Connecting Markets East & WestJapanese Pension System:
Current Status and Need for Further Reform

Nomura Institute of Capital Markets Research

Akiko Nomura
STRICTLY PRIVATE AND CONFIDENTIAL
Nomura Institute of Capital Markets Research

February 2, 2023

© NomuraJapanese pension system◼ Japanese pension system consists of the public pension system covering
everybody and various types of private pension plans.
Individual DCCorporateDCDBDB
DBP

NPF

EPF

Employees’ Pension
Insurance
Public pension system

National Pension (Basic Pension)

Non-workingspouses

Self-employed

Private employees

Public employees(Note) Gray areas are voluntary plans. DC=defined contribution, DB=defined benefit, EPF=Employees’ Pension Fund, DBP=Defined Benefit Corporate Pension,
NPF=National Pension Fund.
(Source) Ministry of Health, Labour and Welfare (MHLW), Nomura Institute of Capital Markets Research (NICMR)

1Coverage of private pension plans◼ While the importance of private pensions increases, the coverage of corporate
pension plans has not been growing sufficiently.
◼ Measures to strengthen the private pension system, especially DC plans, areneeded.
Number of private pension plan participants(million)
20DB15DC1050(Note) Not adjusted for participants in more than one plan. DC includes both corporate DC and individual DC.
(Source) MHLW, NICMR

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Basic structure of Japanese DC plans◼ Employer and employee make contributions.
◼ Employee directs investments of his/her individual account assets based on theinvestment education provided by the plan administrator.

Basic structure of DC plans (corporate type)
Employee

Employercontribution

contribution

Investment directed by employee

IndividualaccountRollover

Indiv DC(Source) NICMR

Investments

RolloverCorp DCBenefit
3How DC participants manage their assets◼ Around 60% of DC assets are in investment trusts.
◼ Supporting further investment diversification holds the key for successful asset
accumulation in DC accounts.
Corporate DC plan asset allocation

Individual DC plan asset allocation
Stand by funds,
1.2%Stand by funds,
0.6%
Deposits,
29.4%

3.7 trillion yen

17.8 trillion yen

Investment
trusts,57.9%

Deposits,
27.4%

Insurance
products,
12.0%

Investment
trusts,61.1%

Insurance
products,
10.3%(Note) March 2022
(Source) Association of DC Plan Administrators, NICMR
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Introduction of the “default funds”◼ Japanese version of “DC default fund arrangement” was introduced by Revised
DC Law and became available in 2018.
Basic features of the Japanese DC default funds
Designation• Employer can decide whether to designate the default fund for the DC plan or not.
• The default fund will be selected from the DC product lineup.

Product features• Criteria for the default funds will be stipulated in the regulation.
• The newly inserted section of the DC law includes the words such as “long term
perspective,” “price fluctuation” and “securing profits.”• Plan administrators are to select the fund based on their professional knowledge.

Disclosures toparticipants• Expected return and possible losses of the product• The reasons for designating the product• Treatment of participants without investment direction (as below)

Treatment ofparticipants without
investment direction

Plan administrator notifies participants about the default fund when they join the DC plan↓
A participant has not selected investment products after 3 months↓
Plan administrator notifies the participant about making selection↓
The participant still does not make selection after 2 weeks↓
The participant’s account assets are invested in the default fund.
The participant is regarded as having made the investment direction him/herself.

(Source) Revised DC Law, NICMR
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DC plan and the investment trust industry◼ Share of investment trust assets via DC plans has reached 12% of total assets
excluding ETFs.
◼ According to Investment Trust Association survey, 6.4% refer to DC investment asa trigger of interest in investment trusts.
Trigger of interest in investment trusts
Investment trust assets via DC plans020
40 (%)(JPY trillion)

14.0

14.0%

12.0

Assets via DC
plans (lhs)

12.0%

10.0

Share of DC planassets (rhs)

10.0%

8.0

8.0%

6.0

6.0%

4.0

4.0%

2.0

2.0%

0.0

0.0%

(Note) Share of DC investment trust assets in publicly offered investment
trusts excluding ETFs(Source) DC Plan Administrator Association, Investment Trust
Association, Japan (JITA), NICMR

Financial institution
InternetNISA
Books
Credit card points
Advertisements
YouTubeHaving spare funds
Economic and market trends
DMs
Newspapers, magazines
Friends
Family members"20 million yen for retirement" issue
Selecting investment trust in DC
Seminars
SNSGood DC investment experience
Others6.4
2.6(Note) Provisional translation by NICMR(Source) JITA, NICMR

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Implications and discussion points◼ Aging population puts pressure on the funding of pay-as-you-go public pension
system. Enhancing sustainability will have to take priority.
◼ Private pension plans will have to play a larger role in enhancing pension adequacy.
◼ As private pension plans are voluntary, how to enhance their coverage is a challenge.
◼ Defined contribution plans are more promising in terms of adoption and coverage.

◼ Employers do not promise pension benefits in DC plans and participants assume
investment risk, so it makes sense to have them decide on how to invest individual
account assets. Adequate investment education and guidance, and utilization ofdefault funds may hold the key.
◼ Individuals can gain experience in long term diversified investments via DC plans,
which will have significant implications on their savings. It will also lead to anincrease in capital market participants.

7• Established in April 2004 as a wholly-owned subsidiary of Nomura Holdings, Inc. and the only institution of its

kind, the Nomura Institute of Capital Markets Research (NICMR) is dedicated to research on capital markets
as well as the financial system, especially how they are regulated and organized and how they perform. Its
mission is to encourage the sound growth of Japan’s financial and capital markets through unbiased
research and policy recommendation.

• The information and opinions of this document are for general information use only and are not intended as
an offer or solicitation with respect to purchase or sales of any financial instruments or as personalized
investment advice. Although this publication is compiled based upon information that NICMR considers
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