Section 3. Other Activities Surrounding the Pension System

(1) Current conditions of the employees' pension fund system

The employees' pension fund system, which is the core of the corporate pension, was established in 1966 to substitute a part of old-age pension benefit service of the Employees' Pension Insurance by the Government and to aim the security of generous financial support in retirement life of employees by offering higher pension benefits than the government's standard. Since the establishment, it had developed steadily along with good economic growth and it has been playing an important role of supplementing the public pension. At the end of March 1998, the number of subscribers was about 12.25 million people with the estimated balance of the fund amounting \49 trillion. However, after the recent collapse of the bubble economy, some EPFs are suffering from bad financial conditions with the worsened investment environment, and the number of dissolved EPFs is increasing. In 2000 a new corporate accounting standard will be introduced for the corporate pension and retirement fund, and the debt will be reflected on the accounting of the parent companies, but the parent companies are concerned about possible impact on the corporate ranking as a result of the accounting status, and this concern is likely to affect the corporate pension in some ways. Thus, the environment surrounding the system is changing drastically with the changes in the social and economical environment, diversification of the size and the ratio of beneficiaries to insured people of the fund, etc., and it is now required to revise the system to flexibly respond to changes based on the self-support mechanism of the fund.

(2) Introduction of the defined contribution pension system

Currently, corporate pensions in Japan such as employees' pension funds (EPF) are using the mechanism to pre-determine the benefit amount based on the subscription period and the standard of benefit (defined benefit type), but there is another mechanism (defined contribution type) for consideration in which the benefit is determined based on the sum of the contributions and the profit earned through the management of the contributed fund.

With the defined contribution pension system, the amount of benefit is determined after defining the contribution and the performance of fund utilization, and the companies do not need to bear additional burden in the future. Because the share of individuals is clear, it is easy to transfer one's own share when changing the job (portability). On the other hand, it has been pointed out that the weakness of this system is that it creates uncertainty to the plan for post-retirement life because the benefit amount is not defined in advance.

In preparation for the aged society in the 21st Century, it is necessary to develop a system to assist self-supporting efforts with the foundation of the public pension, and the introduction of the defined contribution type pension is needed to be included in part of the system. In January 1999, four related ministries, Health and Welfare, Finance, International Trade and Industry, and Labor, formed the "Committee for the Preparation of the Defined Contribution Pension System", and the details of the system has been discussed to take specific measures in preparation for the introduction of the system in fiscal 2000 as part of the pension system.

For the corporate pension system containing various independent systems such as employees' pension funds and the tax-qualified pension plans, it is considered necessary to establish a common standard for the future, and related ministries and government agencies are discussing for the formulation of an inclusive basic law on corporate pension (the Basic Law on the Corporate Pension).

(3) Reviewing the regulation on pension fund management

Regulations on pension fund management have been eased for a few times previously in accordance with the changes in economic and financial environments. So-called 5-3-3-2 regulation (Regulation stipulating the investment rule of 50% or more principal guaranteed asset, 30% or less domestic stocks, 30% or less asset in foreign currency, and 20% or less fixed property) was abolished in 1997, and the regulation on the investment expansion (Regulation on the ratio of investment allowed through investment advisory companies) was abolished in 1999. In addition to these actions, many regulations on fund management will be removed with the measures taken with the current revision of the system. It is planned to formulate guidelines to clearly and specifically define the role and responsibilities of the people involved in fund management with the same contents for the fiduciary requirement (fiduciary duty and duty of care) in the Prudent-man Rule ("the principle of prudent people". A standard of investment actions that the people involved in the management of corporate pension should take. People involved in the management of pension fund are required to act in the same manner as a prudent expert for the task, and to apply the care, skills, diligence that such expert would apply.) used in the U.S. and in Europe. The concept of self-responsibility of fund will also be enforced thoroughly through propagation of the guidelines.

2. Internationalization of Pension

(1) Need for internationalization of the pension system

With the progress of internationalization, the population of the Japanese people living in foreign countries and foreigners living in Japan are increasing, and there have been some problems with the pension system as Japanese insured people sent to overseas on a temporary assignment must subscribe both the Japanese pension and the pension of the assigned country and pay a double premium, or when they subscribe the pension of the assigned country, they cannot receive the benefit.

In order to resolve these problems and to respond to the internationalization, we must take actions to change the system so that the insured people sent on a temporary overseas assignment can subscribe either one of the pension systems in the two countries, or that the subscribers can receive the benefit from both countries in accordance with the subscription period in each country in the case when the total subscription period of both countries reaches the minimum required period. To realize such changes, we must conclude bilateral agreements with concerned countries.

(2) Current status of the effort

In order to conclude such bilateral agreements with foreign nations, Japan has relatively active personal exchange with Germany, the United Kingdom, and the United States to discuss on this issue.

1 Germany

With Germany, the discussion between the two governments began in September 1995, and in April 1998, after eight meetings Japan signed its first pension transfer agreement, the "Agreement between Japan and the Federal Republic of Germany on Social Security", and it was approved in the Diet on May 21, 1998. After the national assembly in Germany approves the agreement, Japan and Germany will exchange and issue the instruments of ratification. In addition, the "Law on special treatments concerning the Employees' Pension Insurance Law and other similar laws and other arrangements for the Implementation of the Agreement between Japan and the Federal Republic of Germany on Social Security" was established on May 19, 1998, which stipulates required exemption measures to various laws on the public pension system such as the Employees' Pension Insurance Law to implement the agreement. This law will be enacted upon the issuance of the agreement.

2 The United Kingdom

With the United Kingdom, an agreement to commence the negotiation on the pension treaty to prevent the double payment in the two countries was reached in December 1997 upon Japan's proposal to begin the negotiation, and after the preliminary discussions between governments in February 1998, the negotiation to reach the agreement began in November 1998. Currently, the negotiation is in progress for early conclusion of the agreement between the two nations.

3 The United States

With the United States, a preliminary meeting was held in May 1996, and both Japan and the United States are undergoing the preparation for starting the discussions between the two governments.

In addition to these three nations indicated above, Belgium, the Netherlands, South Korea, Canada, Italy, France and Luxembourg have requested Japan for the negotiation on the issue of bilateral agreement on the pension system. In order to make the pension system to fit the international age, the Ministry of Health and Welfare is planning to exchange information with the Ministry of Foreign Affairs and relevant ministries and government agencies, and to take actions toward the conclusion of the pension agreements, particularly with the nations with active personal exchanges.