Henry, Clark,
Some corroborating data re: concerns about the Japanese pension system, from AFR in Australia, coincidentally just posted by Joe Flood on LongWaves ...
fyi, note the $ are Australian $, so the shortfall in USD is $450B, not $750B, but that's still a fair piece of change ...
afr.com.au
Japan Inc contemplates $750bn
pensions black hole
By Tony Boyd, Tokyo
A little-known financial black hole in the balance sheet of Japan Inc is
now estimated to have grown to 60 trillion yen ($750 billion), almost
rivalling in magnitude the bad loan problem of the nation's banks.
The black hole, which takes the form of unfunded defined benefit
pensions promised by corporate Japan, poses a risk to investors and will
likely be the trigger that strips Japan of its triple-A sovereign credit
rating within the next month.
Although the unfunded liabilities are private, ratings agency Moody's
Investors Service believes the problem is so huge that it may be treated
as a contingent claim on the Japanese Government.
Japan's most respected pension industry analyst, Mr Shinji Watanabe of
Nikko Research, has told The Australian Financial Review that the size
of the problem is now 60 trillion.
Japan's Ministry of Health and Welfare says it is only 1.2 trillion but
that is based on a series of unrealistic assumptions including 5.5 per
cent investment returns and 5 per cent economic growth.
"Unfunded pension liabilities are Japan's second bad loan problem," Mr
Watanabe said.
The Government's estimates of the size of the problem have been shown to
be wildly optimistic by the disclosure of Japanese companies with
American Depositary Receipts which are forced to adopt US accounting
standard FAS 87.
Under the US Financial Accounting Standards Board's FAS 87 standard,
companies must reveal in their accounts the actuarial present value of
pension obligations, the accumulated benefit obligation, the projected
benefit obligation and the fair market value of plan assets at balance
date.
A study by Nikko Research Centre this year of the Japanese companies
with ADR programs shows that all 23 companies have inadequate assets to
cover their projected benefit obligations.
The shortfall of assets over liabilities was 3.9 trillion at March 31
and for some companies the level of unfunded liabilities was equal to
more than their net worth.
For example, Mitsubishi Electric, which is ranked as one of the top 100
companies in the world by revenue, has unfunded liabilities of 676
billion. That is more than its net worth.
As a percentage of shareholders' equity, the shortfall in pension
reserves averaged 23.8 per cent for the 23 companies. According to
Nomura Research Institute, that represents a major risk factor for
management and investors alike.
Japanese companies will not be obliged to reveal their retirement income
liabilities until fiscal year 2000. Mr Watanabe said the shortfall in
assets to cover pension liabilities was growing as more and more
companies cut the assumed annual rates of return on their pension assets
to more realistic levels.
Mr Masao Tamura, a certified pension actuary with Nomura Research
Institute, said that while it was prudent to cut the expected rate of
return, this pushed up the projected benefit obligations.
He said that each 1 per cent cut in the expected rate of return
increased the projected benefit obligation by about 20 per cent, which
in turn pushed up the shortfall on plan assets.
As well as cutting their assumed rates of investment return on pension
benefits, Japanese companies are cutting the total level of pension
benefits paid.
This year Sumitomo Chemical, Hitachi, Nissan Motor, Nippon Steel and
Kawasaki Steel all cut their pension benefits.
Mr Tamura, who is one of only 300 actuaries in Japan compared with 2,100
in Australia, warned that the safety net for pension fund beneficiaries
was "totally inadequate" and that there was no law which would protect
the interests of beneficiaries.
Disappearing pension benefits will only serve to exacerbate the
precautionary savings motive driving sluggish consumption in Japan,
according to Ms Kathy Matsui, equity strategist at Goldman Sachs
(Japan).
Ms Matsui said the exact size of the unfunded pension liabilities of
corporate Japan would not be known until 2000 when Japanese accounting
standards would be brought into line with the US standards.
"Obviously the smokestack industry companies will be the most vulnerable
because the average age of employees is much higher and they will have a
much higher liability," she said. "So far we have only seen the tip of
the iceberg."
Japan's corporate pension fund market consists primarily of two types of
corporate pension plans: employee pension funds and tax qualified
pension plans.
EPFs number about 1,800 and cover 12 million workers while TQPP number
about 92,000 and cover 11 million workers. Both of these plans are
defined benefit schemes that qualify for certain tax exemptions covering
their earnings and their payouts.
Private pension plans are expected to grow in importance and popularity
because of the crisis in the public pension system caused by the rapidly
aging population.
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