The AIJ Pensions Scandal Threatens Japan’s SMEs


Back in February it became clear that AIJ Investment Advisors Co., a Tokyo-based investment advisory firm, was unable to account for some ¥200 billion in pension funds it managed for corporate clients. This still unfolding scandal has the potential to trigger an avalanche that endangers the survival of many of Japan’s small and medium-sized enterprises. Corporate employees’ pension funds involve borrowing a portion of the national employee pension fund from the state. The pension fund then manages the investments made using that borrowed money, and pays out pensions to retired employees. But of the 595 employee pension funds in Japan today, 213 (36%) lack the resources to pay back the sum borrowed, putting the investing companies in danger of collapse unless they can find a way to make up the deficit.

Corporate pension funds withhold a portion of pension premiums paid in by employees and invest this money independently instead of paying it to the state pension system. The original aim of the system, which dates back to 1966, was to leverage investments to get higher returns than the state could offer, making more generous pensions possible. So long as the economy continued to grow, high returns seemed all but assured, and not just large corporations but also small and medium-sized enterprises banded together to form pension cooperatives. At the peak, there were around 1,900 of these funds in existence.

No Easy Way Out

When the bubble economy collapsed, however, it became more difficult for pension funds to obtain returns that were higher than the government rate of interest, and many companies were unable to maintain the levels of benefit payments they had promised. After the turn of the millennium, most large corporations paid back the portion they had borrowed from the state and dissolved their pension funds, some shifting to 401K-style corporate pensions.

But this option was not available to most SMEs. Cutting pension benefits would have been one possibility, but that would have required the approval of two thirds of the beneficiaries—a big hurdle for pension cooperatives, which tend to be made up of numerous companies of different sizes and backgrounds. Lacking the resources to repay the borrowed portion and unable to reduce the size of their pension payments, many SMEs have been left with no way of getting out of the corporate pension system, however eager they might be to escape. Today 495 pension funds, or 80% of the total amount, are cooperatives.

Jobs for Bureaucrats

It has also emerged that more than 600 bureaucrats from the former Social Insurance Agency found positions as managers of pension funds around the country after retiring from their government jobs. Whatever their expertise on public pension policy, these former bureaucrats knew almost nothing about fund management. Hence, not surprisingly, as soon as they faced funding difficulties, these former bureaucrats ran straight into the arms of companies like AIJ, which promised attractive returns.

The cumulative deficit of the 213 pension funds that lack the resources to make their promised pension payments amounted to ¥628.9 billion as of the end of March 2011. Each member of the cooperative is responsible for its share of the total debt. If one company cannot pay and goes bust, joint responsibility means that the other companies in the consortium have to cover the bankrupt company’s pension obligations. “This setup could easily trigger a chain reaction. We could see one collapse after another,” says a senior official in the Financial Services Agency.

One example of how things might pan out can be found in Hyōgo Prefecture. There a pension cooperative made up of 50 taxi companies was dissolved in January 2006, leaving ¥7.1 billion in unpaid debt obligations. By January this year, 14 of the companies had gone bust.

In addition to tightening the regulations on financial advisory companies like AIJ, the government is considering making it easier for employers to reduce their pension obligations. However, changing that law in that way has been described as an “infringement of constitutional property rights” by an official at the Ministry of Health, Labour, and Welfare; and there is deep-rooted opposition to the change among those who share this opinion. (March 12, 2012)

(Originally written in Japanese.)

social security SME Yoshida Hiroshi pension fund AIJ corporate pension welfare