Study warns on Japan's pension deficit

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Study warns on Japan's pension deficit

By Barney Jopson, Financial Times

September 9, 2003

Japanese companies face unfunded liabilities in their employee pension funds that are far larger than those at US corporations, where pension deficits have led to worries about the financial health of large companies.

According to a report to be released today by Greenwich Associates, a US consultancy, assets at employee pension funds in Japan cover on average only 62 per cent of the payments they will need to make to retirees in future. The assets of US funds cover 103 per cent of their payment obligations.

Dev Clifford, a managing director at Greenwich Associates, said if the problem in the US were on the same scale, "it would cause an outcry and a lot of political turmoil".

The size of the deficit provides a reminder that the country still has severe structural problems, even as it enjoys a cyclical economic upswing. Along with bad loans at banks and growing public indebtedness, experts say pension underfunding has the potential to drag the economy down.

"The funding gap creates a need for sponsor companies to make contributions to pension assets that they may not be able to support from their cash flow. That could crimp their ability to invest in the future," Mr Clifford said.

A large part of the deficits can be explained by a decade of poor domestic equity returns - although the Greenwich calculations were done in April and May as Japan's stock market began a four-month rally.

Ryuichi Yagi, a consultant with Watson Wyatt in Tokyo, said: "The gains in the stock market over the last four months have reduced deficits by at least the amount they grew in the year to March."

The Greenwich report also criticises Japanese companies for hiring fund managers "with practices that often fell short of global standards for investment philosophy and processes" and recommends that they "cull" underperformers.

Many pension plan sponsors have for a long time handed mandates to fund managers within their own keiretsu group rather than to managers chosen on merit.

Interest in alternative investments has, however, grown as pension funds seek to boost returns. Greenwich found that 18 per cent of pension funds invest in hedge funds while 17 per cent intend to start.

Companies are also set to restructure pension plans to reduce payment obligations. Currently 99 per cent of assets are linked to defined benefit plans, but in the next ten years this figure is expected to drop to 51 per cent as assets are shifted to defined contribution or hybrid plans - both of which have been introduced only in the past two years in Japan.