SR-26 October 1994 The Impact of Market Access and Investment Restrictions on Japanese Pension Funds Era. • This report relates the trend of the aging Japanese population to the need for adequate retirement income. It briefly describes the Japanese system of"public EBRI EMPLOYEE BENEFIT RESEARCH INSTITUTE and private pensions, the administration and investments of pension plans, and the choice of investment managers made by pension plans. The report presents evidence of lower rates of return to pension assets in Japan, compared with the United States and other developed countries; relates these below normal returns to government regulations; and provides implications for deregulation of the Japanese pension fund market. • Japan has one of the most rapidly aging populations in the developed world as _:_-i!_:. a result of extremely low fertility rates and one of the world's highest life ?'d_(_:J")¢,)i_i_,/ .[-_-_'.i " expectancy rates. The aging population necessitates that pension funds be -:_#i -' -7 ".: a. invested efficiently so as to vield the highest possible returns using prudent ._-5";_4z_._.':-::-: _- __.... investment strategies. _'_;5>_'<_::_-""-_: :_ _"'- • The Ministry of Finance investment guidelines require that most of the funds ,_._::; _..,. . ,, from the public programs invested in the financial markets must be managed by --_>_'<: " ' trust banks and life insurance companies. The National Pension Plan and the - " Employer Pension Insurance Systen-_ are not allowed to employ discretionary investment advisors. ,-< • ()nly ore' of the two types of private employer pension plans can employ i_@: _- :.:.: _ discretimmry investment advisors. The majority of all private employer pension fund assets in Japan are managed by 8 Japanese trust banks and 21 Japanese lift' insurance companies. The top 15 pension fund managers handle 94 percent .:}_12 ......... ;-.q,-_ . of all pension assets. In contrast, the 15 largest pension fund managers in the "_' :'"> .... " United States control about 22 percent of pension funds. =<#.i'__).<i;_ :-. • The conserwttive regulations under which ,Japanese plans operate bias plan _ -- !_r ._. ."" ;- holdings toward fixed income rather than equity investments and result in asset ' -:_: allocations significantly different from those of U.S. pension plans. Ministry of :..-_, . :- . .. Finance regulations restrict competition in pension management services and .._ - . ... limit the ability of a plan to hire specialized managers. Regulations and customs ' '"{" -_.. - that require more conservative asset alh)cation and reduce competition among . lend managers tend to cause lower investment returns. • Without changes, Japanese pension funds will continue to operate under severe restrictions that limit their opportunities for higher return. Ultimately, this will require either higher employer or employee contributions, or both, to support thtm'e retirement benefits. EICRI 5p#c,dA'(,l)o>_.._R 2_* ()ctobcr1994 * ,1._2 I. EIIH
Transcript
SR-26October 1994
The Impact of Market Accessand Investment Restrictions on
Japanese Pension Funds Era.• This report relates the trend of the aging Japanese population to the need for
adequate retirement income. It briefly describes the Japanese system of"publicEBRIEMPLOYEE
BENEFIT
RESEARCH
INSTITUTE
and private pensions, the administration and investments of pension plans, andthe choice of investment managers made by pension plans. The report presents
evidence of lower rates of return to pension assets in Japan, compared with the
United States and other developed countries; relates these below normal returns
to government regulations; and provides implications for deregulation of theJapanese pension fund market.
• Japan has one of the most rapidly aging populations in the developed world as
_:_-i!_:. a result of extremely low fertility rates and one of the world's highest life
?'d_(_:J")¢,)i_i_,/ .[-_-_'.i" expectancy rates. The aging population necessitates that pension funds be-:_#i -' -7 " .: a. invested efficiently so as to vield the highest possible returns using prudent
_'_;5>_'<_::_-""-_: :_ _"'- • The Ministry of Finance investment guidelines require that most of the funds
,_._::; _..,. . ,, from the public programs invested in the financial markets must be managed by--_>_'<: " ' trust banks and life insurance companies. The National Pension Plan and the
- " Employer Pension Insurance Systen-_ are not allowed to employ discretionaryinvestment advisors.
,-< • ()nly ore' of the two types of private employer pension plans can employ
i_@: _- :.:.: _ discretimmry investment advisors. The majority of all private employer pensionfund assets in Japan are managed by 8 Japanese trust banks and 21 Japaneselift' insurance companies. The top 15 pension fund managers handle 94 percent
.:}_12......... ;-.q,-_ . of all pension assets. In contrast, the 15 largest pension fund managers in the
" _ ' :'"> .... " United States control about 22 percent of pension funds.
=<#.i'__).<i;_:-. • The conserwttive regulations under which ,Japanese plans operate bias plan_ --!_r ._.
."" ;- holdings toward fixed income rather than equity investments and result in asset
' -:_: allocations significantly different from those of U.S. pension plans. Ministry of
:..-_, . :- . .. Finance regulations restrict competition in pension management services and
.._ - . ... limit the ability of a plan to hire specialized managers. Regulations and customs' '"{" -_.. - that require more conservative asset alh)cation and reduce competition among
. lend managers tend to cause lower investment returns.
• Without changes, Japanese pension funds will continue to operate under severerestrictions that limit their opportunities for higher return. Ultimately, this will
require either higher employer or employee contributions, or both, to supportthtm'e retirement benefits.
This Special Report was made possible, in part,by funding from The Investment
Company Institute andthe European Federation of Investment
Funds and Companies.
Charts
Table of ,.,_,,, 1. Investment Return of Pension Funds ........
....... Chart 2. Portion of' Population Aged 65 and Over" : -_ ' by Country, 1900-2025 ...............................................
Chart 3, Structure of Public Pension Schemes: 1992 . ;_
T_xt Chart 4, The Rapid Growth of Japanese PrivatePension Funds, Selected Years, 1975 1993 ............... 8
Introduction ..................................................................... 2 Chart 5, Relationship Between Public Pensions
(chart 1. chart 2) and Employees' Pension Fund .................................... s
Aging of the Population ................................................... 4 Chart 6, Breakdown of the Japanese Employees'(tabl(: 1) Pension Funds Management, 1993 .......................... 10
Japanese Pension System ............................................... 5 Chart 7, Hisi.orica] Changes in Asset Allocation of
The Public Systen_ ....................................................... 5 Japanese Employee Pension Funds by Trust
Table i, Estimates and Projections of the ,JapaneseChoice eta Ftmd M:magvr. ....................................... 11Population .................................................................... 5Account Manz_gement ............................................... 12
Table 2, Social Security Tax Rates and TrustRates of Return .............................................................. 1;3Funds ........................................................................... 7Conclusioll ...................................................................... 14
Table 3, Public and Private Pension Trust Funds:Bibliography. .................................................................. 16
March 1993 .................................................................. 7
2 SR-2_ • EBRI Special Report
Chart t
Investment Return of Pension Funds, 1985-1992
3.5
l 30.3 • t,
,'-() -[2850 _ United Kingd_ 28.50
225 / ix.] _ /_5_._ / N 18.
12.72 "'_I
12.98 __9_j 138 _ / / "_
,o \ "V I 940
.5
-10
10.6-15
I I I I I I
1985 1986 1987 1988 1989 1990 1991 1992
Source: US. Employee Benefit Research Institute (defined benefit plans); Japan, unpublished data from The Pension Fund
Association (market value-based yield of employee pension funds). United Kingdom data provided courtesy of WM Company.
:::.:=: : :_::::.i,_::.:i_ii_%!ii_:::ii;i_!.i]:.:::.ifii:_The Japanese trust banks and life insurance companies, can man-:: :' , ; '. "i retirement age;
*: : ;:: ":': : :': 7"_<4_':_:i!:__:'__J_:?>:: income • asset allocat.ion limits for total plan assets and for
t--:i_i):i: 4t,,,,_ ,__]_.X_i_._i]I-,: _:-: < : <::%_¢,:_ ;. _.i:_:--_::.._-_::_c_- system each individual money manager employed by a: / _'l,l, _" {.l_.__,G_l,'l,{J_'l¢ _" _v_t: consists era pension fund that require most assets be invested in
" ' :...... : .... network of bonds and fixed return instruments rather than in
overlapping equities and hinder the hiring of specialists;
public programs and two primary types of defined benefit • accounting practices that value assets at book value
corporate pensions. All citizens are eligible to be covered instead of market value, concealing actual investment
by at least one of the public programs, and about one- performance and thereby limiting competition based
halt' of' all private-sectm" employees participate in a on superior investment returns; and
corporate pension plan. Both the public and private • problems associated with selecting and changing
pension systems are closely regulated by the Ministry of money mangers that limit direct competition for
Finance and the Ministry of Health and Welfare. management services.
Recently, regulatory policy governing the
investment of public and priw_te pensions has received The effect of these regulations is that Japaneseconsiderabh, attention by the Japanese pension commu- trust banks and life insurance companies retain control
nity, ti)reign investm(,nt firms seeking greater access to of most pension fund assets available tbr outside man-
the Japanese market, and 1LS. trade negotiators. Off agement. These financial institutions do not have to be
particular interest are: concerned with competition from other types of invest-
• regulations that preclude certain types of firms from ment managers. Firms seeking to provide advisory
acting as m(mey managers tbr some pension funds; services, particularly specialized investment services,
• limits placed on the percentage of fund assets that have only the most limited restricted access to pension
discretionary investment advisors, 1as opposed to fhnds.
l [)i._t('t_.n(_r_ tt_e ,<fm,'_lt (tduisor._" (t_' [i(('t*s('([ /)y the -J(zp(_mts(' go_ er_m('_zt (:_*l ttl_ltl(l_c' ])(!ll._ll_ll_lsNctx /tl Jclport o/l/.r [)3'o[)tailzDl_ (z li(,(v*._r as (x
t_ pru( idc il_rr:4m, l_: (uh'ic,' t_)c/imlt:, it_clu(lill.q ])rllsi_,n plcln_. T]w 5' are m)t diarri#i_mqliv £nrrstme_t (i(_uisor. A ({iscrt'ti(mc_ry incestment adcgsor is riot
Portion of Population Aged 65 and Over by Country, 1900-2020
30
Japan
Sweden _ _
15 ..
_.- ,m _ _ ._.-- _ _ United States
o I I I I I t1900 1920 1940 1960 1980 2000 2010 2020
Source: Instituteof Population Problems,Ministry of Healthand Welfare, Jinko tokei shiryoshu (latest demographicstatistics), 1992.
This Special Report focuses on the impact adequate attention to their pension fund investments. As
of these regulations on the rate of return to pen- the pension fund is not shown in the corporate balance
sion assets in Japan. These regulations limit the sheet, most top management tend to believe that the
investment options of most pension funds to pension fund is not the property of their company and,
prescribed conservative investment strategies, theretbre, they are not concerned over the management
preclude the use of certain types of investment of their pension fund."
advisors, and inhibit open competition among The Japanese population is a_,dng much more
investment management firms. The ability of pension rapidly than that of the United States and other devel-
plan sponsors to implement modern investment tech- oped countries (chart 2 }. The cost of providing publicniques, hire specialized managers, m" use current pension benefits based on the current benefit formula is
state-of-the-art investment theory to optimize the projected to double within the next 25 years. Similar
selection of a pension portfolio is also restricted by these cost pressures will occur among private pensions. These
guidelines, For those pensiou t\mds whose investment demographic trends increase the importance of investing
behavior is constrained by these regulatory limits, the retirement funds in an efficient manner to yield the
investment return will be adversely articled (chart 1). highestpossible returns subject to risk considerations.
Lower rates o(" returr_ necessitate higher pension This report begins by examining the aging of the
contributions to support promised benefits in a defined Japanese population and relates demographic trends to
benefit pensi.n plan. 2 However, Japanese executives do the need for adequate retirement income. Next, the
not seem to recognize the financial implications of this report briefly describes the Japanese system of public
relationship. Noboru Terada (199,1), executive director, and private pensions, the administration and invest-
Pension Fund Association, :_states, "It appears to me that ments of pension plans, and the choice of investment
top executives of business firms, regl'ettably, do not pay managers made by pension plans. The report then
to pension assets in Source: Ministq/ol Health and We/fate, Latest Demographic Statistics an adequate retire-Japan compared with (Tokyo: Instituteof Population Problems, 1993). ment income. Thisthe United States and latter point is further
other developed illustrated by the
countries, 4 relates these below normal retm'ns to govern- increase in life expectancy at age 65. Male life expect-
ment regulations, and provides implications for the ancy at age 65 increased from 11.9 }'ears in 1965 to
deregulation of'the pension fund financial market in 16.3 years in 1992, while female life expectancy at 65
Japan. increased from 14.6 years to 20.3 years] Consequently,
the number of years the average person could expect to
.(.-.):_ :.... . _ _ ..... :: - :_- ,. ,Japan has receive a pension in Japan increased by almostone of the 40 percent.
_i ._" -
most rapidly This rapid aging of the population will place
aging popula- severe financial pressure on the nation's public and
: _: : lions in the private pension systems. Tax rates for public pensions
- . .. : : :: _ . developed must be significantly increased if benefits are to be
world 5 as a maintained, and employers will face a more difficult time
result of extremely low f'ertility rates and one of the in providing adequate retirement income from company
world's highest life expectancy rates. Following World pensions. The aging of the population necessitates that
War II, Jal)an experienced a very sbm'l baby boom that pension funds be invested efficiently so as to yield the
was ti)lh)wed I)y a sharp decline in fertility rates. Life- highest possible returns using prudent investment
tim(, fertility rates have d('clined from 3.26 births per" strategies, s
woman in 195 t to less than t.5 t)irths per' woman in the
1990s. These h)w fbrtility rates are not sufficient to- :- ,", " " " : The
maintain the absolute size of the population in the nextPubliccenturv.( _ ...
I,iti, expectancy at birth tbr males in 1992 was System76.1 years, while women could expect to live until age
82.2, compared with 67.7 years formen and 72.9 years :';_:, : The aapa-for women in 1965. The increased life expectancy has ..... nese public
contributed to population aging (table l) and exacerbated system consists Of the National Pension (NP) plan,
4 77zr_)uykou/tb_s umdvxis, _mmctar3' _alaes rzr'c reported itz yea. Substantial 7 l)ata are/}'am .lapanese li/[. tables of various years as reported in Pensiotz
flactuativztx in _'_'/e_tttN_' rtzh'_ tmtlee colluertizl N titre, series data/}am _r_Jtt [¢) [,'ulld Association t1993b).
dolhtr._, e._lrc.le]_ mi.sIeadin£' t?ectd,'r._ c'cztt malcc their em,n "bull park"
con uvrxir_ttx [i,r ltLg.'] / [9.9.l i'ulucs l_xin_d art exc/tanfg(' r(tN, of 100 hell per dldlar, x The rcq)id aging oflthe populatiatt is forci.g cha_tges in employment pr_ctice_
_)/'Jat)arzese companies, particular@ in tke use oflifetime employment and
5 M_rtin ( lg,'_,'b t..ctde._ u d.:(til,,d disctes._iute o/'lhe aging r_fthc .h_pa:wsc seniority ba.s_,d pay system,s. Clark aad Ogawa (1994J describe the chctttg4e,s ill
the Employee Pension Insurance (EPI) system, and population, the tax rate necessary' to provide future
a series of mutual aid associations covering vari- benefits using the existing benefit formula is projected to '_
pus types of public employees(Social Insurance increase to 19.5 percent in 2000, 24.5 percent in 2010,
Agency, 1993; Tamura, 1992; Clark 1991). The Pension and 29.5 percent in 2020. However, these increases will
Insurance Amendments enacl(_d in April 1985 trans- be sufficient only if the eligibility age for unreduced EPI
formed the National Pensi,n t'rnm a program covering benefits is raised from 60 to 65. 9 Table 2 provides an
only the self employed int_ a universal retirelnent overview of the tax rates and trust funds of the public
benefit system that provides a basic, flat-rate benefit to system.
all persons 65 and pyre'. (?hart 3 provides an overview of
the structure of the public system that currently oper- AdmilEstratiol_ alzd Irmeslment Regulation of'the NP and
ares in Japan tPension Fund Association, 1993b 1. EPI Trust Futzds_The Ministry of Health and
Welfare supervises the operation of the NP plan
Belw/'its--Benefits from tlw National Pension plan are and the EPI system. Contributions are submitted by
paid at ag_ 65, alth_ugh reduced, early retirement employers and self-employed workers to the Social
benefits can be received between age 60 and age 65. Insurance Agency. Contributions for both funds are then
Benefits are increased annually to reflect increases in transferred to the Trust Fund Bureau of the Ministry of
the consumer price index. The cost of National Pension Finance. The Trust Fund Bureau transfers monies, as
benefits is financed by individual contributions and by needed, back to the Social Insurance Agency, which paysgeneral governmental revenue's, which account for one- benefits to retirees.
third of the cost. The Pension Welfare Service Public CorporationUnreduced retirem_!nt benefits from the EPI
program are paid at ,'l,,e_,,60. After retirement, all benefits
are indexed t.o the consumer price index. The EPI system9 The dapam_,_e _ol'ertlm_'tl_ has regl_lctrly attempted to raise the ehf4tbillty age
is financed by a tax m_ covered earnings equal to t},,,,, (_0 t_3db. t{_wc_._.r. [_,_s{c, tio, h_:_sr_ever passed. The current propo_n{ is -,_
14.5 percent in 1994. The tax, which is paid equally by t,, rczis,, ttle egla, ibdzty a2,' f},r t)c,,s'i('bcrze/it,v to 65 but to cotttuiue to aEou, th(: z_.,_"e(Lr_zm/_.s-r_'lated hrt_ef}t t. b_'gl_ ctt age dO. I/the eligibility tzge for zzm-educ'ed
the employer and the emp}o\ee is scheduled to rise to _,,,,,,/_t,,-,_,Tl_lz,t.__ztho. t/te t_x,-(ztezz.c,u[dhauet, beit_creasedto34.SpercetH16.5 percent in 199,'5. Due t_ the rapid aging of'the .M,,._<,. o/H,,ulth urn/ Wc//itze,1H94,.
6 SR-26 • EBRI Special Report
Table 2
Social Security Tax Rates and Trust Funds
Employees'Pension Insurance National Pension
Tax Trust Reserve Tax Trust ReserveYear rate fund ratio amount fund ratio
1995 16.5 132.5 5.7 11,700 8.9 2.7(130.6) (8.8)
2000 19.5 182.7 5.1 14.200 12.8 2.7(150.6) (10.5)
2010 24.5 269.1 3.7 19,200 23.7 2.7(152.8) (13.4)
(P\¥S[)( ' ) is a solni- 2020 29.5 343.4 3.0 21,700 38.0 2.9 Pension funds rema}n,', _n_{overnmental or_"udzation (134.6) (14.8) the Trust Fund Bureau
overseen by tbe Mh_istry (4' Source: Ministryof Health and Welfare, Pensionsat a Glance and is used for investn,,,,_tHealth and Welt'are. 1(I[l (Tokyo:Social InsuranceResearch Institute, 1994). in infrastructure projcO :_.was established in 1961 for Note: The tax rate for the Employees' Pension Insurance is the Another 15.6 percent of
combined employerand emp{oyeetax paid oncovered earnings, these monies is used fi-)rl;he purpose of makin_ The tax amount for the National Pension is reported inyen perloans to emp]oyers t'¢w monthin 1994 terms. The trust funds are shown in trillionof yen. loans to participants in
housing, \_ elf are, and The values in parenthesesare the inflation-adjustedvalues of the these systems. Thetrust funds shownin 1994 terms. The reserve ratio is the value of
medical facilities: loans to the trust fund divided by the projected annualbenefit payments, remaining amount,participants fro' housing; approximately 20 trillion
and loans to retirees, yen, is invested by the
BegJiming in 1986, the P\VSP(: was authorized to PWSPC in the financial markets in bonds, stocks, and
manage a portion of the monies in the EPI and National other investments.
Pension trusl t'unds ti)r investment purposes. It Even with higher tax rates and an in-'_ Estimates from March 1993 are that the creased eligibility age to receive benefits, the
_ joint EP[ and National Pension trust funds had absolute size of the EPI trust funds in 1994 dollars
assets of 96.3 trillion yen (table 3). These funds are will begin to decline in less than 10 years. Real fund
basically comparal)le with the 1/.S. Social Security trust assets measured in 1994 dollars are projected to peak in
fund; however, tlwy difli'r in th(; manner in which they 2003, EPI trust fund assets relative to annual benefit
are mvesled. _ Sixty-(fight percent of EPI and National payments fall during the next 25 years• Fund assets
1_>in l)rtm'ilJr, t/I,' t'('n_l._l I_('[/}n(, ,'_vrl I_ c l)ub/m ('_rl)ora/i<m (l)IV,_'t_('i _,_ l l 7"hi,_ d_,scus,_mrz of the purpose and actic'itl_._ of the PWSP(/ is based on
,H't'l',s('l'll i)v till' z]llHl.'¢/t v ./'IIc_.'/t/'_ (rod II;'//iu'e: ]ml_,ct,ez, m practice the nlutcrml,v uz Public IVel/)ue Sercice Public Corpvratio_z (1993) azzd Social
/}mmumi <u'tlt dtc,. ./tim lqI>,'l'(' hive/ he m,-ottuted leith tim ,Mint,vtl F (Jr" [nsurttnc't' Agem'y (1._)9,'-b.["l_z_tNte.
12 All ovsets in tile U.,b'. Social ,S'ecurity trust iizpoCs ctre required l)y tam lu bc
Non-members of Employees' Members of Employees'Pension Fund Pension Fund
Total: 197,400 yen (US $1,881) Total: 288,860 yen (US $2.751)
Notes: 1) Model pension benefits (per month) for men with 40 years' membership according to actuarial revalution in 1989.2) Dollar amounts have have been calculated at the rate of $1.00 = 105 yen.
.,_
Source: Materials prepared by The Pension Fund Association, 1993.
8 SR-2d ® EI_RI Special A'ep_Jt
decline from 5.7 times ammal benefits in 1995 to Private Pensions3.0 times annual benefits in 2()20.
The PWSPC cannot use discretionary invest- The ,Japanese private pension system has two
rnent advisors or firms specializing in certain types of basic types of plans: Tax Qualified Pension Plansinvestments to nlanage the portion ()f its assets invested and the Employees' Pension Funds. 13
in the securities nmrket so as to achieve higher rates of
return, instead, it is limited to dividing its assets among Tax Qualified Pension Plans--Tax Qualified Pensiontrust banks and lid insm'ance companies and must Plans were established in 1962 by amendments to the
comply with the prescribed asset allocation rules. (See corporation tax law and the income tax law. Benefits at,'
p. 9 of this report fi)r a description of these regulations. ) determined using years of service and employing eitho' :,These restrictions limit the investment options available fiat benefit or an earnings-related benefit formula.
to the PWSPC and are likely to adversely affect the Contributions are determined using reasonable actuarialreturn that it can expect to earn on its assets, methods to calculate liabilities. Tax Qualified Pension
The PWSPC and the Ministry of Health and Plans must be actuarially evaluated at least every fiveWelfare favor eliminating or modifying many of years. The number of Tax Qualified Pension Plans
: the investment restrictions, while the Ministry of has grown rapidly. In 1992, there were approxi-
Finance favors retaining these requirements, mately 92,000 plans covering 10.4 millionRelaxing the investment restrictions would allow the employees (Watanabe, 1994). Assets in these plans
PWSPC to use a more diverse set of money managers, totaled 16.1 trillion yen in 1993 (Kawamura, 1994)produce more competition among the increased number (chart 4).
of managers as they bid tbr investment funds, and allow
the use of money managers who specialize in particular Employees' Pettsion Funds--The Employees' Pensioninvestment instruments. Fund system was established with the amendment of the
Employees' Pension Insurance Law in 1965.14 The
Mz_tua/Aid Associations--Each mutual aid association of number of plans increased from 142 in 1966 to 1,789 in
the social security system is organized under separate 1993. These plans covered 11.8 million workers in 1993,legislation (Daiwa, 1992). Participants in the mutual aid representing 36.7 percent of all participants in the EPI
associations pay contributions into trust flmds that are system (Kawamura; 1994). Assets in Employees' Pension
managed independently by the various associations Funds have increased from 1.4 trillion yen in 1975 tosubject to Ministry of Finance regulations. Contribution 35.4 trillion yen in 1993 (Kawamm'a, 1994) (chart 4)
rates and age of eligibility for retirement benefits vary. The objective of the Employees' Pension Funds is
The total assets in the four mutual aid associa- to provide retirement benefits equal to 60 percent oftions is 34.0 trillion yen, as of March 1993 (table 3), The preretirement annual income when combined with
largest component of each of the trust funds for the benefits paid out by public pensions (The Pension Fundmutual aid associations is invested in the securities Association, 1993a). The total retirement benefit in 1992
markets. Fifty-two percent of total monies in all of themutual aid association trust accounts is invested in the
securities markets, with 21.5 percent being used for "_Fo,._ ,,_o_,,d_tail_,dd,_.c,_,_._io,,of_,,ploy_,,-p_,_.,.io,,.,,i,_a_p_,,,._e CZ_,'t_(199I ), Mura/eami (199lh), and The Pension F end Association "1993a 1993b_
::: loans to participants and 26.1 percent in government _4"_ bonds. Fora more detailed disc_zssion of Employees'Pension Funds see The
Pensi,_n Fund Association (1993a).
October 1.994• EttRI Special Report 9
Chart 6
Breakdown of the Japanese Employees' Pension Funds Management, 1993
Managedby "New Money"Managers 3.9%
Managedby LifeManagedbyTrust InsuranceCompanies
Banks 58.9% 37.3%
Total PensionAssets 1993 (asof End of March 1994)Yen 35.4 Trillion
for a hypothetical employee with 40 years of insured Funds have been permitted to hire discretionary
service who is covered by au Employees' Pension Fund is investment advisors if they obtain a license from
shown in chart 5. The information shows that toget.her the Ministry of Health and Welfare. They must also
the public and private pension plans in Japan provide select a particular investment product or set of
substantial retirement benefits, investments offered by the investment advisor and
It is the employer's responsibility to insure receive approval of the Ministry of Health and Welfare to
sufficient fends are available to pay the promised use these products. As of October 1993, 664 of the
benefits. Higher rates of return reduce required contribu- 1,789 Employees' Pension Funds had received the first
tions necessary to finance a given level of benefits. Thus, license. 15 Of these, 246 had also been approved to utilize
it is in the plan sponsor's interest to invest these assets investment products being offered by the discretionary
efficiently in order to yield relatively high rates of investment advisor (Terada, 1994).
return. Investment of assets in Employees' Pension
Funds must conform to strict regulations established byAdministration and Im,ustment Regulcztio'z of Priuatc the Ministries of Finance and Health and Welfare. These
Pe**sions--Tax-Qualified Pension Plans are re- investment limits relate to the book value of plan assets
quired by the Ministry of Finance to use trust and include the following.
banks and life insurance companies to manage • The investment portfolio of the fund managed by each
their assets. Funds must be managed in accordance money manager must have:
with the balanced portfolio regulations of the Ministry of • At least 50 percent of total assets in principal guaran-
Finance. Existing regulations preclude discretionary teed assets.
investment advisors fl'em managing the assets in tax- • No more than 30 percent of total assets in domestic
qualified pension plans and substantially restrict the equities.
investment opportunities of these plans. • No more than 30 percent of total assets in any type of
Employees' Pension Funds also must select fbreign asset.
money managers fbr their pension assets that satisf}
Ministry of Finance guidelines. Traditionally, theseinstitutions were either trust banks or life insurance t-, Due to the requ,r_'tnunt tlicit the Emplo),ee.d t'en_ion Funds be in evistence
/br rd least 8 ,/e<trs before the;' can u,_e c: discrctiut*aO' aduisor, <rely I,(},YR
companies. Since April 1990, Employees' Pension fi,..,,I,c,,-eetivihh, t, rq,p/, /br thi.s[iceHse(Ter<,da199.lL
1 0 SR-2d ° EBRI Special Report
Chart 7
Historical Changes in Asset Allocation of Japanese Employee Pension Funds by Trust Banks, Selected Years 1975-1993
100 [] Others
80 [] Foreign Securities
[] Domestic Eqoi'iiesg' 60t_"d
[] Domestic Bondsg_ 40
] Loans2O
01975 1980 1985 1990 1993
Fiscal Year
Source: Unpublished data fromThe PensionFund Association (Japan)•
• No more than 20 pe,'cent of total assets in real estate, anee companies managed 37.3 percent; and new• All individual accounts must conform to the 5:3:3:2 money managed in discretionary accounts was
regulation. This regulation effectively precludes hiring only 3.9 percent. 16 The American Chamber of Con>
a discretionary investment advisor who specializes in merce in Japan (1994) estimates that two restrictions in
_:, specific types of investments and inhibits existing and particular, that no more than one-third of all assets can
prospective money managers fl'oin developing special- be managed by a discretionary investment advisor and
ized management capabilities, only funds that are at least eight years old can use a
• Since 1990, funds have been allowed to employ' discretionary investment advisor, reduce the pool of
discretionary investment advisors subject to the investment funds available to discretionary investment
following constraints: advisors to approximately 20 percent of the total assets
• No more than one-third of all the plan's assets can be in Einployees' Pension Funds. 17 Currently, this percent-
managed hy these investment advisors, age is reduced even further by the old money-new inoney• Japanese discretionary investment advisors must also distinction.
conform to the 5:;3:3:2 rule; however, fbreign discre- The balanced thnd regulations restrict the
tionary investment advisors are allowed to place up to porttblio allocation decisions available to plan sponsors.
50 percent of assets that they manage into equities Since these regulations apply to pension plans at all
and may have up t(_ 70 percent in foreign assets different stages of maturity, the ability to select different
provided the total assets of the pension fund meet the investment risks is significantly reduced. Data indicate
5:3:3:2 rule. that, on average, private pension funds managed by
• Only new money frmn contributions since 1990 can be trust banks had about 26.7 percent of their portfolios in
managed by discretionary investment advisors, domestic equities in 1990 and 26.3 percent in 1993
• Only Employees' Pension Funds that have been in Ichart 7). These and other data suggest that pension plan
existence ibr eight years can use discretionary invest- managers allocate their portfolios more heavily in fixed
ment advisor's, income than required by the regulations. While it is
Operating under these restrictions, the invest-
ment monies in Employees' Pension Funds remainlt; There has beer* a sh_ft it_ the (Iltocatiorl o/'Emphuees'Pelz,_iott Fund assets
primarily in the hands of trust banks and life insurance ,,,.<, t?_)mtrust baMesrz,'zdtou.ardlif_:insura,zcecomp_nies.I,_1982, trustcompanies (chart 6 ). Data provided by The Pension _,,,,_._u,ere ,,_a,mging76percent o/'fuml assets compared with only 24
Fund Association (Kawamura, 1994) show that, in _.........._f_,,-zit_,i...... _,(._,(-,,._po,,i,._(w._...... t,ze,1994_.1993, trust banks managed 58.9 percent of the total 17Becau.sedi,scretzoncl<)intestrm,nt manag,ers are notpermitted to mu,zctge
assets of all Employees' Pension Funds; life insur- t_._ qualified plan._" as,sets, the toga! percent_zge ofpriuate pla,_ a,_,s'ets they c(znttl(_gla_(' ix 13. 7 [_#tFC¢Ilt.
October 1994 • EtIRI Special Report 1 1
possible that some managers are, at any particular point control only about 22 percent of pension lends (Tamura,in time, more c_mservativc in their investment orienta- 1992; Securities Industry Association, _994).
tion than the restrictions require, there also are other Japanese pension funds generally select
possible explanations. The decision to invest slightly money managers with business ties to the sponsor-below the 30 percent limit also may be influenced by the ing company. The small number of life insuranceconservative investment mandates embodied in the companies and trust banks that manage most of the
regulatory scheme and by other regmlations of the assets of pension funds often are part of various indus-
Ministry of Finance that result in most of the assets of trial groups that include the pension plan sponsor. Apension funds being managed by trust banks and life report by the Securities Industry Association (1994)
insurance companies. If permitted by government concludes that these money managers maintain relation-
regulations, increased competition among money manag- ships with plan sponsors on multiple levels and thaters would stimulate efforts to generate higher returns "pension management is not based on performance orand should result in portfolio selections more heavily investment skill, but on collateral institutional relation-
weighted toward equities, ships."
Bianco (1991) states that money managers are --*" _° _: Choice of often "selected fbr what one could loosely call 'political ;
, : _:_ a Fund reasons' and not because of'their proven skills."
> Manager Eisenstodt (1992 reports that "to manage their pension
_:_ assets, Japanese companies usually choose fund manag-e<<. ers who are large and faithful shareholders of the firm or
_,<%_>g_<__-._g{_;xg@_:_-_.. =-g<_3:v:v.-_._;:;_:: good customers. ''19 These noninvcstment reasons for• tions on
investment managers and portfolio allocations have choosing pension fund managers make competition bydiscretionary investment advisors and foreign-owned
limited, with minor exceptions, the choice of money trust banks who are not related to a firm's traditionalmanagers for priwtte pensions to a few trust banks andlife insurance companies. These financial institutions are money managers more difficult.
Moreover, because the balanced fund regulationsalso the exclusive agents for the proportim! of funds in
public pensions invested in the financial markets, apply to each manager as well as to the pension plan,Pension management in Japan is concentrated they effectively preclude pension plans from assigning a
in a very few firms. The vast majority of all private portion of plan assets to a manager that will follow aemployer pension fund assets in Japan are man- specialized investment program. This in turn, inhibits
aged by only 8 Japanese trust banks and 21 competition for specialized expertise.
Japanese life insurance companies. Nine foreign- Once a manager is selected, there is relativelyowned trust banks have an insignificant share of little switching of assets away from the chosen money
the investment funds (The Wyatt Company, 1994). is manager. This reflects the business relationshipsdescribed above along with regulatory constraints and
The top 15 Japanese pension fund managers handle
94 percent of all pension assets. In contrast, the accounting standards. Regulations governing the process
15 largest pension fund managers in the United States of transferring funds from one money manager to
18 The Ecortomist q 199 la_ repro'is that in 1991, after five years of competing 19 For/_trt}ler di,_czzs._iotz (_f this issue, $ec The Economist _1989, 1991c_),
for pensmu i\mds, the tbreign trust hanks manage m_ly 59 billion yen of
pension ass_,ts
12 SR-26 • EBRI Special Report
another inhibit changing managers. The lack of readily company cashes out the portion of its holding belonging
available pertbrmance records of money managers also to the pension. The cash value is then returned to theserves to limit the frequency of actually moving assets pension fund, which will realize any gains or losses in its
across managers, porttblio.
Assets generally are valued at book instead Life insurance companies guarantee a minimumof market value, but when a pension fund changes return on assets invested with them. 22 In the past, the
managers capital gains and losses are realized/° If guaranteed return has been 5.5 percent; however, thisassets have declined in value, then changing money was lowered to 4.5 percent in April 1994. Since assets
managers results in the realization of these losses are valued at book, reported rates of return to life(Securities Industry Association, 1994!. The effect is to insurance companies can be altered by selling assets that
require a plan that holds securities which have declined have gained or lost value. 2a In general, all Japanesein value to "hook" losses that it would not have to insurance companies have paid the same dividend
recognize if it retained its current manager. The use of (Murakami, 1991b). 24book values as the normal accounting method tends to While trust banks may establish individual
"::_ conceal actual investment performance and makes it pension accounts, these individual accounts are often/
more difficult for discretionary investment advisors to invested in jointly managed funds. 2s Thus, in practice,
compete for business based on superior investment the pension fund has a proportion of the trust bank's
perlbrmance (American Chamber of Commerce in Japan, total investment fund, which is similar to the funds1994; The Ecottomist, 1991b). _1 found in life insurance companies. In 1993, 43.0 percent
of the assets in trust banks was invested in domestic
Account m anagenlent bonds and 12.2 percent in loans (chart 7).
Life insurance companies typically do not manage :.... Japanesepension funds in separate accounts. Instead, funds are pension timdscommingled with other accounts and invested according maintain
to balanced fund restrictions imposed by the Ministry of substantiallyFinance. Each pension account owns a portion of the different
total portfolio (Murakami, 1991b). When a pension plan investment
seeks to change money managers, the life insurance ": portfblios
"co Biaaeo ¢1991, (*rA,tics t/left l/ze zero.o/ fuude t,aIm' i,s am. of'the primary of retarr_ o/'5.;J t)ercer*t, plan admitKstratars tend to sell as,sets ta realize
ine/_}cier_cws i*_ the petl.slotl tlli'estlta.nt marteet, eal)it(_{ g_tit_n e_en if this tends to sacrifice the possibility of fl*rther aceitmul(_tzoa o/'uarealized gait_s on stocks. Bianeo (1991) c(mcludes that "portfbli_
2I Comparatit,e irwesttaeltt lu'r/brmam'c data ale m_t readily acazlable i*_ rnana_er.s are deliberately sabordi_lating their inc, estrnent deeision.s to saris/};Japan (Ez._erzstodt. 1992: The t,;commzi._l. 19&gJ Thu._, tadaj' it u,ozzld be occ_zmtir_g m_les _lzul mmms."
dif/h:ult fbr plan admlalstrc_t,ms to make per/brmatlce a de/})ting c'omt)anent af:?4 Etseastodt (1992_ reports that all 2I lifo insurance companies tkat manage
the selection o[a mo_wv massager l)enm(m asset,_ reported a 6.4 pereel_t rettlrrt for tile. yec_r elldlw2 lllrarcll 31,
22 Niwat(_ (199,']) de._crl_Jes the Vl)eratirmal effects of usizlg haole t,alues arid 1992
hole Ii]_' itlSltV(ltlet' cotal_atll_'S aft' a_lt? to o[_-sel law ittuesttrzettt performance itl "),5•. "g_ alia )'city u'it]l lgtllt'ttllZ_,¢l £(tizl_ f}'(mz pret,ious years ill order to t_lalllt{l[a a - _;iac'e [)ell._lgltl/}tll(_s are ill separate czeeounts, tlle tYlg.%'tb(lllkS (tt'e c1_a
._._j_ ,stable retur_ credited to the t_e_mor_ [}_mls they raam_.ge, tie _;gues that hfi, di.scutca_ttc_ge relat_ce to lifo insurance companies in malntaint_lld investmentillglgl'(ll_('t' eollllJaIties are beth,r able Ill use this t)rocedllre lhaa trl_st [)anl_s. retlzr_ls l_l declillta£, marteet.s. The life irzsuranee camparzies Chill ]_lOl'eeasily
._eIl assets with urzrealized gains from their si_gle portfi)lia,s (ma_LV of these
e,¢ 1)aiwa (1.9_92_descrd_e_ hou' the use .f hoolc _,alue tr_ ctetermmt_N rates _)/' i_lt'e,_tmetlt portfidi..s predate the t)easio_z tdarzs, tharl east the trust berths (The
returtz alters pl{tt* m_trmcJer._" d,'ei._z(ms. In ar_ e/y}_rt to {,ehicce the t¢irRet rc_tc tG,m,m_ist, ig_JIh; Eia, nstodt, 1992L
October 1994 • EBRI Special Repo_7 13
than those held by U.S. pelisi_m tilnds. Frank Russell rates of return to Japanese stocks between 1953 and
Japan estimates that, ain.ng Russell clients in the 1992 was 18.6 percent, while the return to JapaneseUnited States, 58.9 perc_'nt of assets are held in equities, bonds fl'om 1966 to 1992 was only 8.2 percent. In com-
28.9 percent m fixed assels. 7.1 percent in real estate, parison, the return to cash holdings between 1930 and
1.3 percent m cash, and 3.H percent in other assets. In 1992 was 6.2 percent. Ten-year moving averages of thesesharp contrast, Russell estimates that the assets of returns were 17,9 percent, 8.4 percent, and 6.5 percentall Employees' Pension Funds, those held by respectively. 29 Since 1966, annual returns for stocks
insurance companies, trust banks, and discretion- exceeded those for bonds 74 percent of the time. For
ary advisors, are alloeated 15.0 pereent to equities, rolling 10-year periods during this period, stock returns
74 percent to fixed income investments, 7 percent exceeded bond returns 100 percent of the time. :_°
in cash, and 4 percent in other assets 2_5(Repeta, The implications of these data are clear. Govern-1994). Data sh<>wthat in 1993 Employee Pension Funds ment regulations that restrict investment choices of
managed by trust banks had 26.3 percent of'assets in pension fund managers by requiring a high percentage of'equity, 55.2 percent in fixed income, 16 percent in the portfolio to be held in bonds and other fixed assets
foreign securities, and 2.5 percent in other assets. These and which prevent plans Dom hiring specialized man-
asset allocations rel]ect the regulations of the Ministry of gers will tend to lower the rate of return to the pension -Finance and the consequent conservative investment fund.
choices of Japanese plan administrators. Investment theory predicts that, if binding,Japanese asset allocations also dif'tier substan- these types of regulations on asset allocation, lack of
tially from those of U.K. m_d Canadian pension plans, mark-to-market accounting and performance data, and
Pension plans in the United Kingdom are estimated to restrictions on selection of fund managers will tend tohold 62 percent of ass_,ts in equity, 29 percent in fixed yield lower returns to Japanese pension funds. Invest-
income, 7 percent in real estate, and 4 percent in cash ment practices in lhe United States and other developed
and other assets. 27 (?anadian plans are estimated to hold countries permit much greater flexibility and eompeti-53 percent of assets i,, equity, 38 percent in fixed income, tion in the investment of private pension funds. As a
3 percent in real estate, and 6 percent in cash and other result, the rates of return to pension funds in these
assets. % countries would be expected to be higher than those inThe much larger holdings of fixed assets can be Japan.
expected to yield lower rates of return among Japanese To illustrate possible impacts of portfolio alloca-pension funds. A report by l:rank Russell Japan Co., Ltd. tions in ,Japan, rates of return to pension funds in the
{1993) provides a comprehensive analysis of returns to United States and Japan are examined (chart 1). Infer-
stocks and bonds in ,lapan and illustrates the effect of mation concerning rates of return for Employees'
alternative asset allocation choices. The nominal annual Pension Funds in Japan were provided by The Pension
Fund Association IKawamura, 1994). Data fbr the tions. Terada / [994) states that it is generally believedUnited States are for single-employer defined benefit that a one percent increase in the rate of return to
plans and are based on the Employee Benefit Research pension funds lowers required contributions by
Institute Quarter(v Pel_._'i(mInve._tmelzt Report. They 20 percent.
indicate that rates of return to defined benefit pensions Because the regulations currently in effectin the United States have been considerably higher than generally are believed to adversely affect pension invest-
those to the Employees' Pension Funds in Japan. 31The ments, sponsors &pension funds in Japan support
gap in rates of return between pension Funds in the deregulation of investment decisions tTerada, 1994). TheUnited States and those in Japan reflects, at least Ministry of Health and Welfare, which oversees the
partially, the impact of financial market regulations Employees' Pension Fund system, also supports changesalong with asset allocation decisions in ,Japan. in many of the investment regulations that limit the
The Wyatt Company (1994) reports rates of efficient management of pension funds (The Economist,
return to pension funds tbra series of countries for 1989_.
1991-1993. During this period, pension funds in the
' United States are reported to have achieved average The Japaneseannual returns of 14.8 percent, compared with government
1.8 percent tbr pension funds in Japan. 39 Average has imposed areturns fin" other countries reported by Wyatt were ;:_: series of
21.9 percent for the United Kingdom, 16.3 percent tbr regulationsAustralia, 15.5 percent tbr (",anada, 14.0 percent for ' :' , _ : that limit theSpain, :_:land 11.7 percent for Switzerland. :_4 types of
The importance of rates of return on invested investment firms that can manage pension funds,
assets to pension contributions is shown by Ezra (1989). restrict investment options available to pension fund
He shows that, with an annual rate of return of managers, and impede competition in pension manage-
8 percent, over 8(1percent of each benefit dollar is ment services. Examination of pension data reveal threeattributable to investment retm'ns, while only 20 percent important observations: a large majority of pension
of benefit payments are from direct contributions, fhnds are managed by a relatively small number of
Higher rates of return further lower the percentage fi'om Japanese trust banks and life insurance companies,
contributions, while lower returns result in a higher which generally are not selected based on per/brmance;proportion of each benefit dollar coming from contribu- pension funds in Japan are more heavily weighted
toward bonds and loans than U.S. pension funds; and
rates of return to Japanese pension funds have beenal Between198'5..... t 19,q2.ttwret,,r'n,_t,,xirff4h'emtd<,3'erdefinedc(mtri_uti<m much lower than those in the United States and other
plans and multwmld,,v,'r Ida_._ h* the United Stale.s cd.vo exceeded tfw raze ,g' developed countries.return to the l&wd_J_cc._' t_cnm.n Ftolds *rl el,er3' .v(,c_r <_cet)[ /br 1990
(EmployeeH,'rwfitRc._ea,chln._tituh'.199.lL Available data do not permit formal statis-tical tests of the impact of the governmental
regulations on the portfolio decisions of plan.'_3 [?,,tz_rlls /i. Np_tltl (tr_' Ilt_tth'd t. 1999 199&
--_ sponsors or ultimately on the rate of return to
;,4 (',,,,l],uv, t,q r(,h'.s ,,tvclt,,',l g,, t,,'tt.siotz [i,,tds Ucvo.s.v coutlt,l,',_ l.v ('(,,,l[)[[¢cl[e(] assets in Japanese pension funds. However, invest-h_' (!xl'/IctltA*e t'_Ttt' [lzzctllcttl_ltl,s l/ rclh'._ (zvt' tsre,_enh::d _l ct ,_ilt*,_[_' c'uvrencv.
Be ......... i. ,'(wh cou,ltr 3 th,, hull _qp,wsi_m assets arc itlce._ted i,1 the (bm_e.sti¢ ment theory and available data support the
,,tar_eel, pres,'nti,zg rcturns i,_ ttw currcn(-y (,i'(>_('h c(_untrs,, as it_ th(' (d,_'(, text conclusion that the government restrictions on(tlld ill (']l(ll'[ 1. ])l'('X('lltS HII' r/tar'eat [9l('_llFi, O/'('lltnl)arfttlt:¢' t'(:tltlTt.s'.
October 1994 • Et]Rl Special Ncl(.q 15
pension fund investments and the allocation ment advisors will be able to operate under the more
decisions of plan managers working within these lenient asset allocation rule currently applied only fbr
regulations systematically reduce rates of return new money, i.e., up to 50 percent of assets can be ill
to pension assets in Japan. Reg_alations and customs equities and 70 percent can be ill foreign assets, provided
that reduce competition among fund managers, prevent that the entire pension fund still meets the 5:3:3:2
the hiring ()t' specialized mangers, and require more investment rule.conservative asset alh)cations tend to cause lower There is no pending proposal to eliminate the
returns to pension investments. Accounting standards eight-year rule for Employees' Pension Funds to use
that employ book rather than market values, the choice discretionary investment advisors; no proposed changes
of money managers for noninvestment reasons, and the in the asset allocation rule; and no proposal to allow Taxlack of information concerning the investment perfor- Qualified Pensions and the PWSPC to employ discretion-
mance of various money managers also tend to affect the ary investment advisors. With respect to public pensionreturns to pension funds in Japan. plans, while the Ministry of Health and Welfare would
There is limited movement toward removing like to increase the amount of public pension plan assets
some of the restrictions on investment of pension assets, that can be invested by PWSPC and to permit PWSPC toIn June 1993, the Ministry of' Finance announced its hire discretionary investment advisors to manage those
intention to eliminate the old money/new money distine- assets, the Ministry of Finance is expected to oppose
thin on the use of discretionary investment advisors by such changes.Employees' Pension Funds. Initially, the bill was to be The immediate prospect for fundamental
considered by the Diet earlier in 1994 and, if passed, the changes of policies governing the investment of Japaneserule would have been eliminated effective in October" pension funds is quite limited. Only a few proposals are
1994. There has been no action to date on this legisla- now being considered. Without such changes, pension
lion; however', current expectations are that the bill will funds will continue to operate under severe restrictions
be considered this fall and have an implementation date that limit their opportunities for higher returns. Ulti-
of early 1995. matety, this will require higher employer or employee
If the old money/new money distinction is contributions, or both, to support future retirementeliminated, it is anticipated that discretionary invest- benefits.
1(i 5R-26 • EBRI Sp_,cialRepoJ_
..: .... ; :: :: :; i::.-:,4!:_ : Frank Russell ,Japan Co., Ltd. Japan Capital Market: History: 1992. Tokyo: Frank Russell Japan Co., Ltd.,
: :.._!,_;__.,oS:--:_-'_g %' Iwabuchi, Katsuyoshi, "Overview: Social Security Today
!!:: i :_il: and Tomorrow." Economic Eve: A Quarterly Digest of
JETRO. An Introduction to the Pension Welfare Service
Public Corporation. Tokyo: JETRO, n.d.American Chamber of Commerce in Japan. Investment
Management Subcommittee. "The Investment Man- Kawamura, Hiroumi. "Deregulation of the Employees'Pension Fund: For the Benefit of the Japaneseagement Industry in Japan." Unpublished report.
Tokyo, May 1994. Pension Beneficiaries." Unpublished data. ThePension Fund Association, 1994.Bianco, Ernest. "Time to Free Up Those Funds." Global
Irwestmct_t Manageme_t (1991): 36-38. Martin, Linda."The Graying of Japan," Population
Clark, Robert. Retirement Systems in Japan. Homewood, Bulletin. Vol. 44, no. 2 (1989).IL: Irwin, 1991. Ministry of Health and Welfare. Latest Demographic
Clark, Robert and Naohiro Ogawa. "Employment Tenure Statistics, Tokyo: Institute of Population Problems,and Earnings Profiles in Japan and the United States: 1993.Comment." American Economic Review. Vol. 82 . Pensions at a Glance. Tokyo: Social Insurance
(1992_): 336-345. Research Institute, 1994.
" The Effects of Mandatory Retirement on Mulvihill, Donald. "Contracted Assets of Foreign Corn-
Earnings Profiles in Japan." Industrial and Labor petitors: September 1992." Unpublished data.Relations Review. V_I. 45 11992b): 258-266. Goldman Sachs Asset Management Japan Limited,
" Human Resom'ce Policies and Older Workers 1994.
in Japan." Unpublished paper. North Carolina State Murakami, Kiyoshi. "Critical Issue Is Seldom Discussed:
University, 1994. Extending State Pension Coverage to All." IBISDaiwa International Capital Management Co., Ltd. The Review (1991a): 5-6.
Pension Fund in Japan. Tokyo. Daiwa International . Retirement Benefits and Pension Plans in
Capital Management Co., Ltd., 1992. Japan. Business Series No. 135. Tokyo: SophiaThe Econonfist. "Taking the Lid Oif Japan's Pensions' University, 1991b.
Pot." The Economist. 4 February 1989, 73-74. Murdo, Pat. "Japan's Social Security Reforms Target
__ . "Foreigners Wait fi)r the Goodies." The Econo- Equity, Solvency Issues." Japan Economic Institutemist. 8 June 1991a, 80-81. Report. No. 32A, 27 August 1993.
, "'Book 'era." The Ec(momist. 9 November 1991b, Niwata, Noriaki. Insurance Principles and Praetice in92-94. Japan. Tokyo:
The Insurance Institute of the Keio University, 1993." 1 SEisenstodt, Gate. Treme _dou_ly Flawed." Forbes. 17
August 1992, 45-46. Ogawa, Naohiro. "Impact of Changes in Population and
Employee Benefit Research Institute. "Annual Private Household Structure upon the Allocation of Medical.::. Trusteed Plan Rates of Return, by Plan Type." Unpub- Resources in Japan." Japan and the World Economy.
lished data. Vol. 5 (1993): 137-156.
Ezra, Don. 'Retm n.a Supply the Bulk of Beneiit Dollars." Ogawa, Naohiro, et al. Medics! Analysis Based on thePensions & lnuestm(,t_t,_. 18 September 1989. Integrated Model/bra Low-Fertility Society. Tokyo:
Octvber 1994 • EBR[ .'_pecialRcl)ort 1 7
Nihon lh_iversitv Population Research Institute, Social Insurance Agency. Outline of Social b_surance it_1993. Japan. Tokyo: Ministry of Health and Welfitre, 1993.
Tokyo: Pensmn Fund Association, 1993a. Fund System." NRI Quarterly (Summer 1992).
• "Public Pension Schemes and Corporate Terada, Noboru. "The Current State of Management of
Pension Schemes in Japan." Paper presented to 9th Pension Funds, and Tasks Facing It: The Need for
International Meeting of Insolvency insurers, Tokyo, Further Deregulation." CaMRI Speech 3. March 7,
199'3b. 1994.
Public Pension Welfare Service Public Corporation. The Watanabe, Noriyasu. "Private Pension Plans in Japan."
P_btie Pet_siot_ Wetfilre Ser_,icc Pzzblic Corporatiot_. Paper presented at conference, Securing Employer-
Tokyo: Public Pension Welfare Service Public Corpo- Based Pensions: An International Perspective. The
ration, 199;{. Wharton School, University of Pennsylvania, Phitadel-
Repeta, Lawrence. Letter to Robert Clark, Tokyo. 1994. phia, PA 1994.
Securities Industry Association. The Japatzese lm_est- The Wyatt Company. A SummaO, of Wyatt's Szzrveys otztt_'lzt Matzagemettt Market: Issues Forcing U.S. the 1993 Investment Performance of Retirement Fund
Seezzrities Firttzs. New York, NY: Secm-ities Industry Assets in Major I'I,})rld Markets. Washington, DC: The
Association, 1994• Wyatt Company, 1994.
1 8 SR-26 • EBR[ Special Report
This _'_'f)eciolReport was written by EBRI Fellow Robert L. Clark, professor, College ofManagement, North Carolina State University and prepared by the Employee Benefitlh'search Institute.
This Specie! Report was made possible, in part, by funding from The Investment
Company Institute and the European Federation of Investment Funds and Companies.
The Ilwestment Company Institute is the national association of the U.S. ilwestment
company industry. Its mutual fund members have assets of'about $2.071 trillion, accountingfbr approximately 95 percent of total industry assets. Many of its investment advisermembers provide advice to both investment companies and other clients.
The European Federation of Investment Funds and Companies (EFIFC) represents theinvestment fund industry of the 12 member states of the European Union, as well as that of
Austria, Sweden, and Switzerland. As of March 1994, the federation represented more than10,200 thnds with net assets of about 1,200 bio EU.
Special Note
Initial drafts of'this paper were written while Clark was a visiting research scholar at
Ni hon University Population Research Institute, July 1994. Professor Clark wishes to
thank the following persons for providing important information concerning public andprivate pension policies and practices in Japan: Junichi Sakamoto and Hiroshi
Yamabana of the Pension Bureau, Ministry of Health and Welfare; Hideo Ibe, presi-
dent, Research Institute for Policies on Aging; Donald Mulvihill, chief operating oflleer,
Goldman Sachs Asset Management Japan Limited; Lawrence Repeta, president, Frank
Russell ,Japan Co. Ltd.; Naohiro Ogawa, deputy director, Nihon University PopulationResearch Institute; Kiyoshi Murakami, advisor, Nippon Dantai Life Insurance Com-
pany; Osamu Kido, executive managing director, Pension Fund Association; Tadashi
Nakada, director, Actuarial Division, Pension Fund Association; Tsuneo Inoue, generalmanager of Investment Research Department, Pension Fund Association; and HiroumiKawamm'a, general manager, Pension Investment Department, Pension Fund Associa-
tion. The conclusions expressed in the paper concerning the current status of pension
Funds in Japan and the effect of government regulations on the investment performanceof pensim_ thnds are solely the authors unless specifically attributed to individuals.
October 1¢._5_.Io h't¢tU,Speciall_:'poH 19
EBRIEMPLOYEE
BENEFIT
RESEARCH
INSTITUTE_,
research organization based m Washington, DC. Established in 1978, EBRI provides educa-tional and research materials to employers, employees, retired workers, public officials,
: "" : .... members of the press, academics, and the general public. The Employee Benefit Research
• ' and research organization established by EBRI in 1979. EBRI-ERF produces and distributes
:_-.::_ : :v:..: ,;_-:., a wide range of educational publications concerning health, welfare, and retirement policies.
_5:_ :_,: _-:(-_g_-::;J_:_i:)'i!_!_:i Through its books, policy forums, and monthly subscription service, EBRI-ERF contributes to_i-_--_:., . _..._._ the formulation of effective and responsible health, welfare, and retirement policies. EBRI:_:._. :, .:... and EBRI-ERF have and seek a broad base of support among interested individuals and
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_:_?e_:_:-,_:_,z,._:::_:- EBRI Issue Briefs provide expert evaluations of employee benefit issues and trends, as well--,_._;_:;<'_--,,_-_."_-,.- critical analyses of employee benefit policies and proposals. EBRI Notes provides up-to-
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updates on major developments in Washington in employee benefits.
'. :" " - EBRI also publishes EBRI/Gallup public opinion surveys, special reports, studies, and books.
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