<<Japan Inc contemplates A$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
(A$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. >> |
