Aon Risk Solutions Global Pension Risk Survey 2017 Japan Survey Findings
Contents Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 2
Executive summary Page 1 of 2 The Aon Hewitt Global Pension Risk Survey has been conducted every two years for nearly a decade. This report is part of a global series exploring the attitudes and practices toward risk management of defined benefit plan sponsors around the world. This is the first time the survey has been conducted in Japan. The findings in this report will help sponsors to benchmark their risk management practices against those in the market in order to refine their strategies to better align with their objectives. The chart below shows trends in the Japanese market in terms of accounting liability (PBO) and assets since 1993. Funding statuses have been improving gradually, except during the 2008 financial crisis. This is mainly because of the decrease of PBO since 2003. PBO reached a high of JPY184 trillion in 2002, but since then has gradually decreased. PBO in 2016 is JPY125 trillion (a 3 decrease compared with 2002). According to the Bank of Japan, possible reasons for the reduction in PBO are as follows: Voluntary redundancy activities were conducted by many companies in the early 2000s and retirement benefits had been paid out to these people. There were many baby boomer retirees in the late 2000s and the retirement benefits had been paid out to them. A number of companies have changed their defined benefit (DB) plan to other types of plan. Employee Pension Funds, which consist of a contracted-out portion of public pension plus supplemental pension, have been abolished or changed to other types of plans, with the contracted-out portion transferred back to the government. In 2014, due to Abenomics (the economic policies advocated by Japanese Prime Minister Shinzo Abe since the December 2012 general election), the funding status of pension plans across the Japanese market rose to the highest level seen in the last 10 years. In the past few years, DB pension plans have been affected by a variety of factors, such as the low yields of Japanese government bonds and political factors within and outside Japan. These have had profound implications for funding levels. Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 3
Executive summary Page 2 of 2 Against this backdrop, we were keen to understand how schemes had reacted to the changes and what plans they had for the future. 31 schemes responded to our survey questionnaire and we present the results of the survey here. Most pension plan sponsors in Japan are still focused on maintaining current levels of risk going forward; therefore, the survey does not show that they have taken any significant actions. Instead, we found that they are fine-tuning their activities to keep pace with changes in the market. A few of them are trying to reduce risk or taking strategic risks to generate better returns. Japanese whole market trend JPY billion 200,000 150,000 100,000 50,000 0 PBO Asset Funding level 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note 1) The above graph is based on the estimated size of the Japanese market using data from listed companies (more than 3,000 companies). Note 2) Unfunded DB plans are included as well as funded DB plans in the amount of PBO. Source: Flow of Funds for the First Quarter of 2017 by Bank of Japan, June 30 2017 9 6 3 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 4
Demographics of survey participants Page 1 of 1 Demographics of survey participants We had a total of 31 responses in Japan to the 2017 survey, covering schemes with about 70,000 members and JPY410 billion of assets. Nearly half of the participating companies have less than 500 participants and JPY5 billion of assets. Most of the survey responses are from private companies, including Japanese branches of companies which are listed in other countries. Business sector Plan membership Other 3% Public traded company 27% 5,000 to 10,000 4% 2,000 to 5,000 17% over 10,000 8% under 500 4 Private company 7 1,000 to 2,000 8% 500 to 1,000 17% Pension assets Plan liabilities over JPY 10,000M 24% under JPY 500M 19% JPY 500M to 1,000M 5% over JPY 10,000M 3 under JPY 500M 3 JPY 5,000M to 10,000M 33% JPY 1,000M to 2,000M 1 JPY 2,000M to 5,000M 1 JPY 5,000M to 10,000M 15% JPY 2,000M to 5,000M 15% JPY 500M to 1,000M JPY 1,000M to 2,000M 1 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 5
Long-term objectives Page 1 of 1 In the survey, we explore the long-term objectives of respondents with respect to their pension plans, including strategies and how robust they are, the time frame for these objectives, and determining factors impacting these objectives. Only 11% of respondents do not have long-term objectives. In Japan, companies cannot insure to remove all their pension plan risks (ie, buy-out), meaning that the potential options in Japan are limited when compared with other countries. Among the respondents with long-term objectives, No change to current levels of risks is the top long-term strategy. This means that the current level of risk is acceptable to them and should be maintained in the future. Approximately 3 of respondents set more specific objectives, among them, avoiding interest/inflation risk, equity-type risk, or other long-term target. Long-term objective To afford to insure to remove all risks Avoid equity-type risk Avoid interest/inflation risks Other lower-risk position No change to current levels of risks No long-term objective 17% 61% 11% 1 2 3 4 5 6 7 8 9 10 We also asked respondents about their expected timeframes for achieving their long-term objective. The majority of respondents (6) expect to achieve their long-term objectives within five years. This is not surprising when the longterm objective for the majority of respondents is No change to current levels of risks. The remaining respondents anticipate that it will take five years or more to achieve their long-term objective 2 of respondents think it will take 15-20 years. Timescale to reach long-term goal 5-10 years 2 15-20 years 2 10-15 years Over 20 years Under 5 years 6 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 6
Further analysis of long-term targets Page 1 of 1 We asked respondents what key factors will influence how long it will take them to reach their long-term objective. Three key themes stood out the amount of risk they are willing to take (6), the employer s ability to make contributions (2), and the level of long-term interest rates (2). Among those factors, the amount of risk they are willing to take is the top factor determining the time it will take to achieve their long term objective. This finding is mirrored in the survey results seen in other countries. None of the respondents believe that a fixed timeframe, resources to execute their plan, or the level of corporate bond yields to be key factors. Factors determining time to long-term objective Resources to execute our plan The level of long-term interest rates 2 Fixed timescale The level of corporate bond yields The employer s ability to make contributions 2 Amount of risk we are willing to take 6 Given the competing factors, it is important for schemes to have a flight plan. A flight plan will help them to reach their long-term objective by identifying and taking opportunities to move closer to their chosen end game. As part of the Global Pension Risk Survey we asked respondents to describe their flight plans as robust, basic, or aspirational. A robust flight plan is one which has been stress-tested and modelled so that it is known how it will perform in different scenarios A basic plan is expected to achieve its long-term objective, but has not yet been subject to rigorous challenge or testing An aspirational plan is one where the long-term objective has been set higher than the technical provisions, but there are no formal plans to actually reach this objective at the current time Regardless of the size of schemes, all respondents are actively working towards having a robust plan in place. Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 7
Managing benefits and liabilities Page 1 of 2 We asked respondents about their attitudes towards strategies for managing DB pension plan benefits. Closing DB to new entrants and freezing future accruals for existing employees are major actions for reducing the cost of defined benefit pension provision. Instead of providing a DB plan, respondents are implementing DC plans; this is in line with overall trends in the Japanese market. However, it appears that the majority of respondents are not planning to implement any actions to reduce DB cost. This may be because companies are not familiar with these actions and they are not sure that they are achievable. 5% of respondents think that closing their DB plan is not possible under Japanese defined benefit law, even though it is allowed. Benefit actions Wha is your attitude to the following strategies over the next 12-24 months? Already implemented Very likely to implement Somewhat likely to implement Not possible by law Unlikely to implement Not applicable/don t know 5% Closing DB plan to new entrants and replacing with DC 1 1 42% 21% 5% Restricting level of earnings on which accrue pension 47% 47% 5% Reducing future pension benefit levels but retaining DB-style benefits 47% 47% 5% 5% Reducing future DB accrual and supplementing with additional DC 47% 42% 5% Freezing future DB accrual for existing members and replacing with DC 1 47% 32% 2 4 6 8 10 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 8
Managing benefits and liabilities Page 2 of 2 The other approach to managing benefits and liabilities is to offer members options to take their benefits in other forms. These may either offer an immediate funding gain to the scheme due to the conversion terms; reduce the overall risk being run by the scheme; or simply reduce the overall size of the scheme because members transfer their benefits out. In Japan, the potential options are very limited under pensions law and very few respondents have taken those actions. Buying an insured annuity is not a feasible option. Regarding paying a lump sum instead of a pension, companies can encourage employees to choose the lump sum, although take-up is totally at the discretion of employees. Longevity risk is not serious in Japan because many schemes do not provide a lifetime annuity to their employees; therefore, none of the respondents have acted to hedge this risk. Liability management What is your attitude to the following stragies over the next 12-24 months? Already implmented Very likely to implement Somewhat likely to implement Unlikely to implement Not aware of but interested if possible Not applicable/don t know Insured annuity 44% 5 Paying a lump-sum instead of pension 5 44% Hedging longevity risk 5 5 2 4 6 8 10 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 9
Investment strategy considerations Page 1 of 3 With the maturity of DB schemes ever increasing, the focus on investment strategy intensifies. In this section of the survey, we investigate the extent to which schemes have acted in these areas in the recent past, and also ask what their future plans are. Investment changes What changes have you made in the last 12 months to your target investment strategy? Reduced Not changed Increased Local equities Global equities 8% 92% 25% 75% Fixed government bonds Index linked government bonds Corporate bonds Property Insurance Alternative assets Illiquid assets Derivatives Active asset allocation 8% 8% 83% 10 92% 10 92% 82% 10 91% 10 8% 8% 18% 9% 2 4 6 8 10 Our opening questions were aimed at understanding what changes schemes had made to their asset allocations over the past twelve months. One-third of respondents were not clear on the details of their investment strategy and they were removed from the above chart. Most of the respondents who were aware of their investment strategy had not changed their target investment strategy over the past 12 months. As most of the respondents intend not to change their current level of risks in the long term, it is fair to say that they do not change their investment strategies very often. The portfolio changes that the survey did highlight show a move away from global equities (25% down) and a move toward alternative assets (18% up). In other countries, plan sponsors have generally been reducing their exposure to equity markets and are moving towards strategies where a diverse portfolio of return-seeking assets is combined with a liability matching portfolio. We cannot see this trend happening in Japan. Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 10
Investment strategy considerations Page 2 of 3 Future changes to investment strategy Investment changes What changes do you expect to make in the last 12 months to your target investment strategy? Local equities Global equities Fixed government bond Index linked government bonds Corporate bonds Property Insurance Alternative assets Illiquid assets Derivatives Active asset allocation 9% 1 1 10 10 10 91% 91% 10 10 89% 9 9 10 Reduce Not change Increase 11% 2 4 6 8 10 9% We saw in the high level results that the main trend over the previous twelve months had been for schemes not to change their target investment strategy. We asked the same question, but this time in relation to expected changes in asset allocation over the next twelve months. The results are shown in the chart above and at first glance are almost a carbon copy of the backward looking results, showing that no significant changes are anticipated to investment strategies. We can still see a move toward alternative assets (11% up). Respondents are least optimistic about illiquid assets, and derivatives (all down by 1). Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 11
Investment strategy considerations Page 3 of 3 Delegation What is your attitude to having your professional advisers implement aspects of your investment strategy? Implementation of entire investment policy Implementation of a particular asset class Hedging Tactical asset allocation Manager selection Manager monitoring Yes, delegate No, but very likely to delegate No, but somewhat likely to delegate No, unlikely to delegate No, and haven t evaluated / Don t know 22% 22% 22% 28% 24% 39% 17% 39% 44% 28% 44% 47% 33% 33% 33% 28% 22% 24% 22% 2 4 6 8 10 Once the investment strategy has been set, there is the question of how it is implemented. We asked respondents about their attitude toward delegating implementation to a third party across a wide spectrum of investment activities. Not surprisingly, the monitoring of managers is already heavily delegated (39%) and remains the most popular area of delegation. However, even the least popular area delegation of the entire investment strategy has already been carried out by almost one-quarter of respondents, with a further 17% very likely or somewhat likely to follow suit. Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 12
Investment Strategy Implementation In More Depth Page 1 of 1 Hedging risks Hedging policy Interest rates Credit Currency 58% 58% 3 3 27% 25% 25% 8% 8% 8% 8% At 'fair value' Pre-determined triggers We will not hedge No policy We asked in the survey about the general policy for hedging three different types of investment risk. What is interesting is the variety of approaches taken with respect to the various risks. Generally, interest rate risk and currency risk were viewed similarly and the most common approaches were to hedge these risks at fair value (58%). In contrast, the common response to credit risk was that there is no hedging policy (3). A policy of deliberately not hedging this risk was also prevalent (27%). This difference in philosophy may arise because credit risk is generally judged to be a risk that is rewarded and is therefore worth retaining. The final risk we surveyed for views on hedging was longevity risk. In general, Japanese schemes are less exposed to longevity risk because most of them do not have a lifetime annuity. Hence, half of the schemes are not exposed to longevity risk and 14% of respondents do not expect to hedge this risk. A further third have not considered their approach to longevity risk. Longevity hedging How do you plan to manage your scheme s longevity risk in future? 6 5 5 4 3 2 1 Do not expose to longevity risk 14% Do not expect to hedge Plan to hedge longevity risk Want to remove longevity risk Not yet considered Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 13
Monitoring and mitigating pension risk Page 1 of 1 Under Japanese defined benefit law, plan sponsors are generally required to do a fiscal year-end closing of their DB plans once a year. The growth of DB pension schemes also makes this monitoring and management of risks increasingly important, with one in five respondents monitoring each aspect of risk quarterly. Conversely, some respondents have never carried out those monitoring activities. Frequency of monitoring Weekly or more frequently Monthly Quarterly Annually or less frequently Never Value at risk, mid-term cost projections, sensitivity analysis or other measure of cost volatility Insolvency risk of the sponsor Long-term target funding level Projected next year P&L cost Projected year-end balance sheet Ongoing cash-funding level Asset values 21% 5 29% 2 23% 47% 54% 25% 75% 24% 33% 5 71% 5 33% 33% 23% 0 0.2 0.4 0.6 0.8 1 The past few years for DB pension schemes have been dominated by the persistent low levels of Japanese government bond yields compared to the more distant past. This has had some implications for funding levels. We asked respondents what the effect has been for them and what their likely response will be. Response to low yields What has happened to your funding level? Funding level worsened 17% Funding level improved 33% 5 of respondents have seen no changes to their funding level. Among those respondents who have seen change, two-thirds saw an improvement in their funding level. Funding level unchanged 5 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 14
Hot topics In More Depth Page 1 of 2 Response to low yields What action did you take for low yields? More investment risk Higher contributions 17% Longer recovery plan 17% No special action 67% Accelerate derisking 1 2 3 4 5 6 7 We saw in the main body of the results that the impact on funding levels across DB schemes had been mixed, with 5 seeing no change, 33% reporting an improvement and 17% seeing a worsening of the funding level. Against this backdrop, we were keen to understand what actions were being taken by schemes that had experienced a change in funding level, and this is summarised in the chart above. The majority of respondents are not taking any actions because their funding level has not changed. The remainder have put in place longer recovery plans or increased contributions to their DB plans (both actions taken by 17%). Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 15
Hot topics In More Depth Page 2 of 2 Risk-sharing corporate pension plan At the beginning of 2017, a new type of pension plan, referred to as a risk-sharing corporate pension plan (RS plan), became available in Japan. The purpose of this new arrangement is to help companies reduce or eliminate pension-related risks from their books and increase plan solvency in case of an adverse economic situation. The RS plan is governed by Japanese defined benefit law and has the characteristics of both traditional defined benefit and defined contribution plans. Similar arrangements exist already around the globe, such as the collective defined contribution plans in the Netherlands, target benefit plans in Canada. They are also widely discussed in the United Kingdom, sometimes referred to as and target ambition plans. We asked respondents what their attitudes towards the RS plan were. Just over 4 of respondents have an interest in implementing an RS plan and 15% of respondents with an interest are likely to implement this arrangement. RIsk-sharing corporate pension plan What is your attitude towards an RS plan? Very likely to implement Somewhat likely to implement Unlikely to implement Don t know, but interested to explore Don t know, and not interested 47% 35% 12% 1 2 3 4 5 6 7 8 9 10 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 16
Contacts Tomohiro Soga +81(0)3 4589 4324 tomohiro.soga@aonhewitt.com Sayuri Tsubakihara +81(0)3 4589 4316 sayuri.tsubakihara@aonhewitt.com Zempei Watanabe +81(0)3 4589 4326 zempei.watanabe@aonhewitt.com About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative retirement, health, and talent solutions. We advise and design a wide range of solutions that enable our clients success. Our teams of experts help clients navigate the risks and opportunities to optimize financial security; redefine health solutions for greater choice, affordability, and wellbeing; and achieve sustainable growth by driving business performance through people performance. We serve more than 20,000 clients through our 15,000 professionals located in 50 countries around the world. For more information on Aon Hewitt, please visit: aon.com Follow Aon on Twitter: twitter.coma/aon_japangroup Sign up for News Alerts: http://aon.mediaroom.com/index.php?s=58 Aon Hewitt Global Pension Risk Survey 2017 Japan Survey Findings 17
About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. Aon plc 2017. All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: 4396810. Registered Office: The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN www.aon.com