Social cost of abolishing Japanese Employee s Pension Fund

Transcription

1 Social cost of abolishing Japanese Employee s Pension Fund Takahiro Tachimoto Group Annuities Dept., Nippon Life Insurance Company -6-6 Marunouchi, Chiyoda-ku, Tokyo, Japan tachimoto34754@nissay.co.jp

2 Profile Takahiro Tachimoto (Taka), F.I.A.J Takahiro Tachimoto majored in physics, and completed his Master s Degree in 20. During his Masters, he specialized quantum information and studied why the natural law can be described by quantum theory. Subsequently, he entered Nippon Life Insurance Company and was assigned to Group Annuity Dept., engaged in premium calculation and financial verification of private pension funds. He is a Fellow of the Institute of Actuaries of Japan (F.I.A.J).

3 /28 Overview of Presentation. Introduction of Japanese pension plans. 2. Description of Employee s Pension Fund (EPF). 3. Contents of a law revision on EPF in Influence of the law revision on public pensions. 5. Conclusion and further discussions.

4 /28 Overview of Presentation. Introduction of Japanese pension plans. 2. Description of Employee s Pension Fund (EPF). 3. Contents of a law revision on EPF in Influence of the law revision on public pensions. 5. Conclusion and further discussions. Japanese Pension Plans Add Na tion al DC (P) EPF DB Sub EPI (public) DC (C) *** Basic Pension (public)

5 /28 Overview of Presentation. Introduction of Japanese pension plans. 2. Description of Employee s Pension Fund (EPF). 3. Contents of a law revision on EPF in Influence of the law revision on public pensions. 5. Conclusion and further discussions. Japanese Pension Plans Add Na tion al DC (P) EPF DB Sub EPI (public) DC (C) *** Basic Pension (public)

6 /28 Overview of Presentation. Introduction of Japanese pension plans. 2. Description of Employee s Pension Fund (EPF). 3. Contents of a law revision on EPF in Influence of the law revision on public pensions. 5. Conclusion and further discussions. Japanese Pension Plans Add Na tion al DC (P) EPF DB Sub EPI (public) DC (C) *** Basic Pension (public)

7 /28 Overview of Presentation. Introduction of Japanese pension plans. 2. Description of Employee s Pension Fund (EPF). 3. Contents of a law revision on EPF in Influence of the law revision on public pensions. 5. Conclusion and further discussions. Japanese Pension Plans Add Na tion al DC (P) EPF DB Sub EPI (public) DC (C) *** Basic Pension (public)

8 /28 Overview of Presentation. Introduction of Japanese pension plans. 2. Description of Employee s Pension Fund (EPF). 3. Contents of a law revision on EPF in Influence of the law revision on public pensions. 5. Conclusion and further discussions.

9 . Introduction of Japanese pension plans.

10 2/28 Japanese pensions overview tier III tier II Additional Pension ( 0.8 ) National Pension Fund ( 0.45 ) DC (Individual type) ( 0.2 ) EPF ( 3.63 ) Substituted DB ( 7.82 ) (Unit:,000,000) DC ( 5.05 ) Employees' Pension Insurance (EPI) Annually Paid Retirement Benefit tier I Basic Pension ( 67.3 ) Spouses of Class 2 insured Self-employed individuals Private sector workers ( ) Public sector workers Class 3 insure Class insured Class 2 insured 4% 25% 54% 7%

11 2/28 Japanese pensions overview tier III tier II Additional Pension National Pension Fund DC (Individual type) EPF Employee's Pension Fund ( (EPF) 3.63 ) Substituted DB DB ( 7.82 ) (Unit:,000,000) DC DC (Company ( type) 5.05 ) Employees' Employees' Pension Pension Insurance Insurance (EPI) (EPI) Annually Paid Retirement Benefit tier I Basic Pension Basic Pension Spouses of Class 2 insured Self-employed individuals Private sector workers ( ) Public sector workers Class 3 insure Class insured Class 2 insured 4% 25% 54% 7%

12 2/28 Japanese pensions overview tier III tier II tier I Private pension (voluntary) Public pension (mandatory) EPF ( 3.63 ) Substituted DB ( 7.82 ) Employees' Pension Insurance (EPI) Basic Pension (Unit:,000,000) DC ( 5.05 ) Private sector workers ( ) DB type DC type - DC EPF : Employee s Pension Fund DB : Defined Benefit Plan : Defined Contribution Plan (company type)

13 2. Description of Employee s Pension Fund (EPF).

14 3/28 EPF scheme Public pension only government EPF & Public pension government EPF substituted portion additional benefit

15 3/28 EPF scheme Public pension only EPF ( 3.63 ) Substituted DB ( 7.82 ) DC government ( 5.05 ) Employees' Pension Insurance (EPI) Basic Pension EPF & Public pension Private sector workers ( ) government EPF substituted portion additional benefit

16 3/28 EPF scheme EPF ( 3.63 ) Substituted DB ( 7.82 ) DC government ( 5.05 ) additional benefit Employees' Pension Insurance (EPI) Basic Pension EPF & Public pension Private sector workers ( ) government substituted portion EPF can take advantage of scale EPF substituted portion additional benefit

17 4/28 What occurs if EPF is terminated? distribute to recipients return to the government (=public pension) asset policy reserve for additional benefit policy reserve the substituted portion (=MinV) distribute to recipients return to the government (=public pension) return to the government (=public pension)?

18 4/28 What occurs if EPF is terminated? distribute to recipients return to the government (=public pension) asset policy reserve for additional benefit policy reserve the substituted portion (=MinV) distribute to recipients return to the government (=public pension) The company must pay extra premium to make up a deficit for MinV. asset return to the government (=public pension) asset MinV

19 5/28 Three types of EPF () Independent type - established independently by a (usually large) company. (2) Joint type - established jointly by affiliated companies (e.g., a parent company and its subsidiaries.) (3) General type - established by a large number of companies (most of which are SMEs) in the same business field or the same region.

20 5/28 Three types of EPF () Independent type - established independently by a (usually large) company. Possess plenty of money. (2) Joint type Decision-making is quick. - established jointly by affiliated companies (e.g., a parent company and its subsidiaries.) (3) General type - established by a large Cannot number afford much of companies money. (most of which are SMEs) in the same Hard to reach agreement business field or the same region.

21 6/ Changes of the number of EPFs 2500 dot-com bubble bursts Lehman Brothers bankruptcy Independent type Joint type General type 4 population

22 6/ Changes of the number of EPFs 2500 dot-com bubble bursts Lehman Brothers bankruptcy Joint type 6 General type improve 4 population financially. 2 Independent type Some EPFs had almost no chance to 0 0 asset MinV

23 7/28 Who has to make up the deficit? Benefit for the substituted portion must neither be reduced nor suspended. Some EPFs had almost no chance to improve financially. asset MinV

24 7/28 Who has to make up the deficit? Benefit for the substituted portion must neither be reduced nor suspended. Each company has prime responsibility for making up the deficit for MinV. Some EPFs had almost no chance to improve financially. asset MinV

25 7/28 Who has to make up the deficit? Benefit for the substituted portion must neither be reduced nor suspended. Each company has prime responsibility for making up the deficit for MinV. But when bankruptcy, it is usually hard to pay all amount of their debts. financial risk for the public pension. asset MinV

26 3. Contents of a law revision on EPF in 204.

27 8/28 Dilemma EPF is a financial risk for the public pension. compulsive termination? Companies have to make up a deficit for MinV. Extra premium is too much to pay for small companies. reduction of the debt? injection of public funds? It is hard to give satisfactory explanations to taxpayers. (It is absurd since most citizens are unrelated to EPF.)

28 9/28 Contents of the law revision on EPF. No new establishment of EPF is approved (since April 204). 2. The formula to calculate MinV is renewed. (The previous formula can also be used until April 209.) 3. Deficit of reserve may be paid by installments. (Limited to EPFs which is terminated by April 209.) 4. The government will issue an order to terminate EPF whenever asset < MinV.5 (after April 209.) 5. The government supports establishment of succeeding pension plans, such as DB and DC. (by April 209.)

29 9/28 Contents of the law revision on EPF. No new establishment of EPF is approved (since April 204). 2. The formula to calculate MinV is renewed. (The previous formula can also be used until April 209.) 3. Deficit of reserve may be paid by installments. (Limited to EPFs which is terminated by April 209.) 4. The government will issue an order to terminate EPF whenever asset < MinV.5 (after April 209.) Only 0% fulfilled condition (4) in March, The government supports establishment of succeeding pension plans, such as DB and DC. (by April 209.) All EPFs are motivated to be terminated by April 209. The law revision is virtually EPF abolishment (=terminating All EPFs).

30 0/28 Contents of the law revision on EPF 2. The formula to calculate MinV is renewed. (The previous formula can also be used until April 209.) on the surface just a mathematical improvement. but the real purpose reduction of the debt Both MinV old and MinV new can be used. The debts decreases : MinV old min{ MinV old, MinV new } (Indirect ways to decrease the debt )

31 (reshown) Dilemma EPF is a financial risk for the public pension. compulsive termination? Companies have to make up a deficit for MinV. Extra premium is too much to pay for small companies. reduction of the debt? injection of public funds? It is hard to give satisfactory explanations to taxpayers. (It is absurd since most citizens are unrelated to EPF.)

32 (reshown) Solution for Dilemma EPF is a financial risk for the public pension. compulsive termination? The law revision motivated EPFs to be terminated, but not compulsive. Companies have to make up a deficit for MinV. Extra premium is too much to pay for small companies. reduction of the debt? injection of public funds? Yes, the debt was virtually reduced, but in an indirect way. It is hard to give satisfactory explanations to taxpayers. (It is absurd since most citizens are unrelated to EPF.)

33 (reshown) Solution for Dilemma EPF is a financial risk for the public pension. compulsive termination? Companies have to make up a deficit for MinV. Extra premium is too much to pay for small companies. reduction of the debt? injection of public funds? The law revision motivated EPFs to be terminated, but not compulsive. Yes, the debt was virtually reduced, but in an indirect way. quantified in Chapter 4 It is hard to give satisfactory explanations to taxpayers. (It is absurd since most citizens are unrelated to EPF.)

34 4. Influence of the law revision on public pensions.

35 /28 Quantifying social cost to abolish EPF phrases social cost abolish : expenditure of the government (or municipality) : do away with, get rid of in this context The increase in net expenditure (as the present value) induced by the law revision to terminate all EPFs. hard to estimate all factors For simplicity, let us define social cost = MinV old - min{ MinV old, MinV new } = MinV before - MinV after

36 00/ 00/7 0/ 0/7 02/ 02/7 03/ 03/7 04/ 04/7 05/ 05/7 06/ 06/7 07/ 07/7 08/ 08/7 09/ 09/7 0/ 0/7 / /7 2/ 2/7 3/ 3/7 4/ 4/7 5/ 5/7 6/ 2/28 Stock price indices in Japan dot-com bubble bursts Lehman Brothers bankruptcy discussion on EPF till the law passed (unit: yen) Nikkei soaring stock prices 0

37 3/28 Two questions Stock price discussion on EPF till the law passed Question Question Question How much the expenses were estimated to be? (at the time the bill was under discussion) Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished)

38 4/28 Answer for Question Question How much the expenses were estimated to be? (at the time the bill was under discussion) Answer The answer is clearly written on the discussion paper. (The base month of this analysis is March, 202),00 billion yen asset MinV 600 billion yen asset MinV ( US dollar = 07 yen)

39 5/28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% vertical axis : the ratio of the asset to MinV horizontal axis : represents each EPF (ascending order)

40 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) vertical axis : the ratio of the asset to MinV 0.5 horizontal axis : represents each EPF (ascending order)

41 JPN pensions 2. what s EPF? 3. law revision 4. infl. on public 6/28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0%

42 JPN pensions 2. what s EPF? 3. law revision 4. infl. on public 6/28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Two suppositions All EPFs have the same value of MinV. 2. The values of MinV after the provisional measure are also the same.

43 JPN pensions 2. what s EPF? 3. law revision 4. infl. on public 7/28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same)

44 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

45 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% MinV after = 22.7 (billion yen) MinV before = 24.8 (billion yen) Two suppositions (MinV are same) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

46 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same) MinV after = 22.7 MinV before = 24.8 vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

47 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has Threshold to fulfill the condition (4) deficit in substituted portion on Table (the requirement to exist) 40% 50% 0% Case % up asset MinV (before) Two suppositions (MinV are same) MinV after = 22.7 MinV before = % up asset MinV (after) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

48 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has Threshold to fulfill the condition (4) deficit in substituted portion on Table (the requirement to exist) 40% 50% 0% Case % up asset MinV (before) Two suppositions (MinV are same) MinV after = 22.7 MinV before = % up asset MinV (after) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

49 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Case 3 5% up asset 5% up MinV (before) Two suppositions (MinV are same) MinV after = 22.7 MinV before = % up asset MinV (after) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

50 /28 Before answering Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Case 4 8% up asset 8% up MinV (before) Two suppositions (MinV are same) MinV after = 22.7 MinV before = % up asset MinV (after) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

51 /28 Go back to Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same) MinV after = 22.7 MinV before = 24.8 vertical axis horizontal axis?? % up asset % up asset? % up MinV (before)? % up MinV (after) : the net deficit ( = MinV asset) : each EPF (ascending order) % The increase rate is replaced by the actual rate of yield EPF EPI(after) EPI(before)

52 /28 Go back to Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Termination date : March, % asset 9.57% MinV (before) Two suppositions (MinV are same) MinV after = 22.7 MinV before = % asset 0.34% MinV (after) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

53 /28 Go back to Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has Threshold to fulfill the condition (4) deficit in substituted portion on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same) MinV after = 22.7 MinV before = 24.8 vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

54 /28 Go back to Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Termination date : January, % asset 7.03% MinV (before) Two suppositions (MinV are same) MinV after = 22.7 MinV before = % asset 2.75% MinV (after) vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

55 /28 Go back to Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has Threshold to fulfill the condition (4) deficit in substituted portion on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same) MinV after = 22.7 MinV before = 24.8 vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

56 /3 202/5 202/7 202/9 202/ 203/ 203/3 203/5 203/7 203/9 203/ 204/ 204/3 204/5 204/7 204/9 204/ 205/ 205/3 27/28 Go back to Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same) MinV after = 22.7 MinV before = ,000 -,200 before after vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

57 /3 202/5 202/7 202/9 202/ 203/ 203/3 203/5 203/7 203/9 203/ 204/ 204/3 204/5 204/7 204/9 204/ 205/ 205/3 27/28 Go back to Question 2 Question 2 How much the ultimate expenses will be? (at the time all EPFs are abolished) Whether or not an EPF has deficit in substituted portion Threshold to fulfill the condition (4) on Table (the requirement to exist) 40% 50% 0% Two suppositions (MinV are same) MinV after = 22.7 MinV before = ,000 -,200 This gap represents the social cost if all EPFs were terminated at this month Not incur the social cost in this period in terms of the definition in this paper. before after vertical axis horizontal axis : the net deficit ( = MinV asset) : each EPF (ascending order)

58 5. Conclusion and further discussions.

59 28/28 Conclusion The social cost vanishes (as long as its expected value is focused on), even though it was estimated to be as much as 500 billion yen in March, 202. The strongest reason is the drastic increase in stock prices since 203.

60 Thank you for listening

61 Further discussion In this presentation, the social cost is defined as max { MinV before MinV after, 0 }, but some people may assert that social cost should be MinV after MinV before, instead. Based on this definition, either social cost or social gain is considered to have incurred for all EPFs which terminated before April, 204.