U.S. Insurers See Long-Term Promise In Japan's 401(k) Market
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Excitement was tinged with skepticism last month when financial services companies in Japan received the news that the countrys upper house had passed a bill to introduce 401(k)-type defined-contribution pension plans starting in October.
Pension managers are excited because the pie is huge. Japan, the world's second-largest economy, has a potential DC market estimated at $402 billion.
According to a recent report by Japans ministry of finance, the government introduced a new pension system because the current public pension system is about 25% underfunded. The skepticism of financial services companies arose because although the need for a private pension fund is desperate, the Japanese government has yet to figure out ways to put a new system on track.
Recently the government decided to dissolve Postal Life Insurance Welfare Corp. by 2003. It will start a new public corporation to take over the postal services life insurance business.
Meanwhile, the government is literally running out of public money to plug a hole in the countrys retirement savings. After 10 years of economic recession, ever-rising fiscal spending, together with social welfare costs, has left the country with debt of more than 130% of gross domestic product.
Although the government says it will reduce public works projects, rising unemployment will in turn increase unemployment claims. Additionally, 17% of Japan's population is 65 years old and over, according to the 2000 World Factbook published by the Central Intelligence Agency of the U.S. And the Japanese live longer than any population in advanced countries. All these factors have stymied attempts to reform the pension system.
As far as DC pension plans go, economic woes, coupled with demographic changes, are expected to drag tax-protected contributions below levels attractive to investors.
"The adoption of DC pension plans is slower than anticipated," says Ben Philips, managing director, Cerulli Associates, London, in a telephone interview with National Underwriter. The reason, he says, is that "tax incentives on contributions to Japanese pension plans are not great."
While the government may feel the need to bolster the Japanese stock market, which is at a 16-year low, by funneling private funds into it, Philips says, "with tax revenues at an all-time low, the government has to be careful about the type of tax break it will have to provide."
