First in an occasional series

Staff writer

A new pension system modeled on the U.S. 401(k) plan is expected to create abundant business opportunities in Japan. Skandia Life Insurance Co., the Japanese unit of a Stockholm-based insurer group, will try to grab a piece of the pie by offering variable insurance funds, in which it specializes, and probably variable annuities as well.

Skandia has recently promised to provide insurance products to a major Japanese bank to fit 401(k)-type plans, said Sumio Shimoyama, head of Skandia’s Tokyo office. The unnamed bank is jointly developing an operating system in a cross-sector group centered on the Bank of Tokyo-Mitsubishi and Sumitomo Bank.

The insurer will meanwhile tie up with Nomura Securities Co. and Industrial Bank of Japan to set up a firm that manages individual pension accounts.

The Nomura-IBJ alliance also forms another group of financial institutions that have teamed up to split the high costs of developing a record-keeping system.

“Both projects are only at the preliminary stage,” Shimoyama said, explaining that a legal framework is still in the making.

Four government ministries, led by the Health and Welfare Ministry, will complete a basic draft in June so that new private-sector pension plans with tax advantages can be adopted in fiscal 2000, which starts in April.

The new scheme would allow firms to adopt “defined-contribution” retirement savings plans, for which benefits could vary depending on returns on the investments chosen by the employees. A portion of their salaries could be withheld monthly and invested in financial instruments such as mutual funds, which are managed in stocks or bonds.

For their part, employers would make matching contributions but bear no responsibility for final returns.

The existing “defined-benefit” corporate pensions guarantee a fixed amount of annuities and are becoming a financial burden on many employers.

“This is the kind of business opportunity we cannot afford to forgo, but it will take considerable time before the potential market becomes really lucrative,” Shimoyama said, estimating that it will take above five years before substantial profits can be made.

When the new corporate pension scheme is adopted, Skandia’s variable insurance funds will become a part of investment options for employees.

Variable insurance is essentially a composite vehicle of life insurance and mutual funds. While basic insurance payouts are guaranteed, overall benefits vary depending on investment returns.

Variable annuity functions in a similar way. Skandia will begin marketing such annuities subject to the financial authorities’ approval, Shimoyama said.

The Tokyo unit, launched in 1996, held 54.9 billion yen in outstanding personal life insurance contracts as of the end of fiscal 1998 in March this year. The Swedish insurer group, the largest in northern Europe, operates in 20 countries with total assets of some 5 trillion yen.

The insurer group entered the U.S. 401(k) market only last year and has contracted with some 100, mostly midsize, firms, he said.

Skandia has no business interest in the current defined-benefit plans. But Shimoyama personally defended positive aspects of such pensions, saying he hopes they survive the ongoing pension reform.

“They sure are attractive plans for beneficiaries if there are no structural defects” such as the rigid guarantee of a 5.5 percent annual return, he said.

“I doubt whether (the new) defined-contribution plans should be excessively promoted as being more modern.”

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