Joint Statement of the U.S.-Japan Business Council and theJapan-U.S. Business Council on Adoption of a
Defined Contribution Pension Plan in Japan
November 7, 2000

1. Introduction
The U.S.-Japan and Japan-U.S. Business Councils (the “Councils”) held their 37th annual
meeting in Tokyo in July 2000. At that meeting, business leaders from both countries
recognized the tremendous demographic changes taking place in Japan and the serious
implications of those changes for Japan’s pension system. In light of the active debate onpension matters in Japan, the Councils decided to establish a joint study group to examinepension reform and other related issues in Japan. The study group was tasked with
developing a joint set of recommendations regarding those issues to submit to theJapanese Government.
2. Recommendations
The Councils strongly recommend that the Japanese Government should:(1) as a good first step, pass legislation during the current extraordinary Diet session
to introduce a Defined Contribution Pension Plan (“DC Plan”) into the Japanesemarketplace as soon as possible; and(2) following its introduction, adopt certain modifications to the DC Plan as outlinedin this statement in order to improve overall effectiveness and flexibility of thesystem.
3. Recommendation for the Early Introduction of a DC Plan
The Japanese Government has established welfare pension and healthcare systems ofgreat benefit to the Japanese people. These national pension schemes, as well as corporate
schemes, such as employee pension funds and tax-qualified pension plans, are significant
components of the current Japanese pension system, and are expected to continue to serve
important functions in securing the financial well-being of Japan’s retired population.
In view of the rapid pace of demographic and social change, providing only existing
defined benefit pension plans will not likely meet the retirement needs of today’s young
people adequately. From the plan sponsors’ perspective, as a result of the increasing
mobility of workers, it is becoming more important to provide attractive compensation
and welfare benefits, including adequate employee pension portability, in order to attract
and retain highly qualified employees. Introduction of DC Plans, supportive of Japan’schanging business and social environment, would be of significant benefit to corporations
and their employees as they provide a new supplement to existing pension schemes.

1As a result of the structure of Japan’s current pension system, corporate pensions have notbeen widely established throughout the economy, especially among small- andmedium-sized companies. The current pension system also provides limited choices for
self-employed workers. As the percentage of elderly within the population rapidlyincreases, while the number of new births decreases, it is becoming an urgent task toreform the current pension system to ensure a secure and comfortable retirement forJapan’s future retirees. A DC Plan system is particularly significant for employees ofsmall- and medium-sized companies, which generally are not covered by a corporate
pension, and for self-employed persons as a supplemental income tool to the national
pension system.
Looking at the experience in the United States, the introduction of a DC Plan has
contributed significantly to meeting the retirement needs of both corporate employees andindividuals. With regard to the large corporate sector, DC Plans began as a supplemental
pension to existing defined benefit plans. For small- and medium-sized companies, theDC Plan has provided employers with a cost-effective means to provide for their workers’welfare. As a result, DC Plans currently are as important as defined benefit plans inmeeting employee retirement needs in this important business segment. The introductionof DC Plans also was in tune with the needs of an increasingly mobile labor market. To
some industries, such as high-tech or software where employees tend to change jobs more
frequently than in other industries, the portability function of DC Plans proved to beeffective in enabling those companies to attract top quality employees.
In addition to providing greater security to people who are inadequately covered by
Japan’s current pension system, another important benefit of the DC Plan is that it can be
an effective tool for investment education and deepening financial knowledge. In part asa result of financial liberalizations introduced over the past few years, the thinking ofJapanese consumers with respect to financial matters is increasingly changing from thatof “savers” to “investors”. Introduction of a DC Plan could well serve as a catalyst for thistransformation in financial thinking. DC Plans encouraged U.S. workers to enhance theirfinancial knowledge and investment know-how, thus enabling them to become more
efficient investors. From a systemic perspective, the easing of access to capital markets
by individual investors that accompanied the introduction of DC Plans promoted more
efficient capital flows throughout the economy.
Finally, in order to prepare adequately for their future, people should begin to contributeto a retirement plan as early as possible. Therefore, it is critically important that the DC
Plan be introduced into Japan at the very earliest opportunity.
4. Recommendations for Future Improvement
The Councils strongly support early passage by the Diet of the current legislation on DCPlans. In addition, the Councils believe that the adoption of certain modifications to theproposed DC Plan system would improve its overall effectiveness and provide greater
flexibility to the Japanese pension system. As such, the Councils recommend that theJapanese Government adopt the following changes to enhance the proposed DC Plan2

structure:(1) Allow Supplemental Contributions
As described in the Government’s proposal, DC Plans are intended to foster increasing
self-responsibility among the Japanese people with regard to preparation for theirretirement years. A starting point for such a change in behavior is creating anenvironment where the Japanese people prepare for their own future without overly
relying on assistance from the Government or their employers. In order to foster such aculture of self-reliance and to ensure they meet their retirement needs, it is important thatthe DC Plan be modified to allow supplemental contributions by employees within themaximum allowable contribution limits. In addition, employers should be allowed tomake contributions to individual-type DC Plans established by employees of those firms
who cannot afford to introduce their own DC Plan in order to give such employers theopportunity to assist their employees in preparing for their future.
(2) Expand Eligibility for Participants
The Councils believe that participant eligibility under the DC Plans is too restricted under
the current draft legislation. Dependent spouses and government employees are noteligible to participate, and employees of firms with a defined benefit plan, but no DC Plan,
are also precluded from participating in a DC Plan.
In the United States, the work of spouses is regarded as a kind of employment and they arethus entitled to participate in Individual Retirement Account investment plans (IRAinvestment plans), which are similar to the proposed individual-type Japanese DC Plan.
United States Government employees are also entitled to participate in a DC Plan and this,as a result, enables free job transfer between the public sector and private sector. TheCouncils believe that, like in the United States, both dependent spouses and government
employees should be permitted to participate in DC Plans. In addition, the Councils urge
the Japanese Government to permit employees of firms having a defined benefit plan, but
no DC Plan, to prepare adequately for their retirement by permitting them to participate inindividual-type DC Plans.
(3) Provide Access to DC Plan Funds in Times of Financial Emergency
The Councils understand that, in order to accumulate sufficient financial resources tomeet future retirement needs, it is important that participants build up assets in theirpensions over long periods. However, based on experience in the United States, people
will hesitate to participate in such a pension plan if they are not allowed to access their DC
funds in times of financial emergency. In order to foster widespread participation in DC
Plans among the Japanese public, it is important that the Japanese Government allow DC
Plan participants to make withdrawals or obtain loans from the plan in times of financial
emergency.

3(4) Increase Contribution and Conversion Limits
While the details have not yet been released, in order to provide adequate flexibility toboth plan sponsors and participants, and to ensure adequate opportunity for workers toprepare for their future retirement, the current contribution limits should be raised andconversion limits should be large enough across all market segments. As mentioned
earlier, changes in Japan’s economic structure and in individual lifestyles havesignificantly diversified the needs of employers and individuals. To satisfy such diverse
needs, contribution and conversion limits need to be large enough to provide fullflexibility. The system needs to have sufficient contribution flexibility to accommodate,for example, the irregular income flows of self-employed workers by allowing
contributions to be made by those workers on other than only a fixed monthly basis.
(5) Additional Matters for Consideration
Although beyond the scope of this statement, the Councils believe that the Japanese
Government in the future should undertake a comprehensive study of the impact ofJapan’s tax system on the new DC Plans, and whether those taxes further theGovernment’s goals in introducing DC Plans. Included in such a study should be an
analysis of how to handle the special corporate tax in relation to DC Plans.

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