A Tear in Japan's Safety Net

Workers at Japan's great corporations used to count on two things: a job for life and a decent pension. Lifetime employment in Japan is long gone, picked apart by relentless restructurings. And pensions? A recent series of assaults on big corporate plans raises the possibility that this other pillar of the corporate social contract may be crumbling, too.

The latest implosion of a major pension plan took place at Japan Airlines, which slid into bankruptcy three months ago. On Mar. 18, JAL got permission from the Labor Ministry to slash pension benefits by up to 50% for its 24,000 current and former employees.

Then on Mar. 23, Mitsubishi Heavy Industries said it wanted its workers and retirees to accept cuts that would ease the pressure on its plan, which is underfunded by 259 billion yen ($2.8 billion). Mitsubishi is trying to narrow the pension deficit before new accounting rules take effect in 2012. The new rules will require companies to state in regulatory filings their full unfunded pension liabilities instead of spreading the amount over a longer period.

Since 2002, when the government first allowed companies to cut pensions for retirees, the Labor Ministry has received only six requests to do so. But more companies are expected to try as pension costs mount and the date for the accounting change looms closer. JAL, phone giant NTT, Mitsubishi Heavy, and travel agency Kinki Nippon Tourist publicly have said they want to lower their pension payouts.

Low bond yields, an aging population, and a drop in the stock market to a quarter of its 1989 peak have put a squeeze on Japan's corporate pension funds. Japan's top 278 companies were a combined 21.5 trillion yen ($230 billion) behind on pension funding in fiscal 2009, a 50% increase from the previous year, according to a study by Tokyo's Daiwa Institute of Research. Unfunded liabilities at Hitachi, the country's largest private employer, totaled 1.1 trillion yen ($11.8 billion)—triple the pension deficit that helped sink JAL.


Two-thirds of a company's retirees have to support proposed cuts before a company can seek clearance from regulators to reduce pension benefits. Pressed by their old employers, many retirees vote against their own financial interests. Nobuzaki Yamazaki of the Research Institute for Policies on Pensions & Aging in Tokyo, points out that "retirees feel an emotional connection with people still at the company. The feeling is that 'if current workers can accept a cut, then so can we.'" Other pensioners are angry. "How can you just throw away a contract?" asks Etsuko Hamaya, a 62-year old former JAL flight attendant who retired in 2008 after almost 40 years of service. She stands to lose $650 of her monthly income and voted to keep the plan unchanged.

Defined-benefit programs, which make regular payments to retirees regardless of the ups and downs of the market, remain popular in Japan. According to Stamford (Conn.)-based research firm Greenwich Associates, some 60% of Japan's corporate pension assets are still in defined-benefits plans, which U.S. companies started to phase out decades ago. Many U.S. companies have switched instead to 401(k)-type plans that push the investment risk onto workers.

Now some Japanese companies also want to lighten their loads. Nippon Telegraph & Telephone (NTT), which posted Japan's highest operating profit in fiscal 2008, still has 576 billion yen ($6.2 billion) in unfunded pension liabilities as of last fiscal year. It has been trying for six years to reduce payouts to its retirees. After regulators rejected the telco's petition, NTT pressed on in the courts: The Supreme Court is expected to decide the case this year. In February, Kinki Nippon Tourist, one of Japan's top travel agencies, which lost $8 million in 2009, persuaded its 1,400 retirees to take a 10% cut in their pensions. In March the company got its 2,100 current workers to accept a similar deal.

Economists had hoped Japan's baby boomers would spend their pensions and savings when they retired, weaning Japan off exports as the big source of growth. "Before the baby boomers started to retire there was lots of talk about how they would boost the economy. But that hasn't happened," says Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute. "Instead, people are worried about their pensions, and they don't know how long they're going to live or how much money they'll need. So they're holding on to their funds."


The Japanese see a possible impact on their work culture as well. "What's worse is the simple fact that companies are saying, 'we're not going to keep our promises,'" says Motohiro Morishima, professor of human resource management at Hitotsubashi University in Tokyo. That erosion of trust, Morishima says, could damage the competitiveness of Japanese companies, which tend to rely on shop floor employees to police themselves and refine work processes. "You've got to keep people on the front lines committed or the system is too risky," says Morishima. "There could be big problems."

Taizan Hayashi, a 70-year-old retiree who worked at NTT for four decades, says the company bullied people into voting for the reductions, a charge that many pensioners also levy against JAL. Hayashi persuaded 285 fellow pensioners to sue NTT to stop the plan changes. The lawsuit was thrown out on procedural grounds, but Hayashi is still speaking up. NTT retirees received phone calls and visits to their homes from company representatives. "I got a couple of calls. Other people got more," says Hayashi. "It was like having a bill collector on your back."

NTT spokesman Fumihide Asano says the company didn't pressure retirees unfairly and that retirees accepted the deal because they understood that "difficult business conditions made it necessary." JAL spokeswoman Szu Hunn Yap says JAL's phone calls to retirees simply helped explain the reason for the cuts: "Some of these people have been away from the company for a long time and may have been out of touch with what was happening."

For retired flight attendant Hamaya, a new, more frugal life awaits. "When I was 55, I looked at how much I would get and thought, 'I can make it on this much,'" she says. "My plans have been turned upside down."

Before it's here, it's on the Bloomberg Terminal.