Japan’s EPFs to be phased out over next ten years
21 June 2013
By Asia Asset Management
Japan’s Upper House has approved a bill proposed by the Ministry of Health, Labour and Welfare (MHLW) – the authority in charge of the social security system and private pension plans in Japan – in late April, to effectively abolish employee pension funds (EPFs), according to local media. It is set to take effect in April 2014.
According to a report from Towers Watson from April 23 this year, the MHLW had previously submitted a bill to abolish all EPFs within ten years. However, following the December 2013 general election victory of the Liberal Democratic Party, which opposed this policy, the MHLW modified the bill in April. The major contents of the proposed bill, which the Upper House has just approved, were:
EPFs whose assets fall short of the liability for contracted-out benefits (social security old-age benefits) must be dissolved within five years. At the time, 210 of the total 562 EPFs fell in this category.
Those EPFs that have more assets than liabilities for contracted-out benefits can continue, but must pass an assets test every year (assets of 1.5 times the liability for contracted-out benefits will be required). The MHLW will order EPFs failing the test to be dissolved.
No new EPFs can be established in the future.
The MHLW will encourage financially sound EPFs (approximately 10% of all EPFs) to switch to other types of pension plans.
When EPFs are dissolved, any funding shortfalls for contracted-out benefits must be made up by participating employers.
The purpose of these measures is to minimise the risk that the social security system will be adversely affected by underfunded, contracted-out EPFs.
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