This article provides an overview of the current state and expected trends in Japan regarding a topic of increasing global attention, Financial Wellbeing. Continue reading the article below to learn more.
The twenty-million shortfall
The Japanese Government published a report in May of 2019, titled Asset Formation and Management in an Aging Society. The topic of unsatisfactory post-retirement income quickly gained traction in mass media and reignited concerns regarding the public pension system.
The report was subsequently withdrawn, citing its premise “has caused extreme worries and misunderstanding and runs counter to the government’s existing policy.”
The content of the report was not entirely new, outlining that to maintain a satisfactory standard of living in retirement, the average household would need a saving of 20 million yen on top of public pension.
When compared to other countries, investing in risk assets is not prevalent in Japan, and it is assumed the government has issued this report to raise awareness about the importance of investing.
While the amount to be saved to maintain living standard depends on individual case, such as income level, standard of living after retirement, home ownership, etc, the sheer amount of 20 million yen quoted by the report may further increased the uproar.
Further, the amount quoted includes retirement allowances and pension plans provided by companies, but it seems that many in Japan are not aware that they are covered by such schemes.
Public pension awareness
The Japanese public pension system was amended in 2004 to consider the decline of birthrate and aging of society forecasted at the time; and a decrease in pensions about 1% per annum was implemented.
Lifelong payments from the public pension system start from age 65 in general. In the model-case, there is a large decrease of about 50,000 yen in the monthly sum provided by the system after 30 years. The 20 million yen can be understood as the future value of 50,000 yen over 30 years, or the forecasted decrease in the public pension system benefits.
Due to the complexity of the public pension’s structure and benefit calculation formula, many Japanese are not well-aware of the pension system itself or the level of benefit they will be entitled in retirement, further increasing the unease and distrust concerning the system.
Retirement allowances and pensions provided by companies supplement employees' retirement income, but only a few schemes were set up from the perspective of securing employees’ retirement income. Additionally, most companies are unable to provide financial advice, including public pension topics, for employees.
In recent years, “health management”, which aims to improve productivity by maintaining and promoting employee health, has attracted attention in Japan. In addition to physical and mental health, support for employees Financial Wellbeing has become a global trend, and awareness in Japan is gradually increasing.
Supporting employees' Financial Wellbeing is not limited to “investment education” provided to participants of Defined Contribution schemes. It has more depth and breath, providing support with the management of employee’s wealth and assets in various life stages leading up to retirement.
With the importance of personal savings and efforts in asset formation expected to increase
further due to shrinking public pension payments and a shift from the Defined Benefit company schemes to the new Defined Contribution system, we believe the time has come for companies to recognize the importance of and embrace Financial Wellbeing; and start providing such support to their employees.
Our Survey Results
Aon Japan included Financial Wellbeing as a Hot Topic in the 2019 update of its annual Benefit Survey to better understand awareness and gain insight on specific actions taken by corporate managers in this topic. We would like to provide some findings of the survey below.
Although 100% of respondents have heard the term “Financial Wellbeing”, about half of them indicated they do not have a firm understanding of its specific contents.
When asking about specific actions taken, more than half of companies responded that some sort of seminar was provided for employees, however, most of these were limited to, in order of prevalence, “Continuous Defined Contribution education” covering DC investment, “Seminar for new employees” offered for fresh hires and “Preretirement seminars”.
In addition, many respondents stated that they had established various voluntary benefit systems. For more than half of the companies, this means either providing a savings plan or allowing employee contribution to the company’s Defined Contribution scheme.
For most companies, face-to-face seminars are limited to DC investment education; and asset management education tailored to each employee’s individual need is not sufficient. However, going forward, companies will likely be expected to provide financial education tailored to their employees' life plans.
In addition, when considering voluntary benefits offered by companies, there are many limitations that apply. For example, employee contribution to company Defined Contribution plans are allowed under very specific conditions and the cash amount can be very small. Even if that’s not the company’s intention, these voluntary plans generally offer limited support for employees.
In Japan, the idea of Financial Wellbeing is not yet widespread, and companies do not yet face pressure from employees to provide support with Financial Wellbeing. However, we expect that with benefits from public pensions decreasing and further transition to Defined Contribution schemes, similarly to other countries, the importance of companies’ support with Financial Wellbeing will increase further and further.
How can we help?
We believe an effective way to support employees with Financial Wellbeing is to organize face-to face seminars and individual consultations with a financial advisor. Such support should not be limited to Defined Contribution investment education and should be tailor made to consider each employee’s current life plan and individual financial knowledge.
In addition, asset management support tools, such as websites and apps using advanced IT technology are spreading rapidly, making it possible to provide advice tailored to each individual. Utilizing such tools can enable companies to increase employees’ Financial Wellbeing in a cheap and efficient manner, therefore we expect adoption of such tools will become a trend in the near future.
For global companies, if corporate headquarters is willing to strengthen support for Financial Wellbeing, Aon can provide support in the following topics
- Create a tool to calculate expected retirement benefit
- Create and distribute benefit statements for employees, describing the current accumulation of retirement benefits
- Support employees’ retirement planning
- Financial literacy training
- Implementation of asset management support tools
- Support with implementation of a matching system
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.
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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.