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Defined Contribution Account Manager with a Life!
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AimPoint Pension Group
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For private companies, there are essentially three approaches to providing retirement benefits. But, first, what are retirement benefits in Japan?
Japan defines retirement plans pretty much the same way as US FAS 87 defines pension plans; "periodic pension payments to retired employees or their survivors [...] includ[ing] benefits payable as a single lump sum." (FAS 87 paragraph 7.) In the States it has been determined that FAS 87 applies to plans described only as severance plans.
The word "Retirement" in Japan refers to all reasons for leaving employment, including age and quit.
Japanese employees prefer and get tax preference for lump sum disbursement of their retirement benefits.
Retirement benefits paid to former employees are deductible business expenses. There are limitations on the definition of "employee" -- a former director is not a former employee and a company must be careful to avoid payments made to former directors being characterized as dividends. Dividends are taxable to the firm as profits and again to the former director.
Individual annuity products are not readily available in Japan. Lump sum benefits are usually spent, saved or invested.
As in North America, private companies must fund retirement plans.
But, the funding vehicles take forms unusual to North Americans; (i) the creation of a balance sheet liability, (ii) an insured vehicle reminiscent of US Group Annuities and (iii) a severely restricted trust arrangements for certain types of plans.
The most financially effective vehicle is the first. A balance sheet liability is created. It is the only method where a company is able to deduct accruals before they become payments. Administrative costs are relatively low. These plans are called "Book Reserve System" plans. Actuarial principles are not required for the computation of the balance sheet liability.
The insured vehicle requires a contract with an Insurance company or Trust Bank and is called a TQPP. Premiums are calculated on an Entry Age Normal (EAN) method with narrowly promulgated actuarial assumptions and must be paid exactly as billed -- there is no "range" of tax-deductible contributions. "Over-funding" is defined as the excess of assets over the EAN Accrued Liability (AL) as recalculated every three to five years; it is seldom large and has been negative for many sponsors for several recent years. The excess of the EAN AL over the sum of termination benefits is divided among employees at plan termination. The premium is a tax-deductible expense as paid.
When a company initiates or joins an arrangement where they provide the pay-related parts of the national retirement program (Social Security,) additional benefits must be granted and the benefits are funded with assets managed by Insurers and Trust Banks. Like TQPP, the sponsor must pay the premium billed and gets a deduction for those payments. There is no reversion of assets. These plans, called EPF, are poorly funded from a North American perspective and have seen additional problems over the past several years as asset performance has drifted. The government has permitted foreign firms to compete for fund management and investment flexibility is being increased, hoping to achieve better returns.
This quotation repeated in a recent article (Consulting Firms's Advice On Diversity Was Uniform) in the WSJ comes from the featured major international consulting firm's philosophy of practice. The article seemed to complain that the firm was only pretending to diagnose, then turning in a "cookie cutter" prescription and charging for all of the diagnosis time.
It raises an interesting question; what is malpractice?
In the U.S., there has been an emphasis on cardiopulmonary resuscitation training so that ordinary people can save the lives of others suffering heart attacks. Time is critical in these situations. When I went through the training, the instructor emphasized that our "licenses" were valid only for a limited time (perhaps one year) and that, unless we were current, we should not attempt to save someone's life.
The reasoning was this: if one is not qualified to perform the action (license is not current) and does, he/she is guilty of assault. Why assault and not malpractice? The answer is that only a professional can be guilty of malpractice. Despite the fact that an individual may have performed CPR numerous times during his licensed period, he does not remain a professional without maintaining the requirements for accreditation.
No matter how sharp a person is, how quick their mind, how persuasive, without credentials he/she cannot be guilty of malpractice! Further, the professional must be operating within his/her field of qualification to be guilty of malpractice: an MD who signs off on your actuarial report is not guilty of malpractice.
How does this apply to FAS 87 reports? Very simply, if a qualified actuary does not sign your report, there can be no malpractice on the signer's part. Fortunately, most organizations that require FAS 87 reports have an auditor who is a professional and, in fact, is accepting professional responsibility by virtue of his firm's signature on the audit.
Moving backwards in the quotation, one realizes that diagnosis also requires a professional. As with malpractice, tenure, intelligence, membership in MENSA don't result in one being a professional. What looks like diagnosis when performed by a lay person is nothing more than observation combined with personal opinion.
You have been reading the online edition of LIA $FACTS$, the monthly fax newsletter of Lohmann International Associates. For further information, please visit our home page on the Web or send e-mail to Les Lohmann.
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