LIA $FACTS$ for September 1998
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Retirement Plan Design Decisions

Those decisions are pretty much all you need to do. While you should consider the form of the benefit, most Japanese prefer lump sums and, when the plan uses the Book Reserve System, they are the only choice. To increase your understanding of the plan, we would advise you to examine anticipated benefits for several rank and file employees and also for several executives.

A final consideration is to remember that Japan is changing. Make an effort to maintain flexibility. If turnover turns remarkable higher, most Japanese plans will end up costing far more than originally designed. If the investment climate continues to flounder, alternatives need to be considered for saving the money. Investing in your own business remains the most cost-effective method, but it does leave a certain amount of insecurity among some employees.

The Right Book Reserve

One method of saving the money involves externally funding the "normal" or age retirement benefits and carrying a book reserve for the severance benefits. As with all retirement plans following the "Book Reserve System," a tax deduction is permitted for accruals to the book reserve in advance of actual benefit payments being made.

There is a minimal level required for the book reserve. You are permitted to hold higher reserves, but there are restrictions in reducing it later on. The advance tax deduction remains based on the minimal level regardless of how high the reserve is set.

Japan, unlike the U.S. and Canada, distinguishes between voluntary and involuntary severance when determining retirement benefits in the typical plan. The minimal level of book reserve is based on a proportion of the voluntary benefit calculated at the end of the year.

Many companies, in order to reach levels closer to the ABO of FAS 87, hold 100% of the voluntary termination liability. This means, basically, that the company has assets to pay every employee who quits in a situation where every employee does quit. For an ongoing enterprise, this is unlikely to occur.

But of course, in Japan, few employees quit. Involuntary severance is the more common situation. Some companies choose to hold a reserve based on 100% of this amount. This means that they have assets sufficient to fire every employee without suffering insolvency. This amount is usually much larger that the FAS 87 ABO which takes into account the fact that the company is an ongoing concern. In general, holding 100% of the involuntary is extremely conservative and is probably inappropriately shifting earnings among generations of owners and employees.

We recommend trying to track the FAS 87 ABO to the degree permitted by the tax authorities. It is the only number which takes the fact that the company and employment are ongoing into consideration. It, in conjunction with the Net Periodic Pension Cost, reasonably allocates earnings among generations of owners and employees.

Copyright 1998 Lohmann International Associates

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