The incident in which AIJ Investment Advisors Co. lost most of ¥145.8 billion in pension assets through bad investments highlights problems related to the type of corporate pension fund known as kosei nenkin kikin. According to the Securities and Exchange Surveillance Commission, 84 corporate pension funds, 74 of them kosei nenkin kikin, entrusted ¥145.8 billion to AIJ, which incurred ¥109.2 billion in investment losses.
Kosei nenkin kikin manage private corporate pension assets as well as part of the pension premiums that must be paid into the nation’s kosei nenkin pension program, which is for corporate workers. The kosei nenkin kikin system was set up in 1966 when Japan was enjoying high economic growth. At that time, it was expected that because of the high growth, higher yields and subsequently better pension benefits would be obtained than if the management of pension premiums was entrusted entirely to the government. At their peak, there were 1,883 kosei nenkin kikin.
Given low stock prices and low interest rates in the postbubble economy, the raison d’etre of kosei nenkin kikin seems to have almost disappeared.
A major problem is that many kosei nenkin kikin are still trying as their goal to secure a 5.5 percent yield. To pay high pension benefits, many kosei nenkin kikin have used up their accumulated kosei nenkin premium reserves. Some had no choice but to rely on AIJ, which promised high yields.
In many cases, enterprises that were members of kosei nenkin kikin made up for decreases in kosei nenkin premium reserves and returned the management of kosei nenkin premiums to the government. They then set up corporate pension funds that do not manage kosei nenkin premiums. As a result, the number of kosei nenkin kikin has decreased to 577, most of them formed by small or medium-size companies.
To stabilize the operation of kosei nenkin kikin, it is necessary to lower the benefits paid out from the investment of pension assets. But to do so, two-thirds or more of the employees and pensioners need to agree to the measures.
To disband kosei nenkin kikin, enterprises must at least make up for shortages in kosei nenkin premium reserves. But these days many businesses are financially too weak to do so.
The government should rethink the kosei nenkin kikin system, including its possible abolition. The bottom line is that it needs to strengthen the public pension system to stabilize pensioners’ lives.