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Japan set to adopt portable pensions in 2001

TOKYO: Japanese wage earners move one step closer to gaining greater control of their retirement nest-eggs on Monday, when parliament starts debate on a plan to introduce a new portable pension scheme from January 2001.

Like the 401(k) plan in the United States, Japan's fixed-contribution pension plan will give people the freedom for the first time to decide where to invest their retirement funds.

The other great attraction is that contributions and investment earnings will be exempt from tax until the money is withdrawn. The risk is that retirement benefits will depend on investment returns.

Passage of the bill, expected during the current session, could ease fears the government is quietly pulling back from some of the painful structural reforms it has promised to take Japan out of recession, especially after it delayed introduction of the new pension schemes until next January from later in this year.

The new plan was proposed last year as deep structural problems came to light, unmasking serious shortfalls in Japan's company-managed pension funds.

New accounting rules were rushed through requiring tougher disclosure from April 1, and these are forcing firms to make huge write-offs to plug holes in the funds.

Even those writeoffs are not enough to cover shortfalls that may amount to more than 50 to 70 trillion yen, according to estimates by Tim Marrable, an analyst at Warburg Dillion Read.

The state pension scheme, too, is creaking under the burden of huge unfunded liabilities, adding to the urgency for change.

For Japan's rapidly ageing society, the plan means greater risk for individuals who have left the management of their retirement funds in the hands of their companies, which guaranteed lifetime employment.

But since that guarantee is no longer secure, as Japanese companies restructure and cut payrolls while the economy pulls out of its worst recession in five decades, the new scheme allows retirement funds to be transferred when a worker switches jobs.

That in itself will help introduce badley needed flexibility into Japan's still-rigid labour market, economists say.

Because much of the retirement money is expected to go into the stock market, analysts say the government is hoping for an equity boom like that seen in the United States, which is still in its longest-ever bull rally.

Hopes are high that the new funding will continue to fuel the rally in Japanese stocks that has lifted the Nikkei average more than 50 percent in the last year to a 31-month high last week.

Analysts say it will still be some time before Japanese investors take to the stock market like their U.S. counterparts, since many were burned so badly a decade ago when Japan's asset bubble burst, leaving the economy littered with bad loans backed up by inflated land and asset prices.

"Whether the boom that started last year will turn out to be a temporary phenomenon or not will depend on our efforts to gain confidence from a wider range of investors," said Yasuo Sakuma, senior fund manager at Dai-Ichi Kangyo Asset Management.

Those fears could prompt many to avoid riskier investments and to place their pensions with trusted, but low-yielding, old stalwarts such as the post office savings scheme.

Still, with the new pension regime and the fact that Japanese individuals sit on the world's largest pool of savings, some 1,200 trillion yen ($11 trillion), the increased appetite for investment returns will keep asset managers busy.

Equity trusts, similar to U.S. mutual funds, have been sprouting up, and bookstore shelves are lined with guides on how to gather stock information and invest online using the Internet.

The financial industry is already racing to compete for the money, with the Industrial Bank of Japan and giant stockbroker Nomura Securities facing up against Bank of Tokyo-Mitsubishi and Sumitomo Bank to offer investment products.

Under existing pension plans, retirement benefits are fixed, but contributions are increased if investment returns slow down.

With the new plan, contributions of up to 216,000 yen a year are allowed for employees of companies with existing pension plans. For those without, the yearly ceiling is 432,000 yen.-Reuters