As Japan's private sector pension providers increasingly transition towards direct contribution plans, employees are increasingly beginning to consider whether it's best to manage their pension savings themselves.
Individual defined contribution plans – dubbed Ideco – are starting to pick up tailwind across the Japanese society. This demand is down in large part to a growing alarm among Japanese workers that they haven’t saved enough for retirement.
In June 2019, a report from Japan’s Financial Services Agency highlighted an income savings gap of ¥20 million ($185,000) for retired couples who live until the age of 95 – or 30 years after retiring.
The government rejected the report’s findings, but the public has been up in arms and the applications for Ideco plans have surged.
After primarily attracting self-employed individuals and freelance workers, Ideco plans started to gain prominence in 2015 when the Japanese government expanded its eligibility to essentially anyone up to 60 years. That happened as a part of a tax reform scheme that made Ideco contributions tax deductible and returns tax free.
In 2017, Ideco enrolment grew 150%, and between January and May 2018 an average of 34,000-plus Ideco accounts opened each month, to surpass 1 million enrolled, according to a 2018 report by Nomura Research Institute.
Among the newly enrolled were 176,000 public employees, 96,000 corporate employees and 26,000 from various backgrounds, mostly nonworking spouses. Ideco plan participants who were corporate employed without a corporate pension plan had more than doubled since January 2017, increasing by 262,000.
Ideco enrolment rose most among people aged 40 to 60. According to the Nomura Research Institute report, these individuals contributed nearly the maximum monthly amount since they’re nearing retirement.
The Ideco contributions go into investment vehicles chosen by the contributor; they are still DC-related, such as term deposits, insurance products, or investment trusts.
Still, an increased freedom to choose investment trusts might help to foster the emergence of a business for retail asset managers, sources told AsianInvestor.
Doing so might also help Japanese workers to better manage their money when they retire.
Indeed, many corporations – 55.2% in total – give a lump-sum payment when their employees retire. Many employees like receiving a lump-sum payment upon retirement, because they end up paying lower taxation than for running pension payments, and they can be certain to get it all (as opposed to the risk of dying early).
These lump-sum payments may need to last retirees for 20 years or more. Having hands-on experience with Idecos in how to invest would be no bad thing.
This article was adapted from a feature about Japan's pension system that originally appeared in AsianInvestor's Winter 2019 edition.