JAPAN Recommendations Defined Contribution (DC) Trend in Japan Since the new laws were implemented in 2001, there has been steady increase in the number of Defined Contribution pensions in Japan. As of January 2005, 1,260 Defined Contribution plans were in place, representing nearly 3,800 employers in Japan. The concept of a DC plan in Japan was enacted in October 2001. There are 2 types, a company-sponsored type and an individual contribution type. The plan participants can receive benefits from age 60 if they have been making contribution for 10 years or more. Withdrawals before age 60 are only permitted in case of death or severe disability. A choice of at least three investment vehicles must be given to the plan participants and one of these must be a guaranteed fund. The Employer must explain to the plan participants why the Employer selected the investment vehicles. Each plan participant directs his/her own asset management personally and must be allowed to change funds once or more every three months. An employee changing jobs is allowed to transfer funds to a new plan if he or she has been a member of the previous DC plan for at least three years. Other Plan features include: ‰ Contributions: DC plan contribution rate ranges between 7% and 10% depending on industry, which is usually set based on the existing DB plan benefits. However, the tax free contributions are capped at JPY 552,000 per annum, and a contribution over the cap is not permitted even on a taxable basis, and it accepts the employer contributions only. Since the cap is still low, many companies pay out the amount over the cap monthly as a top up on salary, or set up a book reserve plan that pays the amount equivalent to the loss as a lump sum when the employees leave the company. ‰ Vesting Schedule: Maximum 3 year vesting is allowed for the DC plan, which can either st nd rd be a cliff vesting (1 & 2 year are zero and 100% at the 3 year), or a gradual vesting. ‰ Employee Taxation: The DC contributions are not considered as employee’s income. The DC account is portable to a new employer DC plan and employees cannot take the money out until age 60. But when they withdraw their money after age 60, the lump sum is given a retirement income tax deduction and the pension a miscellaneous income tax deduction. The lump sum paid by the Book Reserve plan is also subject to a retirement income tax deduction while if the amount over the DC cap is paid as monthly / annual salary, it affects the employee’s income tax status and also increases the social security premiums for both the employer and employee. Life Insurance ABC may also wish to consider implementing a Group Life/AD&D scheme to remain competitive. Suggested parameters would be 2x annual base salary, capped at JPY 20-40 million for Life, with an additional 1 or 2 x annual base capped at JPY 10 million for AD&D. The estimated cost of adding this benefit would be about JPY 1.62 Million per year* given the current group size. *2 x annual base capped at 40 million for Life, and 2x annual salary capped at 10 million for AD&D rider. ABC Japan Co. Ltd. Page B - 14