As of the second quarter of 2008, Japanese corporate DB pension funds had an average funding ratio of 102%, and public DB plans were reporting an average 95% funding ratio, according to a Greenwich Associates press release. Overall, 37% of Japanese DB pension plans reported funding ratios over 100%, while 60% had ratios over 90%.
A lesson for the typical U.S. corporate pension plan, which in 2008 saw a funded status drop of 31.5 percentage points (see Corporate Pensions Funded Status Drops More than 30% in ’08 ), Greenwich says the success of Japanese plan sponsors at sustaining their funding ratios from 2007 to 2008 can be attributed in large part to their efforts over the past several years to reduce portfolio volatility and secure their plans’ overall health.
Although the 100 bps gap between expected rate of return and the current actuarial rate represents the first time in recent memory that Japanese plan sponsors have experienced such a shortfall, the allocation shifts that led to current return expectations appear to have improved their positions leading into the market turmoil of fall 2008, the press release said. Over the past three years, plan sponsors and other financial institutions in Japan have markedly reduced their equity exposure while boosting their commitment to fixed-income investments.
Among corporate plans, allocations to active and passive equity declined to 37.2% of total assets in 2008 from 43.2% in 2007 and 44.5% in 2006. Over the same period, domestic fixed-income allocations increased to 38.8% of assets from 35.2% and 34%, respectively. The shift was even more dramatic among public funds, which cut equity holdings to 26% of assets in 2008 from 28.4% in 2007 and 32.9% in 2006, while increasing domestic fixed-income assets to 70% of assets this year from 62.9% as recently as 2006.
Greenwich Associates warns, however, that an emerging shortfall between the current actuarial earnings rate and expected return on plan assets suggests serious challenges ahead.
While demonstrating their commitment to maintaining strong funding levels in their existing DB plans, corporate plan sponsors in Japan have been shifting employees to other plan structures. The share of corporate pension assets housed in DB plans fell to 62% in 2008 from 69% in 2007 and 75% in 2006. However, the proportion of Japanese corporate DB plans closed to new employees appears to have reached at least a temporary plateau after remaining unchanged from 2007 to 2008 at 22%. Almost 20% of Japanese corporate pension retirement assets now reside in “quasi cash balance” plans, and 15% are housed in cash balance plans.