Determinants of Defined-Contribution
Japanese Corporate Pension Coverage*
Kazuo Yoshida†

Yutaka Horiba

Graduate School of Economics
Nagoya City University

Department of Economics
Tulane University

ABSTRACT
Following the collapse of the Japanese financial bubble during the 1990s, Japanese
corporations came to be saddled with increasingly large underfunded pension obligations.
The gap between the level of retirement benefit promised and the market performance ofretirement funds widened alarmingly, adding to the sense of corporate financial malaise
during the “lost decade” that followed the market collapse. Partly in response, the passage of
new corporate pension legislations in 2001 introduced the so-called defined-contribution
pension plans whereby corporations were allowed to establish retirement plans on behalf of
their employees on a voluntary basis whereby the terms of the retirement benefit were nolonger defined in advance as in the traditional plans, but instead were conditioned on theactual performance of managed retirement funds. Only the periodic premium contributions
to the plan during the employee’s active working life were now defined. This paper
investigates the empirical determinants of the Japanese corporate decision to newly adopt
the defined-contribution (DC) pension plans. Among the key findings of the paper are thatthe likelihood of adopting a new DC plan increases with an increase in the size of the firm,
and that it decreases with an increase in the extent of underfunding of the firm’s existing
defined-benefit (DB) pension plan, in sharp contrast to the American corporate incidenceof DC pension.
JEL Classification: G23
Key Words: Japanese Corporate Pension* Financial assistance for this research, received from the Grant-in-Aid for Scientific Research (KAKENHI) for the first author, andthe Japanese Association of Trust Banks (Nihon Shintaku Ginko Kyokai) for the second author, is gratefully acknowledged. The
authors alone are responsible for all shortcomings.
† Corresponding Author. Address Nagoya City University, 1, Yamanohata, Mizuho-cho, Mizuho-ku, Nagoya, 467-8501, JAPAN.
Telephone +81(52)872-5717 E-mail yoshida@econ.nagoya-cu.ac.jp
Received July 6, 2012; accepted July 20, 2012
Copyright©2012 Research Institute for Economics & Business Administration – Kobe University.

34

The Japanese Accounting Review, 2 (2012), 33-47

1. Introduction
Legislations passed in the Japanese parliament in 2001 have made it possible for Japanesefirms to provide American-style defined-contribution (DC) pension plans to their employees on
the voluntary basis. Firms adopting the plan typically give its employees the option of selecting
among several financial products (funds) managed by an independent financial contractor. Patterned
after the U.S. Tax Code 401(k) pension plan, firms adopting this plan make regular tax-deductible
contributions to the participating employee’s retirement account. The benefit payment to theemployee is based primarily on the market value of the account at the time of retirement or job
separation. The employee acquires ownership of the account after a brief period required toward
vesting, and if the employee quits, the account is transferable under certain conditions to a new
employer. Hence, there is neither underfunding nor overfunding associated with this plan, as its assets
and liabilities are by definition equal.
The DC adoption by Japanese firms reflects some unique social and economic circumstances of
the Japanese society which include rapid aging of the population, increasing underfunding in boththe public and private pension plans, and the introduction of new accounting standards. Japan has
had to adapt to the aging society, which gave rise to serious fiscal problems and resulted in the reformof public pension plans in 2000 and in 2004. With respect to the corporate world, there have also
been major problems in the funding of employee retirement plans and their pension payments. Firms
have been forced to address how best to contain retirement costs and to undertake changes in theirpension plans.
The implicit understanding of long-term employment and the seniority-based compensation
system with a steeply rising age-earnings profile used to be two of the most often cited characteristicsof the Japanese labor market. Japanese firms invested relatively heavily in human capital accumulationof their employees, reinforced by the fact that the extent of labor market mobility, especially for themid- to top-level corporate employees, has been limited. Traditional defined-benefit (DB) pension
plans also buttress the sense of reciprocity between retirement compensation and long-term job
tenure. And if those plans are unfunded, covered employees are in effect placed in a position of longterm unsecured bondholders who thereby assume an interest in the survival of the firm as argued by
Ippolito (1985a, 1985b, 1995).
The majority of corporate DB plans in Japan, however, became seriously underfunded during
the decade of the 1990s. It coincided with the collapse of the asset market that began with thefreefalling stock market. The problem of seriously underfunded pension liabilities was compoundedby the Japanese Ministry of Finance guidelines that in effect set the discount rate to be applied in thevaluation of future pension benefits too high (at 5.5%) relative to the actual market performance ofmanaged funds. The regular premium contributions calculated on the basis of that overly optimistic
rate of return turned out to be seriously inadequate.1 The rule was eventually overhauled, but the ideaof DC pension as an alternative to the existing DB plans came to attract greater interest from both
employers and employees as one way to address the growing corporate pension crisis.
1

Governmental regulation known as 5-3-3-2 also limited the realized returns. The rule mandated that the plan’s asset allocation beat least 50% in domestic bonds, no more than 30% in equities, no more than 30% in foreign investments, and no more than 20%
in real estate. The rates of return assumed by U.S. firms to assess their pension position are not subject to this kind of regulation, ofcourse, and presumably they reflect the market conditions more accurately. See Bergstresser et al. (2006), however, for their recent
finding that these rates may in fact be manipulated by the firm’s management leading to distorted earnings and stock prices of U.S.
corporations.

Yoshida and Horiba: Determinants of Defined-Contribution Japanese Corporate Pension Coverage

35

New pension accounting standards were introduced in March, 2001, requiring Japanese firms
to disclose any unfunded retirement payment liabilities and include them in their balance sheet
statement. Concerning the market valuation of managed pension funds, firms need to manage andreduce their unfunded liabilities appropriately, and the related bill which approved the establishmentof DC plans was passed in October, 2001.
This paper aims at examining the Japanese corporate decision making regarding DC adoption.
DC plans are very different from any existing DB plans, and so a switching to DC plans implies
extensive changes even in the employment practice of the firm. Many incentives are at work, someconflicting, and the corporate decision making over pension plans is complex. We are motivatedin this study to address the empirical question of which incentives play a more critical role in theultimate managerial decision to opt for DC plans.

2. Japanese Pension Plans
The new DC pension has been introduced into the Japanese corporate pension system against
the backdrop of existing DB pension plans. The various alternative plans that now exist can besummarized as follows.
2.1 Lump-Sum Severance Plan
The oldest traditional lump-sum DB plan called taishoku hikiate-kin seido (hereafter hikiate-kin) entails
an internal reserve account that is voluntarily set up by the firm, whereby the firm’s periodic “contribution” tothe retirement account is partially tax-deductible from its corporate income tax even though it is an intrafirm credit transfer that does not require an explicit portfolio management of the account.2 Retirement
or severance payouts from the account typically take the form of a lump-sum payment determined on
the basis of the employee’s job tenure and salary history. The account’s accumulated benefits are a legallybinding liability of the firm, however. The plan calls for a one-time severance payment either for retirement
or voluntary quit, and no periodic pension payment is involved subsequent to job separation.
2.2 Traditional Corporate DB Pension Plans
The other DB plans came into existence from a series of corporate tax laws passed in the 1960s
that provided added tax incentives for an establishment of externally managed DB pension plans.
Unlike the hikiate-kin system, the newer DB plans entailed an explicit portfolio management ofpension funds to be managed by independent financial contractors, typically life insurance companies
and trust banks. Two different versions were introduced, both entailing tax-qualified externallymanaged plans. The first version, called zeisei-tekikaku nenkin, was established under the 1962 tax
legislation and came under the jurisdiction of the Japanese Ministry of Finance. The second version,
called kosei nenkin kikin, was introduced by the 1965 legislative revisions of the Japanese Social
Security System, and was placed under the jurisdiction of the Ministry of Health and Welfare. The
kosei nenkin kikin was intended primarily for meeting the pension needs of larger corporations,and the minimum enrollment per plan was set initially at 1,000 employees.3 By 1995 the total national
2
3

The hikiate-kin’s tax-deductibility provision was eliminated in 2002 so the firm’s contribution into the plan is no longer deductible.
The minimum enrollment was subsequently reduced to 700, and then to 500 where it stands today. For further details on theseplans, the determinants of their adoption, and the impact of adoption on stock prices, see Horiba and Yoshida (2002), andYoshida and Horiba (2003).

The Japanese Accounting Review, 2 (2012), 33-47

36

enrollments in these DB plans came to approximately 11 million workers for the zeisei-tekikaku nenkin,
and 12.1 million workers for the kosei-nenkin kikin plans.
2.3 Revised DB Plans
The collapse of the securities market after 1990 brought to light the potential problems of the
traditional DB plans. In addition to the serious underfunding problem, questions arose as to thepreservation of vested rights of covered employees and the responsibility of the plan’s trustees who
managed the plan. For the purpose of addressing the problems, at least in part, a related pension act was
legislated in April, 2002, which revised the kosei nenkin kikin plan and allowed the return of a portion of
its pension liability to the Ministry of Health and Welfare. In addition, two new DB plans called the kikin
variety and the kiyaku variety were introduced, allowing possible incorporation of some of the definedcontribution ideas into the more traditional DB plans based on a new cash balance system.
2.4 Defined-Contribution Plans
The laws governing DC plans currently allow two types of DC plans. For firms with an existing DB
plan that decide to offer a new DC plan, all premium contributions (up to a pre-determined legal limit
per covered employee) are made solely by the employer and are deductible from corporate income tax.
Unlike the U.S. 401(k) plan, however, employees of Japanese firms were not allowed to make individual
contributions into this plan during the period covered in this study.4 The second type of DC plan is for
employees of firms that have no DB plan, and also for self-employed individuals. In this version all eligible
premium payments fall on participating individuals, and are deductible from individual income tax. The
focus of this paper is on the first type (called kigyo-gata) of corporate DC plan. Along with the passage ofthe new DC pension legislations, 2001 saw an enactment of new regulations that mandate the disclosureof the firm’s pension liabilities in the annual financial statement, using substantially the same accounting
standards as those in the U.S., and the mandated disclosure enabled the empirical inquiry of this paper.
The main characteristics of the alternative pension plans can be summarized as follows.
Comparison Between Defined-Contribution and Other Pension Plans

4

Characteristics

Lump-Sum
Severance Plans

Defined-Benefit
Pension Plans

Kigyo-gata DC
Pension Plans

Investment risk borne by:

Employer

Employer

Employee

Firm’s unfunded liability:

Typically severe

Typically severe

No liability

Premium’s tax status:

Partially deductible(disallowed after 2002)

Fully deductible

Deductible up to a limit

Degree of back loading in
Benefit payment:

High

Some

Low

Plan’s administrative cost:

Low

Relatively highRelatively low

Portability to new employer:

None

Limited(possible only after 2005)

High

The so-called 401(k) plans were established in the U.S. in 1981, and both employers and employees were allowed to make premium
contributions into individual accounts. Japanese DC plans, on the other hand, were allowed to accept only employer contributions
into the plan, but the rules were subsequently changed as of 2012 to allow employee’s matching contributions into the plan as well.

Yoshida and Horiba: Determinants of Defined-Contribution Japanese Corporate Pension Coverage37

3. Incentives for Adopting DC Plans
Corporate pension decisions are complex, especially with regard to adopting new DC plans
which represent a sharp departure from staying with the traditional DB plans. The complexity
reflects a wide variety of incentives at play, some of which may be mutually inconsistent. Whatfollows is a catalogue of these incentives and the issues at stake.
<Risk Management>
Stone (1991) and Petersen (1994) analyzed managerial incentives for switching to DC
plans and especially focused on corporate risk management. Stone argued that by switchingto DC plans, firms shifted inflation and investment risks to the employees and also reduced
administrative costs such as insurance, actuarial and accounting costs that would have been
incurred in maintaining existing DB plans. Petersen also related DC pension to the question ofrisk and profit sharing between stockholders and employees. Though employees generally oppose
any increase in their risk taking, they may accept it in exchange for keeping their employment in
unprofitable firms. Both Stone and Petersen produced evidence that financially distressed firms
tend to adopt DC plans.
From 1990 to the beginning of the 2000s, the Japanese stock market floundered wildly, andthe corporate performance generally deteriorated, making it critically important for corporate
managers to control various risks and contain financial losses. It may be presumed that lessprofitable and riskier firms, in particular, needed to address their risk management strategies. The
issue here is whether or not it actually led to a greater propensity on the part of these firms to
adopt DC plans.
<Underfunded Pension Liabilities>
Japanese plans are generally characterized by their underfunding and the associated pension
liabilities, in contrast to American firms which often have overfunded pension plans. 5 For
American firms it has been shown that unfunded pension liabilities negatively impact on themarket valuation of the firm.6 The underlying hypothesis here is that unfunded pension liabilities
cloud the future earnings prospect of the firm at the same time as they result in the forfeiture of
the current corporate income tax incentives associated with more robust premium contributions.
Inasmuch as DC plans avoid this risk, the presumption is that an increased underfunding of DB
pension liability increases the firm’s incentive and hence the likelihood of adopting or switching to
a DC plan.
If such a relationship also holds for Japanese firms, those firms with higher unfunded pension
liabilities may be presumed to have added incentives to adopt DC plan. It must be emphasized,
however, that Japanese firms are legally mandated to address unfunded DB pension liabilities
before adopting new DC plans. There are two methods in satisfying this requirement: either an
immediate reserve accounting for these liabilities, or reduction in liabilities by decreasing future
benefits which must be negotiated with the labor union and is therefore difficult to achieve at
Thomas (1989) and Mittelstaedt (1989) analyze the determinants of the recovery of overfunded pension plan. In particular, it isshown in Mittelstaedt and Regier (1993) that the shift to DC plan produces positive market reaction.
6
See Feldstein and Seligman (1981), Daley (1984), and Barth (1991) among others. Franzoni and Marin (2006) argue, however,that the market tends to overvalue U.S. firms that carry underfunded pension plans. See also Picconi (2006). The link between
DB pension plan and the market valuation of the firm is indeed an open-ended and complex one that continues to be debated.
5

38

The Japanese Accounting Review, 2 (2012), 33-47

least in the immediate sense. When the firm selects the former method, it has to finance theextraordinary pension obligation at once. Hence, from this vantage the DC adoption decision
would be easier for firms with less unfunded pension liabilities. Regardless, the firm’s overall
financing capacity including the profitability of the firm may be critical in all cases involving DC
plan’s adoption.
<Tax Consideration>
Under the Japanese corporate tax rules, firm’s premium payments into DB plans are allowed
as legitimate corporate expense and hence reduce corporate income tax liability. For corporate
contributions to DC plans, however, tax-favored treatment was restricted to the maximum deductionof 36,000 yen (which was subsequently raised to 46,000 yen after October, 2004) per covered
employee per month for firms relying solely on the DC plan for its pension policy. For firms adopting
a combination of both DC and DB plans, the tax deductibility that applies to the DC portion was
limited to 18,000 yen (subsequently raised to 23,000 yen after October, 2004) per covered employee
per month. Since no DB plans are subject to similar restrictions, the tax treatment favors theretention of DB plans over DC plans, especially for profitable firms for which the differential tax
treatment may make a significant difference. Hence, more profitable firms may have lesser incentives
to adopt the DC plans relative to unprofitable firms.
<Stock Leverage Question>
Stock leverage can be measured by the ratio of debt to total assets, as it serves as anindicator of what is left for shareholders in the event of the firm’s insolvency. The agency models
based on manager-shareholder conflicts as well as conflicts between equity holders and debt
holders predict that leverage increases with firm value (Harris and Raviv 1990; Stulz 1990), withdefault probability (Harris and Raviv 1990), liquidation value (Williamson 1988; Harris andRaviv 1990), decrease in profitability (Friend and Lang 1988; Titman and Wessels 1988), andthe extent of information asymmetry (Myers and Majluf 1984). 7 For U.S. firms, Stone (1991)
obtained a positive and statistically significant association between leverage (total liabilities
divided by total assets) and DC replacement of DB plans. This provides the basis for our test
as to whether the total debt/asset ratio for Japanese corporations and the probability of theiradopting DC plans is positively correlated.
<Age Factor>
In the DC plan, employees can manage the investment fund, and the level of future benefit
is based on the actual investment performance. Older employees typically take a more negative
view toward such a plan, feeling that there may not be an adequate period of time before
retirement to redress any major losses that may be sustained in investment. Younger employees,on the other hand, may view the plan more favorably as the longer-term investment period may
reduce such risks. Employees who leave a firm before their retirement may also suffer a large
capital loss in the traditional DB plan while that risk is more limited for employees in the DC
plan. 8 Consequently, the average age of workers in a firm may have influence over the firm’s
choice of pension plan.
7
8

See Harris and Raviv (1991), in particular, for survey of the literature on these and additional findings on corporate leverage.
See Dorsey (1987) for evidence on this from American firms.

Yoshida and Horiba: Determinants of Defined-Contribution Japanese Corporate Pension Coverage

39<Plan’s Administrative Cost>
In DB plans, premium contributions are invested in pooled funds, and so their management
cost is almost like a fixed cost. In contrast, investment decisions in the DC plan are made by each
employee, and there is less fixed-cost aspect to the DC plan. Based on the U.S. studies, this differencein the economies of scale in pension fund management leads to the greater likelihood for smallerfirms opting for DC plans, and for larger firms staying with DB plans. In the Japanese corporate
context, both in the kosei and the new kiyaku and kikin variety DB plans, firms staying with theseplans need to check regularly the legal status of pension rights vested in employees and satisfy theprudent man rules, implying relatively high administrative costs. In implementing the complex
pension accounting rules and procedures, firms with DB plans must generally bear proportionately
higher accounting costs. Thus, from both the management and accounting cost standpoint, it shouldbe the smaller firms that may find the DB plan less advantageous relative to the DC plan, thus opting
for the DC plan.
<Portability>
The portability of an individual DC account to a new employer who may allow such a transfer
may be particularly attractive for younger employees. Individual holders of an account with a DC
plan can possibly carry it to a new employer, and this portability should have a particular appeal tothose employees who have alternative employment opportunities.9 From the employer’s perspectives,
it may be harder for the firm to justify the use of the conventional DB plan as an incentives plan
to retain workers if the necessity for a longer-term skill development is low. Therefore, DC plans
may be adopted more readily in firms facing high job turnovers and generally having a shorter-termorientation or corporate objectives. Dorsey (1987) examined the relationship between job turnovers
and the incidence of DC adoption and found some evidence in support of it for American firms.
Does such a relationship also hold for Japanese firms?
<Negotiation Cost>
Adopting a DC plan entails a significant change in the labor contract that requires
negotiations with the labor union, as Japanese corporations are required by law to obtainthe consent of its employees for effecting any significant changes in working conditions. In
this regard, the decisions of other companies within the same industry often influence thenegotiation process and its outcome in the Japanese corporate world because of the existence ofvarious informal intra-industry alliances and coordination mechanisms on both the employer
and employee sides. The incidence of DC adoption differs widely among industries, but appears
to be progressing especially in the electric tools, transportation equipment, and commerceindustries represented by such corporations as Sanyo, Sony, Mitsubishi Electric, Pioneer, Toyota,
Honda, Itochu, Mitsubishi Trading Company and other leading Japanese corporations. For firms
belonging to these industries, therefore, it may be that much easier to convince their employees
and proceed with the DC adoption.
9

By law, Japanese DC benefits become almost immediately vested with the employee. When an employee quits the job covered by
DC plan, one of the following three options can be exercised by the employee with respect to the accumulated benefits: a) transfer
to a new DC plan if the new employer offers DC plan; b) set up an individual DC plan if the new employer does not offer DC
plan, in which case additional contributions to the plan are allowed only if the new employer does not offer any other pension
plan; c) liquidate the account if DC coverage by the previous employer was for a period not exceeding three years.

40

The Japanese Accounting Review, 2 (2012), 33-47<Informational Dissemination Cost>
In cases where firms adopt a new DC plan, it may be presumed that the management and thelabor side understand the detailed terms and the various implications of the plan, which would
require substantial information gathering and dissemination cost. As it turns out, there is major
competition among banks, securities and insurance companies for acquiring DC pension businesses
especially of larger corporations as their clientele. Although the traditional DB plans were managed
mostly by investment banks and life insurance companies, the handling of DC plans is open
to additional financial institutions such as commercial banks and brokerage houses. As a result,competition for these businesses has been intense, both before and during the enactment of the DC
plan. In this connection, it should be mentioned that the network relationship that may exist among
a loosely affiliated keiretsu corporate group continues to be a significant characteristic of the Japanese
economy, though the extent of its cohesion is clearly weakening.10 It may be presumed that there
is considerable information sharing among the group centering on the “main bank” in the group,
which argues for greater likelihood for typically large corporations belonging to the group to adopt
new DC plans. That likelihood may be further enhanced for firms that have a greater internationalpresence, as firms with many foreign stockholders are in an environment with greater awareness andunderstanding of developments such as the American corporate pension system that has seen a steep
rise in the incidence of DC plans.11

4. Regression Model and the Empirical Findings
For this study we examined the financial records of 2,320 companies listed on the major
Japanese Stock Exchanges (Tokyo, Osaka and Nagoya) obtained from Nikkei Economic Electronic
Databank System (NEEDS-CD ROM), and identified 2,118 companies that had the requisite database for the regression analysis. Specifically, 202 companies did not make that list for not reporting
sufficiently detailed data concerning retirement accounting (30 companies), average age of workers(57 companies), cash flow information (79 companies), stockholder information (23 companies), andnot having completed the entire 12-month fiscal year (13 companies). Of the 2,118 companies thatform the basis of our regression analysis, 274 companies had adopted DC plans as of the fiscal year
ended March 2005 after the legal inception of the DC program in 2001. The distribution of thesecompanies by industry for the period December 2001 through March 2005 is given in table 1. With
the exception of one company that adopted DC plan as an addition to the existing DB plan that
subsequently remained unaltered, the adoption of DC plans by these firms replaced either wholly or
partially the existing DB plans. Of the remaining 1,844 companies that had not adopted DC plans,
1,723 firms carried DB plans of either the zeisei tekikaku nenkin or the kosei nenkin kikin variety, andthe remaining 121 were companies that carried only the internal hikiate-kin plan.
In order to address the issues raised in the preceding section, we employ the logit regression
model to assess the probability of DC pension adoption on the basis of the explanatory variables
listed below. Based on the existing literature review and empirical findings reported in U.S. studies,
the expected sign of each regression coefficient is indicated in parenthesis following the variable name10
11

See Hoshi et al. (1991) and Spiegel and Yamori (2003) for analysis of the main bank system in Japan.
See Jiang and Kim (2004) and Bae et al. (2006) for analysis of the role of foreign investors.

Yoshida and Horiba: Determinants of Defined-Contribution Japanese Corporate Pension Coverage

41

Table 1: Distribution of Firms and Their Pension Status by Industry
Industry
Agriculture, forestry,
and fisheries
MiningFoods
TextilesPulp and papers
Chemicals
Oil and coal
Rubber and glass
Primary (ferrous/non-ferrous)
metals
Metal products
Machinery
Electric tools
Transportation equipment
Precision instruments
Other manufactures
Construction
Utilities (electricity & gas)
Commerce
Real estateTransportationand communications
Services
TOTAL

Sample Total

Number of Firms That Adopted DC Plans During
Dec 2001Apr 2003Apr 2004Mar 2003
Mar 2004
Mar 2005

8
8
112
64
19
194
8
70

0
0
3
0
0
5
0
2

1
0
4
2
0
14
0
3

0
0
6
0
0
14
0
3

83
73
186
199
79
31
77
157
20
365
46

1
0
4
7
3
1
3
4
0
17
1

1
2
8
17
7
1
4
5
2
27
0

2
1
7
12
4
1
2
4
3
20
0

124
195

3
10

3
11

7
12

2118

64

112

98

Note: The DC adoption data are from Nenkin Jyōhō (Pension Information), published by Kakutsuke Tōshi
Jyōhō Sentā (Center for Information on Investment Ratings), various issues.

and the presumed incentives at work in italics discussed in the preceding section that each variablerefers to. It is to be noted that with respect to the X5 variable below designating firm’s profitability,
two conflicting incentives are at work, and the net effect on the probability of DC adoption isindeterminate on the a priori ground.
X1 = the number of employees per firm: plan’s administrative cost (-)
X2 = the firm’s leverage in its capital structure, measured as total liabilities divided by total
assets: stock leverage (+)

The Japanese Accounting Review, 2 (2012), 33-47

42

Variablesa

Table 2: Descriptive Statistics

X1: No. of employees
X2: Debt/Asset Ratio (%)
X3: Cash Flow Volatility
X4: DB Underfunding (%)
X5: OCF/Asset Ratio (%)
X6: Labor turnoverb (%)
X7: Employee agec
X8: Financial Institution Share Ratio(%)
X9: Foreigner Share Ratio (%)
X10: Industry Dummy Variable

Firms with DC Plans
Mean
St. Dev.

3307.3
60.4
2.21
48.0
6.01
7.68
38.0
30.1
8.04
0.41

7010.3
23.4
6.65
18.9
5.52
2.83
3.64
15.7
10.3
0.49

Firms without DC Plans
Mean
St. Dev.
1553.8
60.7
2.92
56.4
4.16
7.77
38.8
24.6
4.72
0.29

4192.0
24.0
6.82
25.6
5.71
2.83
3.80
14.6
7.86
0.45

t-valued
5.82
-0.21
-1.62
-5.18
5.05
-0.45
-3.24
5.78
6.23
4.36

Unless otherwise noted, the data are from the Nikkei NEEDS Data.
Industry-level data for 2001 obtained from the Japanese Ministry of Health, Labor and Welfare, Koyō
Dōkō Chōsa Hōkoku (Survey Report on Employment Trends) 2001.
c
Employee age obtained from Kaisha Shikiho, published by Toyo Keizai Shinpo-sha, 2001.
d
The t-value represents the calculated t-statistic on the difference between the mean for firms with DCplans and the mean for those without DC plansab

X3 = cash flow volatility, measured as the coefficient of variation of cash-to-asset ratio over a
10-year period: risk management (+)
X4 = relative pension underfunding, measured as the firm’s cumulative pension liabilities minus
market valuation of pension assets, divided by the cumulative pension liabilities:
underfunded pension liabilities (+)
X5 = the firm’s profitability, measured as operating cash flow divided by total assets:
tax consideration (-) and the firm’s ability to meet unfunded pension obligations as
required by law (+)
X6 = labor mobility in the industry, proxied by the job turnover rate of the industry to which
the firm belongs: portability (+)
X7 = the average age of employees: age factor (-)
X8 = the ratio of shareholding by financial institutions: information dissemination (+)
X9 = the ratio of shareholding by foreigners: the foreign ownerships question (+)
X10 = the industry dummy variable, identifying the firms that belong to the electric tools,
transportation equipment, and commerce industries (= 1; 0 otherwise): the relative ease ofnegotiation (+).
Table 2 presents the mean values of the ten explanatory variables in two groups. The first groupis for the 274 firms that adopted DC plans during the period December 2001 through March
2005, and the second group is for the remaining 1844 firms that did not. Casual inspection of themean values reveals a remarkable finding suggesting that Japanese firms adopting DC plans had on
average a substantially larger workforce and lower underfunding of DB liabilities, that are contrary toYoshida and Horiba: Determinants of Defined-Contribution Japanese Corporate Pension Coverage

43

Table 3: Logistic Estimation of Plan Choice, 2001-2005 a
Independent Variable
Intercept
X1 : Firm Size
X2: Total Debt/ Asset Ratio
X3: Cash Flow Volatility
X4: DB’s Relative Underfunding
X5: Operating Cash Flow/Asset Ratio
X6: Industry Labor Turnover Rate
X7: Age
X8: Financial Institution Share Ratio
X9: Foreigner Share Ratio
X10: Industry Dummy Variable

McFadden R2
Log Likelihood
No. of Observations for D = 1
No. of Observations for D = 0

Analysis withFirm Size-3.679 ***(-3.86)
0.417 ***
(6.07)
0.001(0.39)-0.000(-0.04)-0.009 ***(-3.09)4.372 ***
(3.21)
0.007(0.27)-0.035(-1.65)0.611(1.19)
0.538(0.67)
0.379 ***
(2.63)
0.0839-747.4274
1844

Analysis without
Firm Size-1.396(-1.60)0.007 **
(2.32)-0.009(-0.77)-0.010 ***(-3.39)4.863 ***
(3.66)
0.003(0.11)-0.038 *(-1.83)1.807 ***
(3.85)
2.098 ***
(2.93)
0.386 ***
(2.71)
0.0608-766.2274
1844

Table reports logit coefficients and z-statistics in parentheses. The asterisks indicate statistical significanceat 10%(*), 5%(**), and 1%(***) level, respectively.
aexpectations based on previous U.S. empirical studies. On the other hand, larger financial institution
shareholding and larger foreign shareholding of firms adopting DC plans are generally consistent
with the expectations. With respect to profitability, it turns out that firms that adopted DC plans
are on average more profitable than those that did not, and the difference in the mean profitability
between the two groups of firms is statistically significant. This last finding suggests an apparent
dominance of the importance of the firm’s ability to meet unfunded DB obligations based on its
profitability over the tax incentives in adopting DC plans.
Table 3 shows the result of logit regression estimation to assess the likelihood of DC adoption.
The dependent variable equals 1 if the firm adopted DC plan during the period in question, and zero

44

The Japanese Accounting Review, 2 (2012), 33-47

otherwise. To circumvent a possible simultaneity problem, observations on the independent variables
all refer to the beginning year 2001. The left-hand column of table 3 reports findings based on the
inclusion of all ten explanatory variables in the regression.12
The most striking difference observed between the U.S. and Japanese incidence of DC pension
is with regard to the firm size and the financial status of the firm’s existing DB plan, both of which
produce opposite results from those reported in the U.S. studies. Our results are also statisticallyhighly significant. Unlike the U.S. DC pension studies, we find that the likelihood of adopting DC
plans by Japanese firms increases as the firm size increases, and with it the likelihood of retaining theexisting DB plans diminishes.13 Also, as the degree of DB underfunding increases, the likelihood of
DC adoption diminishes, and not increases as in the U.S. incidence.
It turns out, therefore, that contrary to the popular belief that an increasing indemnity ofunderfunded pension is driving Japanese firms to switch from DB to DC plans, in fact it is inhibitingthat likelihood. Our findings suggest that it is primarily the larger and more profitable firms thathave adopted the DC plan. Evidently, the mandated liquidity needs for terminating the existing
DB plans exerted such a constraint on firms contemplating on adopting DC plans that even for thelarger, financially better-positioned firms the extent of DB underfunding has a significant negative
impact on adopting the DC plans. The highly significant positive effect of the firm’s profitability as
measured by operating cash flow relative to the firm’s total assets confirms the importance of theoverall financial position of the firm in adopting new DC plans.
With respect to the remaining variables, we find that the DC adoption is indeed more likely
to have occurred in the three industries of electric tools, transportation equipment, and commerce,holding all other variables constant. In regard to the work-force and labor-market attributes suchas the average age of workers and the labor turnover rate, these variables have the “correct” sign inagreement with the underlying hypotheses but fail the significance test. There is only a weak support
for the argument that firms that employ younger workers are more likely to have adopted DC plans.
Likewise, variables such as cash-flow volatility, total debt-to-asset ratio, share holdings ratio byfinancial institutions and by foreigners register the correct sign but fail the significance test in thefirst regression equation.
The main bank system still remains as a factor in the Japanese corporate world, though its holdhas been weakening. Larger firms usually have close relations with the main bank such that an active
exchange of information beyond normal banking businesses may be presumed to be taking place.
In addition, it is the larger firms that have an international visibility attracting stock ownerships byforeigners, as the remarkable rise in the importance of foreign presence in the Japanese financial
market has been well recognized and documented.14 According to our inter-correlation matrix shown
We have experimented with over a dozen different regression specifications involving these explanatory variables, but the results
are similar.
13
A number of arguments have been advanced to justify the proposition that the likelihood of DB plans should increase with thefirm size. The agency theory of management suggests that larger firms incur higher costs of monitoring employees, making DB
plans more attractive (Lazear 1979). In addition, the economies of scale afforded by a larger firm size may lower the administrative
cost of DB plan, and the pooling of larger pension funds may lower the investment risk. Empirical findings based on U.S. firms
have generally supported the proposition that either there is a positive correlation between DB plan and the firm size, or a negative
correlation between DC plan and the firm size, or both (Pesando and Clarke 1983; Kotlikoff and Smith 1983; Dorsey 1987; Stone
1991; Gustman and Steinmeier 1986; Petersen 1994; Kruse 1995; Ippolito 1995; Papke 1999).
14
See, for example, Shirota (2002). He points out that increased foreign ownerships of Japanese shares have been influential in shifting
corporate priorities from long-term to shorter-term objectives represented by maximization of the rates of earnings, and also fromthe retention of traditional DB plans that are more in line with the long-term employment practice to the adoption of DC plans.
12

X1 : Number of employees		
X2 : Total Debt/ Asset Ratio		
X3 : Cash Flow Volatility		
X4 : DB’s Relative Underfunding(10) X10(9) X9(8) X8(7) X7(6) X6(5) X5(4) X4(3) X3(2) X2(1) X1

Explanatory Variables

0.007
0.098

-0.1270.322
1.000-0.1670.110
1.000-0.238
1.000

1.000

0.088

-0.049

0.173

1.000

-0.218-0.0300.043-0.110

0.007

0.020

-0.201-0.127-0.094-0.206-0.003-0.151-0.122

0.044

1.000

0.145

0.047

0.303

0.007

0.099

0.005

-0.119-0.217

1.000

0.069

(10)

-0.081

0.350

(9)

0.049

0.485

(8)

1.000

-0.006(7)

0.186-0.076

(6)

0.145

0.162

(5)

1.000

-0.157(4)-0.134

(3)

0.141

(2)

X5 : Operating Cash Flow/Asset Ratio
X9 : Shareholdings Ratio by Foreigners
X6 : Labor Turnover Rate			
X10 : Industry Dummy Variable
X7 : Average Age of Employees
X8 : Shareholdings Ratio by Financial Institutions

1.000

(1)

Appendix Table. Correlation Coefficients Among Explanatory Variables

Yoshida and Horiba: Determinants of Defined-Contribution Japanese Corporate Pension Coverage
45

46

The Japanese Accounting Review, 2 (2012), 33-47

in the appendix, the size variable has high positive correlations with such variables as the financial
institutional shareholdings ratio and the ratio of stock ownerships by foreigners. Accordingly, thesecond regression deletes the size variable, and the result confirms the significance of these additionalvariables, at the same time retaining much of the same pattern as observed in the first equation forthe other variables. Evidently, the size variable also serves in the regression as a proxy for these shareratios, and to a lesser extent for the corporate debt ratio as well.

5. Conclusions
The economics of corporate pension has spawned a large volume of literature with competing
hypotheses and some conflicting empirical evidence. The experience of Japanese firms during thefirst several years following the inception of DC plans serves to highlight the importance of financial
variables as key determinants of the ultimate adoption decision.15 While some variables reflecting
non-financial conditions such as the average age of employees appear to be relevant, it is the firm’s
more immediate concerns about how to meet the indemnity of the existing DB plans and the firm’s
overall profitability that appear to be pivotal in the decision to adopt the DC plan.
Concerning the firm size, we have found a positive and strong association between it and theprobability of the firm’s adopting DC plan, in sharp contrast to what has been found repeatedly for
U.S. firms. Our explanation of what may otherwise appear as an anomaly in this instance is the way
in which the financial variables interact with the firm size in the more unique Japanese corporate
settings. Most of the larger firms maintain externally managed DB plans. Faced with the liquidity
requirement for terminating these plans upon adopting DC plan, the extent of underfunded pension
obligations and the firm’s profitability, in particular, become a critical consideration. The majority ofthese firms, and especially those saddled with a heavy indemnity of the existing DB plans, have opted
not to adopt the new plan. Hence, it is primarily large, profitable firms without the burden of heavy
DB indemnity that have proceeded with adopting the new DC plan.

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