With an aging population, a decreasing birth rate, and the baby-boomer generation about to retire, you’re sure to have some idea of the depth of the AIJ scandal involving the loss of pension funds for some 880,000 Japanese. Just how did something like this happen and what will it mean for these pensioners? This article will simplify the background of the Japanese pension system and explain how mismanaged funds could produce disastrous results for retirees expecting to live on their pensions.
The Japanese pension system is comprised of both a national pension insurance (kokumin nenkin) and an employees’ pension insurance (kosei nenkin). To briefly explain them both:
National pension system
All residents of Japan (between the ages 20-60) are required to pay into the national pension scheme. This includes foreign residents. The aim of the national pension is to provide a basic pension to all residents, falling into 3 categories:
- Disabled – paid under certain conditions when a pensioner becomes disabled
- Bereaved – paid to pensioner’s wife and/or children should the pensioner die
- Elderly – paid, in principal, when the pensioner reaches 65 years old
Employees’ pension system
This pension system is mainly for those who are employed by private companies. Pension premiums are deducted from his/her salary. When one is enrolled in the employee pension system, he/she is automatically enrolled in the national pension system as well. As such, he/she would be entitled to higher pension payments in the future.
Pension payments are made by the company and the employee to the Japan Pension Service, a government organization administered by the Department of Health, Labor and Welfare (which replaced the Social Insurance Agency in 2010). Companies are permitted to borrow some of the employee contributions to expand their business through investments, with the intention of returning the borrowed funds to the Pension Service so the employees can draw from their pensions in the future. The borrowed money, combined with the company contributions, can then be invested with a fund manager. To increase possible returns, small businesses often join a co-operative, pooling their funds with other small businesses to increase their investment.
In an ideal situation, the funds will return a profit. However, should that fail to happen for whatever reason, the companies would find themselves in dire straits to return the borrowed money to the Pension Service. The repercussions go far beyond that, however. Consider this chain of events:
- The companies cannot repay the Pension Service for the borrowed funds
- The companies are responsible for repaying what was borrowed using their own funds
- The companies are in danger of bankruptcy because they can’t afford to make the payments
- Upon bankruptcy, the company can write off their contributions, which means that employees may be able to collect some of their pension, but not all
What about the responsibility of the co-operatives? They shoulder quite a burden:
- The responsibility to repay the Pension Service is spread across the entire co-operative
- Should a member of the co-operative be unable to make payments and therefore declare bankruptcy, the burden is then shifted to the remaining members, making it more likely that they too, will be unable to shoulder the burden, and end up filing bankruptcy themselves
This is precisely what happened in the case of AIJ. Asset manager Kazuhiko Asakawa invested the funds from more than 90 corporate pension funds, representing approximately 880,000 people and because of poor performance, the funds were lost – to the tune of 109.2 billion yen ($1.32 billion US). What’s worse is that Asakawa covered up the losses for almost 9 years, from 2002-2011, producing falsified investment reports inflating AIJ’s asset size and investment results. Also under investigation is ITM Securities Co., a small Tokyo brokerage that promoted and sold AIJ’s services. Though it is unclear whether or not ITM was aware of AIJ’s fraudulent activity, ITM’s founder, Hideaki Nishimura, has denied having any prior knowledge.
As of this month, the Securities and Exchange Surveillance Commission (SESC) has only been able to locate 8.9 billion of the 209 billion yen in net assets that Asakawa reported to have. Results of this have been almost immediate, with several smaller companies facing bankruptcy and others being forced to dissolve their employee pension funds.
So what can be done to prevent this kind of disaster from happening in the future? Ideas being tossed around include limiting risky investments and, according to the Health Ministry, limiting the percentage of a pension fund’s assets invested with any one manager. It is no secret that many mid- to small-sized Japanese pension funds are handled by fund managers who are both unskilled and lack the professional experience necessary to manage pension funds. According to a survey by the ministry, 80 percent of corporate pension funds have no one with experience in asset management. What is surprising to learn is that these managers are often former employees of the Social Insurance Agency – the government agency that was responsible for overseeing national pension policy before it was abolished in 2010 and replaced by the Japan Pension Service.
The Japanese Ministry of Health estimates the nation’s total population will decrease by 25% from 127.8 million in 2005 to 95.2 million by 2050. Japan’s elderly population, aged 65 or older, comprised 20% of the nation’s population in June 2006, a percentage that is forecast to increase to 38% by 2055.
Whether or not any new regulations can repair Japan’s pension system is the billion Yen question, however for those 880,000 employees directly affected by the AIJ scandal, these regulations will be too little, too late.
Article by Select Asset Management