Employee Retirement Benefits

With the unemployment rate at its lowest point for two decades, the Japanese employment market remains a model for a lot of countries. Whilst a 2.8% unemployment rate is excellent, it creates a challenge for employers, who face tough competition in the employment market to attract and retain talent. This challenge is further toughened for foreign-owned companies entering the Japanese market who often have difficulty attracting and retaining a local workforce.

A recent study by the Japan Institute for Labour Policy and Training shows that the younger generation employees now entering the labour market increasingly favour life-long employment, and one-company careers (source: Bloomberg).

This raises the question of the type of employee benefit which foreign companies would give to their employees. Despite the differences in practice which can be found between industries, one of the employer’s main concerns is appealing to current and future employees.

Retirement Allowance benefits are in the spotlight. Whilst large international groups offer benefits tailored to their own needs; foreign owed small and mid-size Japanese companies have changed their focus, switching from Defined Benefit Schemes (DB) to Defined Contribution Schemes (DC).

Introduced 15 years ago in Japan, DC Schemes have seen their popularity growing, primarily as a means of alleviating the future liabilities found with DB schemes.

With DC Schemes, employees’ retirement contributions are invested in the markets, and it has been a way for companies to reduce their pension liabilities, whilst contributions are tax deductible.

However, the low cap on annual contributions, and the market risk of the scheme to deliver negative returns, has lead employers in industries with highly qualified employees, such as the high technology and pharmaceutical sectors, to focus the retirement benefits they offer on a controlled type of DB Scheme utilising Japanese Life-Insurance products to provide the defined benefit for the employee, whilst maintaining full budgetary control of the cost side.

This guarantees the employee a defined Retirement Allowance amount, proving to be a key factor in attracting Japanese talent to work for a foreign-owned company rather than their Japanese competitors.

The Retirement Allowance Benefit the employee receives attracts a very favourable rate of taxation for the employee.

Thus, the use of Japanese Corporate Life Insurance to provide DB Schemes, gives employers an important advantage in the labour market place, with the added benefit that contributions to Corporate Life Insurance policies are deductible for Japanese Corporate Income Tax purposes.

Japanese Pension Refund for Foreigners

A recurring question for foreign workers in Japan is the question of the Japanese Pension contributions.

Contribution to the Japan Pension Service, along with Social Security contributions and Labour Insurance contributions, are compulsory for anyone working in Japan and those contributions are directly collected and paid by the employer.

For those who are in Japan for a determined period, or who plan not to retire in Japan, then the question of the fate of their contributions to the Japanese national pension system often remains unclear once they decide to leave Japan.

Japan has signed over the years several social security agreements with different countries to avoid for a foreign national to have to contribute in both Japan and his own country, and to totalize period of employment in both Japan and the other country. As of February 2017, those countries are Germany, United Kingdom, Republic of Korea, United States, Belgium, France, Canada, Australia, Netherlands, Czech Republic, Spain, Ireland, Brazil, Switzerland, Hungary, India. In addition, agreement have been signed and are in the process of being implemented with Italy, Luxembourg, Philippines, Slovak Republic.

For a foreign passport holder after having been employed and contributing to the Japanese public pension for more than 6 months the choice would be to either:

          Leave pension contributions in Japan. This can leave a door open if the foreigner plans on returning to work in Japan. For a passport holder of one of the above-mentioned countries, those contributions would then count under the conditions determined by the social security agreement.

          Claim for a Lump-Sum Withdrawal Payment under certain conditions. This would close the door to application of any other Japanese benefits.

On leaving Japan permanently, it is required to both file a tax return before leaving and settle tax amounts due, or appoint a Tax Representative.

To make the claim for the Japanese Pension Contributions it is advisable to appoint a Tax Representative, who can also make the Pension refund application.

The Pension refund will have 20% withholding income tax deduction taken before the balance is transferred overseas, and the Tax Representative can then file an annual tax return the following year to claim back the 20% tax deducted and remit this to the leavers overseas bank account.

The amount of the Lump-Sum Withdrawal Payment varies depending on the length of the contribution period with a limit of 36 months. For a foreigner having worked in Japan for more than 36 months the payment will be calculated up to 36 months and the rest of the period of contributions will be lost. It cannot be taken account in the case of a return to employment and contribution to the Japan Pension Service in the future and the benefits would then restart from zero.