A recent NHK special detailed the challenges facing the Japanese pension system. The programme stared with a discussion of the effects of the gigantic losses made by the AIJ pension fund, which recently lost around 200 billion yen, affecting 84 pension co-operatives that represent 880,000 employees.
The programme explained the AIJ scandal, its impact on the pension system and the future of pensions in Japan with a combination of classic Japanese television styrofoam mockups, colourful bits of cardboard and (very poor) animation. The producers also drafted people in to sit and represent the different socio-economic groups affected. As we can see from the following graphic, Freeters (those damn young-uns with their job hopping and such), salarymen (and women) and the elderly are all represented:
On the whole they were not allowed to smile, although this lady broke the rule. She is the only one getting any cash though so I suppose it is to be expected:
The reason for this blog post is just to check that I have followed the logic of the pension system and how the collapse of pension funds can lead to corporate bankruptcies. I think this is also a good example of how policy enacted to protect public interests can have the exact opposite effect, although a combination of reckless investment strategies on the part of some fund managers and the inherent unpredictability of the markets doesn’t help much. So without further ado…
Pension payments are made by both the company (kigyō nenkin) and the employee (jūgyō nenkin) with the idea being that the employee will be able to draw upon both in their retirement years. However, in the meantime companies can ‘borrow’ some of the employee contributions from the state to leverage their own investments, make more money and expand their businesses. This borrowed money can then be packaged up with the company contribution and invested with a pension fund such as the one managed by AIJ. Sometimes a number of small businesses will pool their pension pots in a co-operative, making the initial sum for investment greater and as such making even greater returns possible (more on this in a minute).
Ideally, the fund managers take the pension pot, invest it all over the place and return a profit. This would mean that the company could return the money they borrowed from the original employee pension payment to the state and make a tidy sum themselves. The fund managers would also get their cut. Everybody is happy, as illustrated by this graphic:
However, if for whatever reason (international financial crisis, fears over Europe, last year’s earthquake) the fund manager’s investment plans make a loss, the companies that invested in the fund would be unable to return the borrowed money to the state (the employee pension payments). In this case it is the responsibility of those companies to fill this hole using their own funds, which places them at risk of bankruptcy. But if it all goes horribly wrong and it looks like the company cannot adequately fill in the hole without going bankrupt, it can decide to close the pension fund (kaisan). If it decides to do this the borrowed employee contributions still need to be paid back, but the company contributions can be written off. This means that the employees, on retirement, will be able to collect some of their pension from the state, but not all of it. However, it is very difficult for companies to close their pension funds like this because the Ministry of Health and Welfare is keen to protect company employees’ right to draw this company pension.
Now for those co-operatives, and its here that it gets scary. Should a fund be closed another layer of complexity is added by the state’s method of reclaiming the deficit in payments caused by the initial pension fund losses. As stated above, it is usually the case that a number of companies pool their pension pots together and act as a co-operative. This co-op then has even more cash to hand over to the fund manager who is promising the big returns. But if the fund is subsequently closed due to huge losses, liability for repayment of those losses is spread out across the entire co-operative. Now the magic ingredient. If one of these companies should be unable to keep up with the repayments and go bankrupt, their debt is distributed across the remaining companies, which puts further strain on their cash flow. In this situation it becomes more likely that some of the other companies will not be able to keep up with their payments and also collapse. Their debt is then distributed to the remaining liable companies and so on. In this way the collapse of the pension fund can set off a chain reaction, which has the potential to result in multiple bankruptcies. The paradoxical result of this system, which has been designed to safeguard the state pension, is that it could lead to all the money being lost.
So that is how a pension fund run amok (or any pension fund in today’s heady financial climate) can cause corporate bankruptcies in Japan. But the main challenge to the pension scheme is still the simple fact that the baby-boomer generation is about to retire while at the same time the Japanese birth rate remains well below that needed to maintain, let alone increase, the population of young workers. The Japanese system works by taking money paid into the system by workers and giving it directly to those receiving a pension. This worked fine when there was a surplus of payments, with the state able to pass payments onto retired people, while at the same time building up a cash reserve of around 150 chō (150,000,000,000,000) yen. However now that there is a deficit, the cash reserve is being used to top up pension payments. This can only happen for a finite amount of time: when the cash reserve is gone other ways of addressing the deficit will have to be found.