With Healthy Funding Levels, Japanese Plans Face the Future

December 5, 2007 (PLANSPONSOR.COM) - Because Japanese plan sponsors have largely restored their pension funding ratios to healthy levels, they now focus on lowering volatility and exploring hybrid structures such as cash balance plans.

That was the conclusion of a new Greenwich Associates research report, according to a press release.

Researchers said the funding change represents a dramatic turnaround since the current mean funding ratio of 103% is up from 62% four years ago. Nearly two-thirds of Japanese funds now have a 90% funded status.

“Favorable equity market returns are one obvious factor in this story,” said Greenwich Associates consultant Dev Clifford in the news release, “the other being that some corporate and public employers have made significant contributions to their pension plans.”

In terms of plan designs, 21% of corporate sponsors report that they have closed their defined benefit plans to new employees, up from 12% two years ago, but only 3% say they anticipate shuttering their plans in the next two or three years, the report said.

Unlike their counterparts in the United States, Japanese employers are not turning to defined contribution plans as the standard retirement benefit for the next generation of workers.

“Unlike other markets such as the United States, defined contribution is not becoming a big deal in Japan,” said Greenwich Associates consultant Tomio Sumiyoshi. “It has been mired in political discussions for a long time, and everybody seems to agree that, while it’s an interesting concept, it’s not something that will really work for retirement here.”

According to the report, there is a new emphasis by pension plan sponsors on reducing overall portfolio volatility by boosting investments in categories with low correlations to the larger asset classes.

For example, more than two-thirds of Japanese institutions invest in hedge funds, up from 63% in 2006, and Japanese corporate plan sponsors rank among the world’s most active hedge fund investors, Greenwich Associates said.

Currently, Japanese corporate funds that use hedge funds dedicate 9% of their total pension assets to them, while active hedge fund investors among U.S. endowments and foundations devote 16.6%, and U.S. corporate funds allocate 5.4%.