(1) Formulation of a Comprehensive Basic Law Relating to Corporate Pensions
The deregulation plan (third revision) approved by the Cabinet in March contained not only deregulatory measures for corporate pensions, but also instructed the Ministries of Finance, Health and Welfare, and Labor to begin the groundwork for formulating a "Comprehensive Basic Law Relating to Corporate Pensions."
In addition to the major corporate pension systems such as the National Welfare Pension (Kosei Nenkin) and qualified pension system, Japan has other systems that serve similar functions, such as the mutual fund union for small and mid-sized companies and designated mutual fund union. These systems are independent of each other−they are derived from different laws and overseen by different regulatory agencies. Companies can also operate their own inhouse pension plans.
Establishment of the corporate pension basic law is extremely significant in that it will cut across all the corporate pension systems and revise them from a functional standpoint. Besides defining the tax treatment and respective roles of public pensions, corporate pensions, and annuities, the law should clarify the minimum requirements of these various systems to protect participants in corporate pensions. Further study should also be made on ensuring the portability of pensions when employees change jobs and need to rollover the accrued benefits.
(2) Protection of Participant Benefits Under ERISA in the U.S.
For comparison, we look at laws relating to the corporate pension system in the U.S. In addition to tax benefits and regulations, there is a law known as ERISA (Employee Retirement Income Security Act of 1974) that comprehensively regulates corporate pensions. The law protects the benefits of participants in corporate pensions in the following ways:
- Rights earned by employees based on years of service cannot be taken away.
- There is a minimum requirement for funding corresponding to the accrued benefits.
- A pension benefit guarantee corporation is set up to help participants in case of plan termination due to insufficient funding.
- Financial and other information must be released and reported to participants and supervisory agencies.
- Standards are established regarding the duties and responsibilities of the fiduciary.
- Procedures are provided for helping participants and prosecuting violators (including governmental supervision and corrective measures).
The first three are substantive stipulations relating to participants' rights, and mutually interrelated. The latter three are the means by which these rights are realized. Let us look more closely at the rights mentioned above earned through length of service.
- Employees who are either at least 21 years old or have one year of service are eligible to join the pension plan.
- After joining, the right to receive a pension payment upon retirement accumulates every year. A certain limit is applied to the preference to long-term service.
- Once acquired, rights cannot be revoked after five years (or become established at 20% per year from the third year, becoming fully irrevocable in the eighth year).
By stipulating that participants are vested with benefit rights early, ERISA provides the basis for an overall framework to protect participants' benefits. While this protection derives from a social consensus that corporate pension payments are nothing more than deferred salary payments, the law is nonetheless instructive as a legal measure to protect participants.
(3) Japanese Laws Related to Retirement Plans
In Japan, corporate pension plans have generally replaced retirement payments, and many companies use both a lump-sum payment prepared by the company together with a corporate pension contribution from elsewhere (often for the lump-sum payment as well). Thus any consideration of corporate pensions needs to be broad enough to encompass all severance payments.
If severance payments (both lump-sum and pension) and their standards are stipulated in labor agreements or employment rules, employers have a legal responsibility to pay the severance payment. In addition, any changes in the employment rules that are disadvantageous must be "reasonable." However, severance pay becomes vested only upon severance, and not sooner. Also, since it has characteristics of being both a payment of deferred wages as well as a reward for service, the amount varies depending on whether the company or employee initiates the separation, and may be reduced if it is a disciplinary action or the employee is hired by a competitor.
A 1976 law to ensure the payment of wages calls on employers who have a severance payment plan to take measures to preserve a fixed amount of severance pay (with a payment bond from a financial institution, or by setting up a retirement allowance preservation committee), unless they have funds outside the company for the welfare pension or other fund. In addition, the law says that if a company goes bankrupt, the state will step in and pay part of the unpaid wages including severance pay.
However, since the law merely urges companies to comply, the level of preparedness is thought to be insufficient at companies who prepare their own severance payments and need protective measures the most. Also, the emphasis is almost entirely placed on preservation safety, with little attention paid to efficient asset management.
While the Labor Standards Law Research Committee issued a broad-ranging report in 1985 on "Problems Regarding Retirement Allowances Under the Labor Standards Law," the law's revision in 1987 merely sought clarification of items to be included in the employment rules of companies.
Since corporate pensions with funds outside the company do not qualify as wages under the Labor Standards Law, they are not protected. However, participants are protected in the various systems in terms of participation qualifications, benefit design, and preservation of pension principle (participants are protected in case the funds outside the company or the company itself go bankrupt).
(4) Clarification of Participants' Benefit Rights
Corporate pensions are essentially part of the employment terms voluntarily agreed to by labor. While pursuing deregulation, the corporate pension basic law needs to clarify the minimum conditions for corporate pensions to protect participants.
Compared to ERISA in the U.S., there is room for improvement in Japan on clarifying benefit rights, particularly the most basic right of pensions, the vesting of benefit rights at an early stage. Recently, while there has been frequent discussion on preserving and protecting benefit rights, the discussion needs to focus on the specific benefits, including severance payments, that are to be covered.
Presently, individuals who have retired and are receiving or will receive pensions (beneficiaries) cannot in principle have their benefits reduced without their consent. On the other hand, employees who are presently working (participants), including those who have become fully eligible for benefits and have a right to expect benefits, do not have clearly defined rights. The idea that the right to severance pay does not become valid until separation seems to loom in the background. Furthermore, the welfare pension fund requires procedures to have a decision issued.
For both the lump-sum and pension severance pay, since both are paid after long years of service and are critical to financial security in retirement, some form of legal protection seems warranted while employees are still working.
Beginning this fiscal year, inspections will be made to ensure asset availability in the event the welfare pension fund is terminated, while the appropriate level of preservation for individual participants has been clarified and will be protected as a vested right. While this represents a big step in the right direction, it also seems to reject the derivation of funding (preservation) duty from benefit rights.
To limit the retroactivity of disadvantageous changes in pension stipulations, and to establish the basis for participant protection measures such as the duty of funding, we should consider defining severance payments including corporate pensions as deferred wages (that are tax-deferred). Doing so would legally establish an inalienable right to expect payment corresponding to length of service. It would also heighten the awareness of participants.
While popular sentiment opposes giving severance payments to individuals who have been implicated in corruption, some companies pay the equivalent of severance pay by adding it to annual salaries. Today's increasingly fluid employment environment seems to require that the role of severance pay be refined (or that a reduction rule be formulated).
Incidentally, in line with world trends, the Deliberation Council on Corporate Accounting is studying the establishment of accounting standards that incorporate accrual standards for both lump-sum severance payments and pensions.
In drafting a corporate pension basic law, the clarification of benefit rights−that is, the early vesting of these rights−should be the starting point in examining the overall picture and integrating key components such as the preservation of these rights (funding outside the company), the establishment of a benefit guarantee system or some form of secure backing, information disclosure, fiduciary responsibility, and oversight.