Determinants of Defined-Contribution Japanese Corporate Pension Coverage

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 of retirement 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 no longer defined in advance as in the traditional plans, but instead were conditioned on the actual 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 that the 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 incidence of DC pension.