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 talents. This challenge is further toughened for foreign owned companies entering the Japanese market who often find 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 spot-light. 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, employee’s 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 for 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, give 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.