Benefits in Japan

While Japan’s employers seek to cut back on employees, pay and bonuses during the recession, core benefits such as healthcare and pensions are coming under the spotlight, says Tom Washington

As the global financial crisis deepens, Japan’s reliance on exports saw its GDP fall by 12.8% between October and December 2008 compared with the same period in 2007, and unemployment rise to 4.4% in February 2009 from 4.1% in January. Former mainstays of Japanese industry, such as the automotive and technology sectors, are in decline and are suddenly under pressure to cut costs. Dustin Wasserman, consultant, health and benefits at Mercer Japan, says: “The economic problems took a bit of time to reach here, but employers are really starting to be hit. They are not able to export their products any more.”

Japan’s labour laws are geared towards protecting the employee, and employers are unable to make large-scale redundancies without proving there will be dire consequences for the business unless they do so. They must also agree on redundancies with the Ministry of Health, Labour and Welfare before taking action. In recent months, therefore, some employers have offered staff voluntary severance packages. “Employees are not only helped with monetary issues, but employers will often offer other assistance, such as employment services, to help them carry on with their career,” says Wasserman.

Japanese employers are also making cutbacks in other ways. Full-time, permanent staff are put on a ‘seishain’ contract, under which they typically receive two annual bonuses that make up a significant part of their remuneration package. Steve Brown, principal, retirement, risk and finance at Mercer Japan, explains: “It is not a bonus like you would see in Western terms as it is built into the package, but it gives the employer the ability to not actually pay it. We are not only seeing pay freezes, but some employers are not paying these bonuses either.”

Traditionally, Japan’s financial and high-tech industries have tended to offer more competitive perks than other sectors. This is partly due to the increasing globalisation of benefits packages at multinational organisations. In particular, there is pressure from the headquarters of US firms, especially when it comes to core perks such as pensions and healthcare.

Unlike many other countries in Asia, Japan has its own universal healthcare system, which is comprehensive and relatively cheap. Although it is a statutory requirement for employers to pay for annual health checks for staff, healthcare is not perceived as an employer-sponsored benefit because of the national system. Everyone is offered essentially the same base level of care, so staff are, typically, unconcerned about healthcare perks.

But Koichi Fukuda, chief pension actuary and consultant at Watson Wyatt in Japan, thinks this may change. “Given the ageing society, there is uncertainty over how rising healthcare costs should be financed,” he says. “It may become more burdensome for companies that are, typically, contributing 50% of the public health insurance premium to the programme for their employees.”

In 2002, the Japanese government took steps to improve the sustainability of the working population’s retirement benefits, while also making defined contribution (DC) plans legal for the first time. Almost all (95%) Japanese companies offer supplementary pension benefits on top of the statutory requirement, most of which remain defined benefit (DB) plans. Under the legislation, employers must assess their DB schemes to ensure they comply with revised funding rules. Wasserman says: “The DB system was very poorly funded for years, but because of the required change, many employers are changing how they deliver the benefit, retaining a portion of the benefits delivered through a DB plan but the majority of employers are now using a DC plan too.”

Pension schemes are mainly employer-funded and employee contributions to DC plans remain illegal. Legislation has been proposed to change this, however. “Any enhancements the government makes to allow employers or staff to put more into pensions will come through only in 2012, if at all,” says Brown. “All contributions are tax deductable and right now the government is not in a position to lower tax revenue.”

Because of the high level of government social security, benefits are not usually seen as tools for attracting or retaining staff. But with many employers freezing salaries and bonuses, some are enhancing their other perks. “There has been an increase in cafeteria plans, or voluntary benefits schemes giving staff access to discounts on hotels, shopping, restaurants, and so on,” says Brown. “This area is still small, but growing.”

If you read nothing else, read this…

  • If Japanese employers want to make permanent staff redundant, they must prove there will be dire consequences for the organisation if they do not do so.
  • Japan has many contract workers who do not have the same employment rights or benefits as permanent staff.
  • Almost all Japanese employers offer supplementary pension benefits on top of the statutory requirement, most of which are defined benefit plans.
  • Because many salaries have been frozen, employers have increased the number of voluntary benefits schemes for staff.