U.S. Insurers See Long-Term Promise In Japan’s 401(k) Market

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Excitement was tinged with skepticism last month when financial services companies in Japan received the news that the countrys upper house had passed a bill to introduce 401(k)-type defined-contribution pension plans starting in October.

Pension managers are excited because the pie is huge. Japan, the world’s second-largest economy, has a potential DC market estimated at $402 billion.

According to a recent report by Japans ministry of finance, the government introduced a new pension system because the current public pension system is about 25% underfunded. The skepticism of financial services companies arose because although the need for a private pension fund is desperate, the Japanese government has yet to figure out ways to put a new system on track.

Recently the government decided to dissolve Postal Life Insurance Welfare Corp. by 2003. It will start a new public corporation to take over the postal services life insurance business.

Meanwhile, the government is literally running out of public money to plug a hole in the countrys retirement savings. After 10 years of economic recession, ever-rising fiscal spending, together with social welfare costs, has left the country with debt of more than 130% of gross domestic product.

Although the government says it will reduce public works projects, rising unemployment will in turn increase unemployment claims. Additionally, 17% of Japan’s population is 65 years old and over, according to the 2000 World Factbook published by the Central Intelligence Agency of the U.S. And the Japanese live longer than any population in advanced countries. All these factors have stymied attempts to reform the pension system.

As far as DC pension plans go, economic woes, coupled with demographic changes, are expected to drag tax-protected contributions below levels attractive to investors.

“The adoption of DC pension plans is slower than anticipated,” says Ben Philips, managing director, Cerulli Associates, London, in a telephone interview with National Underwriter. The reason, he says, is that “tax incentives on contributions to Japanese pension plans are not great.”

While the government may feel the need to bolster the Japanese stock market, which is at a 16-year low, by funneling private funds into it, Philips says, “with tax revenues at an all-time low, the government has to be careful about the type of tax break it will have to provide.”

All the problems, however, did not snuff out the excitement fund managers are feeling about the countrys DC market. Nomura Securities Company, Tokyo, Japans largest brokerage, is running a separate section for 401(k) plans on its Web site at www.nomura.co.jp.

Japanese life insurers are mostly out of the picture, however, beleaguered by rising insurance claims and falling investment returns. “They are interested in the DC market, but dont have the ability to build a system to go after it,” notes Philips.

International fund managers and life insurers in Japan know they face a situation that will require a long-term commitment.

International fund managers planning to tap the market think it will take 5 to 10 years to take off, but they believe Japan is strategically too important to ignore.

Principal Financial Group, Des Moines, Iowa, which is setting up a DC business in Japan using the sales network of ING Life, Japan, conducted a study of emerging DC markets worldwide about three years ago, says Larry Zimpleman, senior vice president, retirement pensions.

“In 1998, we went over 40 to 45 countries and narrowed them down to four for close scrunity, and Japan was among the four,” he says. “The joint venture with ING was launched in 2000. We are currently moving along toward making the company operational.” Principal will focus on small and medium-sized companies with 50 to 1,000 employees.

Prudential Financial, Newark, N.J., which has been actively cutting into the European fund management market, is also preparing to make inroads into Japans DC market. “We expect that Japans DC market will be a good market,” says Robert Lee, vice president of international investment at Prudential. “However, it will not happen overnight,” notes Lee, citing weak investor confidence and less-than-expected tax incentives.

“The bearish stock market, coupled with relatively low levels of tax incentives, makes people very cautious with regard to putting money into mutual funds,” explains Lee. “Our objective has been to establish a presence at the very early stage.”

The company has been running a series of seminars on 401(k) plans. And the feedback, according to Lee, has been good so far. “Our strategy up to this point has been to establish a linkage between the retirement market and Prudentials brand name,” Lee notes. “As the market grows up, Prudentials presence will grow as well.”

Principal’s Zimpleman also believes that in the long term, Japan will be an attractive market for international 401(k) companies. “The Japanese have always demonstrated a high level of savings,” he says. “The key to success in the DC market will be to turn these savers into investors.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 13, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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