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Japan Finalizes Rules for Pension Asset Transfer


 May 30, 2003

TOKYO - Japan's Health Ministry on Friday finalized rules covering the transfer of assets to the state pension fund from corporate schemes, which could affect 10 trillion yen ($85 billion) or more of assets.

It set September 1 as the date from which the handover is allowed and amended the rules slightly to make it easier to hand back assets in the form of securities rather than cash, as agreed by government officials earlier this month to help the stock market.

Corporate funds, once a transfer is approved by the authorities, can hand back an amount set by the government in either cash or securities.

Securities are valued at market prices around the time the funds reach agreement on a transfer.

The original draft had an October start date. Bringing forward the date was aimed at lifting some of the selling pressure on the stock market. Many corporate funds had preferred to liquidate securities holdings rather than carry them until October, with all the risks involved in a bearish market.

When the private funds hand over Japanese shares to the state scheme, they are required to include at least 80 percent of the TOPIX index <.TOPX> components so that the returned securities will fit immediately into the state's passive portfolio.

The ministry's initial requirement was 90 percent.

Small funds will still probably opt to return assets in cash.

"We simply cannot set up a TOPIX-tracking portfolio," said a spokesman for a Japanese manufacturer whose pension fund has total assets of around 30 billion yen.

Larger funds will find it easier to hand over the assets in securities since they usually have TOPIX-tracking portfolios, although even these have elected in recent weeks to sell their Japanese shares and return assets in cash.

Many Japanese firms have managed part of the public pension scheme for over 30 years, entrusted by the state with getting better returns for employees because of their supposed expertise.

But a decline in returns in general and the erosion of Japanese share prices in particular have forced a rethink.

One-fifth of the 1,700 corporate pension funds, including those of blue chip firms such as Hitachi Ltd <6501.T>, have already decided to return their proxy assets to the state.

A change in Japan's accounting standards two years ago was another factor behind the companies' change of heart.

Japanese corporations are now required to include accrued pension and severance costs as liabilities, a step soon to be introduced by British and other European firms.

Not surprisingly, Japanese corporate pension funds are heavily underfunded on a projected benefit obligation (PBO) basis and neither reducing benefits nor coming up with extra funding will prove easy.

According to a survey by U.S. rating agency Standard & Poor's, Japanese firms on average have 40 percent of their pension liability unfunded as of March 2002, compared with only six percent for a U.S. firm. ($1=118.17 Yen)

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