representative). Employees then join the plan. In contrast, the individual plan is set up for self-employed people.

The corporation plan
The company will enter into the plan agreement with a labour union that represents more than half of its employees or, in the absence of such a union, a representative of more than half of the company's employees. The company must obtain authorization for the agreement from the Ministry of Health, Labour and Welfare.

The agreement must contain the following information:

  • the name and address of the company carrying out the plan;
  • the name and address of the external organization appointed by the company to manage and administrate the assets;
  • the name and address of the external organization appointed by the company to manage and administrate the plan (Un'ei-Kanri-Kikan);
  • qualification conditions for subscribers;
  • matters concerning the benefits package (such as the nature of the benefits, qualification required to become a recipient, method of calculating the size of the benefit payments and method of distribution); and
  • matters concerning the contribution of premiums.

There is a statutory annual cap on the amount of premiums that may be paid into the plan: ¥216,000 ($1,970) per person in a company with a Defined Benefit Pension Plan, or ¥432,000 ($3,940) per person in a company without a Defined Benefit Pension Plan. Premiums may be borne only by the company, and no company is allowed to have its subscribers bear any part of the premiums.

A company must make matching contributions to the asset administrative organization for the plan. Only trust companies, life insurance companies and agricultural cooperatives are qualified to act as these organizations but a company that carries out a plan for its employees is not allowed to function as such an organization.

A plan administrator acts as if it were a legal agent for subscribers. It is under a statutory obligation to offer at least three kinds of funds implemented by a variety of financial instruments, such as bank deposits, postal savings, trusts, securities and insurance products. The plan administrator must also provide subscribers with information about the funds.

After reviewing information provided by the plan administrator, subscribers choose the funds in which they wish to invest. Subscribers must be given the chance to change their choice of funds at least once every three months. Subscribers will provide instructions to the plan administrator, who will then instruct the asset administrative organization for the plan accordingly.

The most significant feature of the Defined Contribution Pension Plan is self-responsibility. Because subscribers are not given an opportunity to increase their future pension benefit amount by making additional premium payments under the Defined Contribution Pension Act, the only method for subscribers to increase their pension benefit amount is through their choice of funds.

Subscribers must make a decision as to which fund is the most beneficial to them and then bear the associated risk. The subscribers to a Defined Contribution Pension Plan thus need a specialist to advise them about asset management matters and to act as an agent solely for their benefit. The plan administrator may function as such. The statute stipulates that a plan administrator should act only for the benefit of subscribers.

When subscribers believe they are entitled to benefit payments, they must submit a request to the plan administrator, who will decide whether the subscriber has met the requirements to receive the benefits. In accordance with its decision the plan administrator will give payment instructions to the asset administrative organization for the plan that is responsible for executing the payment.

From the company's perspective, the advantage of a Defined Contribution Pension Plan is that the company is free from any obligation to pay additional premiums in the future that might otherwise be imposed under other pension schemes. On the other hand, a disadvantage of the Plan is that the company must bear the costs associated with educating and training its employees about investments. Although this education is costly, companies are recommended to do so because employee education is the most important component to the successful implementation of a Defined Contribution Pension Plan.

From the subscribers' perspective, the advantage of this Plan is that even if subscribers change careers or employers they may transfer their pension reserve to the pension plan of the new workplace while continuing to be insured by the same pension fund, as long as their new workplace has a Defined Contribution Pension Plan. On the other hand, a disadvantage of a Plan for subscribers is that the amount of the benefits package will change, depending on the subscribers' decisions about their investments.

The authors acknowledge the help of Jessica Amey, a non-Japanese legal trainee at Anderson Mori, in preparing this chapter.

Author biographies

Hideki Thurgood Kano

Anderson Mori

Hideki Thurgood Kano is an Anderson Mori associate who will become a partner as of January 1 2004. He has been practising labour and employment law exclusively since 1995 and acts on behalf of both Japa nese and non-Japanese multinational companies. Although he advises companies on ways to avert formal labour and employment disputes, he is also an experienced labour and employment litigator, having successfully defended many cases. He has written and lectured extensively on labour and employment matters.

His main areas of focus are: unilateral termination; internal transfer and external secondment of employees; sexual harassment and discriminatory treatment; preparation of, and amendment to, employment rules; employee data protection; employment of non-Japanese employees; labour union negotiations and disputes; litigation; labour insurance; social insurance; pension plans; income tax imposed on remuneration; and intellectual property rights granted to employees.


Wakako Sekiyama

Anderson Mori

Wakako Sekiyama is an Anderson Mori associate. She graduated from the University of Tokyo. Her experience at Anderson Mori includes general corporate advice (including labour and employment matters, pension matters, tax and other corporate issues), corporate finance transactions and intellectual property (including patent, copyright and trade mark). She is also involved in the practice of international and domestic litigation, commercial arbitration and various other business transactions.



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