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The Lower House on Friday approved a new defined-benefit pension bill that will drastically reform the corporate pension system.

The bill is designed to create hybrid pension programs combining features of both defined-benefit and defined-contribution plans, with an eye to protecting employees’ rights to receive pension benefits.

The approval by the Lower House paves the way for the bill’s enactment next April.

Under the legislation, companies will be obliged to maintain a certain level of reserves to meet guaranteed pension benefit payments to workers for at least five years after mandatory retirement, which is set between the ages of 60 and 65.

Companies will also be compelled to reassess their pension plans at least once every five years in order to maintain their financial health and to ensure that workers with at least 20 years of service are eligible for pension benefits.

The bill reshapes current corporate pension schemes into two models.

These are a “contract type” that outside managers will manage based on agreements between workers and employers, and a “fund type” under which companies will jointly manage funds.

Programs managed by life insurers and other investment managers mainly for smaller companies will need to be converted to the new schemes within 10 years.

Should companies wish to transform their existing employee pension funds into the new defined-benefit programs, the government will allow these funds to repay the government-financed portion of pension premiums in stocks rather than cash.

This is to avoid a scenario in which stockholdings are liquidated in order to repay the government in cash.

Under the new defined-benefit programs, companies will generally pay premiums although workers, subject to their agreements, could also pay them. Contributions to pension plans by employers will be treated as tax-deductible losses.

The government also aims to win Diet approval of another bill, carried over from the previous Diet session, to introduce defined-contribution plans.

These are the Japanese version of 401(k) pension schemes in the U.S., under which benefits hinge on investment performance.

Under the modified corporate pension system, the government plans to allow companies to choose between the defined-benefit program and the defined-contribution scheme.

Japanese companies are currently allowed to operate only defined-benefit plans, but face difficulties in funding guaranteed benefits due to the sluggish stock market.

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