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The Diet passed into law Friday a new defined-contribution pension bill that will go into effect Oct. 1, introducing a scheme modeled on the U.S. 401(k) plan, the benefits of which hinge on the performance of investments.

The House of Councilors endorsed the bill at a plenary session to complete the legislative process. The bill was approved by the House of Representatives last week.

The new law will work with a defined-benefit pension law, which was enacted June 8 and will take effect April 1, to drastically reform the corporate pension system by increasing the options for companies adopting pension programs for their employees.

At present, companies are only allowed to operate defined-benefit pension schemes. Introduction of the 401(k) type is a result of difficulties in paying out guaranteed benefits due to the sluggish stock market and low interest rates.

Under the modified system, companies will choose between the two plans, although the 401(k) law requires that firms gain the consent of labor unions before they introduce it. The issue is expected to be a major source of dispute in the upcoming annual spring wage negotiations between labor unions and companies that want to reduce their financial burdens by switching to the 401(k)-style program.

The Japanese 401(k) defined-contribution program applies to people aged under 60, excluding married women who have no paid employment and government employees.

The pension will be in two forms — one in which companies pay premiums and the other in which individuals pay premiums. Payments by both sides are not permitted.

Among its major features, the program allows company employees to instruct pension fund managers as to which financial products their contributions should be invested in, while employees who change jobs can transfer their pension assets if they have worked for at least three years. The new defined-benefit program gives workers two options — a contract type fund under which outside managers handle premiums based on an agreement with employees and a fund type under which companies jointly manage funds.

It requires companies to maintain a certain level of reserves to meet guaranteed pension benefits to workers for at least five years after the publicly mandated pension eligibility age. The age is due to be gradually raised from the current 60 to 65 from fiscal 2013.

Companies will also be required to reassess their pension plans at least once every five years to maintain sufficiently sound assets and ensure that workers with at least 20 years of service receive benefits.

The law also requires that programs now managed by life insurers and other investment managers mainly for smaller companies be converted into the new schemes within 10 years.

If firms want to convert existing pension funds into the new defined-benefit program, the government will allow those funds to repay the state-financed portion of pension premiums in stock portfolios, rather than in cash, to keep the funds from unloading stockholdings to repay the government.

Premiums will generally be paid by companies, but workers could also pay them if they choose to do so.

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