Entire pension fund system must be overhauled
The recent scandal involving AIJ Investment Advisors Co. has exposed a structural problem concerning corporate employees' pension funds.
The Health, Labor and Welfare Ministry bears a heavy responsibility as it effectively ignored problems by failing to take appropriate measures, even though it was clear the entire system needs fixing.
The Diet is desperate to pursue the responsibility of those involved in the scandal, having summoned AIJ President Kazuhiko Asakawa as an unsworn witness. However, the Diet and administrative authorities should work to substantially improve the system and leave to investigators the task of uncovering the company's activities, which border on fraud.
AIJ is suspected of claiming to earn large profits through the stable management of assets in order to conclude contracts with corporate employees' pension funds that had trouble managing their money.
Of about 580 corporate employees' pension funds in Japan, about 70 signed contracts with AIJ. However, even those that did not do so have trouble managing their assets.
Corporate employees' pension funds are designed to manage not only contributions paid into corporate pension programs but also part of the public pension programs, and to pay out pensions to retirees.
Guaranteed high yields
At one time, these funds secured high yields, but their performance has deteriorated in recent years due to falling share prices and low interest rates. As a result, many corporate employees' pension funds are running short of reserves needed to pay pensions.
In addition, 90 percent of these pension funds set guaranteed yields at an annual rate of 5.5 percent, the same yield as when the economy was booming. Based on this yield, the funds promised substantial payments to pension beneficiaries. In an effort to achieve this guaranteed rate, the funds that entrusted their assets to AIJ ended up suffering massive losses.
The corporate employees' pension fund system has been unable to cope with the changing environment. Most of the funds offered postretirement jobs to former officials of the Health, Labor and Welfare Ministry and the now-defunct Social Insurance Agency. A total of 689 such people were on their payrolls as of March 1.
The government cannot evade criticism that it has failed to take drastic measures to improve the system, partly because of the tight personnel network of former welfare ministry officials.
The welfare ministry has finally begun considering measures to bring pension funds more in line with the situation today, such as by relaxing the rules to allow them to reduce payments. It has established a panel of experts for this purpose.
Reviewing the current system's unduly generous conditions, such as an extremely high guaranteed yield, may result in cuts in pension benefits and hikes in pension premiums. However, the system cannot be maintained if the pain accompanying such revisions is put off.
Learn lesson from AIJ scandal
This not only concerns corporate employees' pension funds, it involves the entire public pension system. The AIJ scandal should make the authorities and those concerned with the pension system even more aware of the serious situation surrounding the current pension system.
In the wake of the AIJ scandal, the Financial Services Agency for the first time investigated the entire investment advisory industry. As a result, it came to light that only about half of investment advisory companies had been screened by outside auditors.
We should not tighten regulations without reason, but given that investment advisory firms are entrusted with the management of pension funds, which are supposed to support retirees, we are disturbed by the lack of transparency in their management.
The government also should urgently review the Financial Services Agency's methods of monitoring the investment advisory industry.
(From The Yomiuri Shimbun, April 16, 2012)