A review of international experience

Matching Defi ned Contribution Pension 
Schemes in Japan
Noriyuki Takayama
More than 10 years have passed since Japan began offering defined contribution plans. 
Contrary to expectations, take-up has been weak, partly because account balances can be 
cashed out only after age 60. Beginning in January 2012, voluntary defined contribution 
occupational plans began to implement a new system of matching contributions. The design 
is very specific to the Japanese context, with workers given the chance to match employer 
contributions on a tax-preferred basis rather than the opposite design found in other set-
tings. Although it is too early to determine outcomes, experience with the take-up of defined 
contribution plans in Japan and the lack of incentives for workers to participate suggest that 
the effects will not be strong.
T
he use of matching contributions has emerged in a variety of countries as an incentive 
to extend pension coverage (Palacios and Robalino 2009). In Japan, employer matching 
contributions in addition to government transfers now play a crucial role in extending social 
security coverage. This chapter provides a summary of the structure of the Japanese pension 
system (figure 7.1) and outlines the role of matching contributions within this system. 
The Japanese occupational pension system remains significantly oriented toward the 
provision of retirement benefits in the form of lump-sum payments from an employer at 
the point of retirement. About 85 percent of employers provide benefit payments in this 
form, making it a significant part of retirement income, especially for long-term regular 
employees. According to a 2011 survey conducted by Japan’s National Personnel Author-
ity, the average private sector employee with service of 20 years or more received ¥25 mil-
lion from his or her employer as the present value of all retirement benefits, including 
annuities.
1
 This amount is equivalent to 10–12 times the employee’s annual benefit from 
social security.
In January 2012, after many years of development, voluntary defined contribution 
occupational plans began to implement a new system of matching contributions. The 
design of these arrangements is very specific to the Japanese context. In contrast to the 
much longer established employer-based systems in the United States described in chap-
ter 3, where the term matching contributions refers to employer contributions, in Japan 
the term refers to employee contributions to match the employer contributions that pro-
vided virtually all payments into occupational pensions until 2011. The new employee 
The author is very grateful for the financial support from the academic Project on Intergenera-
tional Equity (PIE), funded by the Grant-in-Aid for Specially Promoted Research from the Japan 
Society for the Promotion of Science (grant number 22000001).

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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
matching contributions have been afforded preferential tax treatment by excluding the 
contributions from income and deferring taxation in the accumulated fund balances until 
they are withdrawn. Many Japanese are now waiting to see the effect this new develop-
ment will have in the field of pensions.
This chapter describes the matching pension schemes in Japan, examines the impact 
they have had, and considers potential future outcomes. The chapter is organized as fol-
lows. The first section provides a brief summary of Japan’s social security system. The fol-
lowing section explains how matching contributions from employers and the government 
have extended the coverage of pensions within this system. The third section provides an 
overview of occupational and individual pension plans in Japan. The fourth section dis-
cusses the new employee matching contributions to defined contribution plans. The last 
section offers some observations on the future prospects for occupational pensions.
Japan’s Social Security Pension Programs
Japan has a two-tier defined benefit system of social security pensions. The first tier pro-
vides a flat-rate basic benefit; the second tier provides an earnings-related benefit. The 
basic figures on social security pensions in Japan are summarized in table 7.1. Eligibility 
for the first tier is universal for all residents of Japan. It covers not only employees but 
also the self-employed, the unemployed, and nonemployed adults, including full-time 
housewives (and househusbands). The only people eligible for earnings-related pensions 
are regular full-time employees who worked 30 hours or more a week. The system also 
provides a pension benefit to dependent spouses of regular employees.
FIGURE 7.1  Retirement benefits in Japan as of March 2011
third tier: 
voluntary
first tier:
mandatory
Tax-
Qualified
Pension
Plan
Mutual  
Aid  
 Pension 
National Pension 
dependent
spouse of
employee
Category 3
insured
(11 million)  
public
sector
employee
National
Pension
Fund
second tier: 
mandatory
New
Defined
Benefit
Plan 
defined
contribution plan
(individual type)
private sector employee  
Category 2 insured 
 (34 million) 
lump-sum retirement benefits 
Kosei Nenkin Hoken (KNH)
defined contribution plan (corporate type)
self-
employed
Category 1
insured
(20 million)  
Employee
Pension
Fund

7.  MATCHING DEFINED CONTRIBUTION PENSION SCHEMES IN JAPAN 
147
Only people contributing to the pension scheme for 25 or more years are eligible to 
receive old-age benefits. The normal pensionable age is 65. The full basic old-age pension 
is payable after 40 years of contributions. In 2012, the maximum monthly benefit for 
people with 40 years of coverage was ¥66,000. The annual accrual rate for the earnings-
related portion is 0.5481 percent of lifetime average salary. For a typical male retiree (with 
an average salary earned during 40 years of coverage) and a dependent spouse, the current 
replacement rate (including basic benefits) represents about 60 percent of lifetime average 
salary. This average benefit level is set to decrease to 50 percent in the near future.
The contribution rate of the principal program for private sector workers was about 
16 percent of salary in 2012, with contributions divided equally between employees and 
employers (8 percent each).
2
 The monthly per person amount of contributions for people 
covered solely by the flat-rate benefit was about ¥15,000 in 2012. The financing is basi-
cally pay-as-you-go, with partial prefunding. The government subsidizes half the total cost 
of the flat-rate basic benefit and covers all of the administrative expenses.
3
TABLE 7.1  Japanese social security at a glance
Program type
1965
1985
2008
Kosei Nenkin Hoken (KNH) for private sector employees
Number of contributors (millions)
19.0
27.0
34.0
Number of old-age benefi t recipients (millions)
0.2
3.3
13.0
Contribution rate (%)
5.5
12.4
15.4
Transfer from general revenue as % of aggregate benefi ts
20.0
20.0
0.0
Annual amount of contributions (¥, trillions)
0.3
7.5
22.7
Annual amount of transfer from general revenue (¥, trillions)
0.01
0.90
0.00
Annual amount of aggregate benefi ts (¥, trillions)
0.04
6.50
340
Current account surplus/defi cit (¥, trillions)
0.34
5.30
−13.50
Funded reserve (¥, trillions)
1.4
50.8
116.6
National Pension
Number of Category 1 contributors (millions)
17.2
17.6
19.4
Number of old-age benefi t recipients (millions)
0.0
6.8
24.0
Amount of contributions per month per person (¥, thousands)
0.10
6.74
14.42
Annual amount of contribution (¥, trillions)
0.02
1.60
1.70
Annual amount of transfer from general revenue (¥, trillions)
0.01
0.80
1.90
Annual amount of benefi ts (¥, trillions)
0.01
2.80
4.30
Current account surplus/defi cit (¥, trillions)
0.04
0.04
−1.30
Funded reserve (¥, trillions)
0.19
2.60
7.20
SOURCE: Ministry of Labor, Health and Welfare 2009.

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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
Matching Contributions for Extending Social Security Coverage
KOSEI NENKIN HOKEN
The principal pension program for private sector employees in Japan is Kosei Nenkin 
Hoken (KNH). The initial design was based on a funded scheme that would build up 
reserves by not paying benefits in the early years. One of the main reasons for its establish-
ment in 1942 was to reduce the purchasing power of the Japanese people during World 
War II through mandatory deduction of contributions from their salary, thereby helping 
reduce the rate of inflation.
Mandatory occupational retirement benefits with employer contributions were 
introduced in 1937. They were abolished with the inauguration of the KNH, which man-
dated both employer and employee contributions.
4
 The employers’ portion was a par-
tial replacement for their contributions to the previous occupational retirement benefits, 
effectively establishing the concept of matching contributions. To encourage employees to 
contribute, the government also implemented a transfer from general revenue, initially set 
at 10 percent of promised benefits.
The hyperinflation that occurred in Japan just after World War II eliminated any 
funded reserve of the KNH and had very adverse effects on workers’ welfare. Accordingly, 
in 1948, the (combined) contribution rate was reduced from 11 percent to 3 percent. In 
response, most employers voluntarily strengthened their occupational retirement benefits. 
The transfer from general revenue was increased from 10 percent to 15 percent in 1954 
and to 20 percent in 1965. These increases were undertaken to extend coverage.
5
During Japan’s long period of rapid economic growth in the late 1950s–1980s, the 
KNH contribution rate was reinstated to previous levels in a step-by-step process by rais-
ing it to 6.4 percent in 1973 and to 12.4 percent in 1986. Coverage of the system was 
also extended. Before 1988, the KNH was limited to places of business with five or more 
employees. Since then, the program covers employees at all business establishments.
Contributions from employers and the government, together with industrialization, 
enabled KNH coverage to expand from 3.5 million contributors in 1942 to 13.5 million 
in 1970. By 2010, coverage had reached 34.4 million workers.
Some groups, however, still remain outside the system. Employees working less than 
30 hours a week or less than two months are not yet covered by the KNH. The current 
ruling party (the Japan Democratic Party) is considering further extending KNH coverage 
to include employees working 20 hours or more a week.
NATIONAL PENSION
In 1961, the National Pension was established to cover self-employed workers and the 
nonemployed, who receive a flat-rate benefit and make flat-rate contributions. To encour-
age people to participate in the program, the government set contributions at a very low 
level at the outset, increasing them in stages. It also made a matching contribution from 
general revenues, initially at a rate of half of each individual’s contribution.
6
The 1961 changes also affected dependent spouses of regular employees, who were 
allowed to voluntarily participate in the National Pension; since 1986, their participa-
tion has been mandatory, albeit with special provisions. Dependent spouses of regular 

7.  MATCHING DEFINED CONTRIBUTION PENSION SCHEMES IN JAPAN 
149
employees (typically full-time housewives) are automatically entitled to the flat-rate basic 
benefits without being required to make direct individual contributions to the National 
Pension. The funding for their benefits comes from KNH contributions as well as the 
transfer from general revenue.
7
People with low incomes are eligible for contribution exemptions. However, people 
who do not make contributions are entitled to receive only one-third the flat-rate benefits, 
equivalent to the value of the transfer from general revenue.
8
 Under the various provisions 
outlined above, the number of people covered by the National Pension increased gradu-
ally, from 18.2 million in 1961 to 27.9 million in 1979.
Since 1986, regular employees in the private and public sectors have also participated 
in the National Pension. Their contributions remain proportional to their earnings; the 
flat-rate basic benefits of the KNH were harmonized with the flat-rate benefit provided to 
self-employed and nonemployed people. This arrangement has enabled the financing of 
the National Pension system to be integrated at the national level.
9
 The number of insured 
people in the National Pension rose from 63.3 million in 1986 to 70.1 million in 2007 
(Ministry of Labor, Health and Welfare 2009). Current coverage of social security pen-
sions is near 100 percent.
The development of this national social security system provides only half the story 
of Japan’s retirement income system. Since the bursting of the “bubble economy” at the 
beginning of the 1990s, Japan has experienced persistent deflation. Many employers have 
sought to contain their labor costs by reducing the number of regular employees and 
replacing them with people who work less than 30 hours a week. The movement to more 
informal (or “atypical”) employment was in part motivated by increases in the KNH con-
tribution rate.
10
Most atypical employees are not covered by the KNH and therefore do not have 
an earnings-related pension. Their enrollment in the National Pension is mandatory, but 
many fail to make pension contributions, a practice that will lead to a reduction in social 
security coverage in the future. In 2010, about 5.5 million people (particularly younger 
people) were delinquent in making their National Pension flat-rate contributions.
11
In 2009, the transfer from general revenue was increased from one-third to one- 
half of the flat-rate basic benefits. This change placed additional burdens on the national 
budget. Currently, about half the transfer to social security pensions is financed by govern-
ment borrowing, one factor contributing to the government’s increasing deficits.
Occupational and Individual Pensions
Historically, Japanese companies paid lump-sum retirement benefits when workers left 
their employment. As worker tenure was long and leaving a job before retirement rela-
tively rare, these end of employment arrangements were effectively retirement plans. They 
were financed through a book-reserve system in which employers estimated the liability 
but did not set aside dedicated funds to pay the benefit.
In the mid-1960s, two major defined benefit plan types—the Employee Pension 
Fund (EPF) and the Tax-Qualified Pension Plan (TQPP)—were introduced. Many com-
panies transferred all or part of their lump-sum retirement benefits into the schemes to 
take advantage of their tax benefits and to smooth cash outflows. In October 2001, a 

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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
Defined Contribution Plan was introduced. The following year, the New Defined Benefit 
Plan was introduced. Each of them differs in terms of applicable laws, regulatory bodies, 
plan management rules, and taxation.
Some people voluntarily purchase individual annuity products from financial 
institutions to provide additional sources of retirement income. Since April 1991, self-
employed workers have also been able to voluntarily participate in the National Pension 
Fund to supplement their retirement income. The following section discusses this third 
tier of the pension system, summarized in table 7.2.
12
COMPANY-SPONSORED PLANS
Before the 1960s, employer-sponsored retirement benefits in Japan were provided almost 
exclusively as lump-sum benefits at the time of retirement or separation from employment. 
In recent decades, defined benefit annuities have also become prevalent. The amount of 
the benefit is usually lower in the case of voluntary termination (resignation) than in the 
case of involuntary termination (mandatory retirement, preretirement death, disability, or 
discharge).
Defined Benefit Plans
The defined benefit plans introduced in the 1960s used to be the predominant employer-
sponsored plans in Japan. Their benefit formulas are typically pay related or use a points 
system. Pay-related plans are based on either final pay or career average pay. Benefits are 
defined as pensionable pay multiplied by a factor determined by years of service and the 
reason for termination. In point plans, benefits are equal to the number of accumulated 
points multiplied by a unit value. Points accrue annually based on the employee’s salary 
grade or job position, age, years of service, or a combination of these factors. Unit value is 
increased at the employer’s discretion or through union negotiation. 
In 2002, cash balance plans were introduced in Japan. These plans are technically 
defined benefit plans, but they resemble defined contribution plans, because they derive 
benefits from the value of an account balance in relation to a predetermined annuity con-
version factor.
Defined benefit plans can be funded through various methods in Japan. The selection 
of the funding approach can be independent of the plan design. There are five fund types:
 
• Retirement allowance plans (RAPs)
 
• EPF plans 
 
• TQPPs
 
• Fund-type defined benefit plans
 
• Agreement-type defined benefit plans.
Retirement Allowance Plans
A RAP is an unfunded plan in which the employer’s liability is recognized via a book 
(accounting) reserve. RAP book reserves were tax deductible until March 2002.
The fund reserve is usually not segregated, and security of accrued benefits depends 
on the financial soundness of the employer. Because benefits are not funded, companies 
usually administer such plans themselves. For ease of administration, benefit payments are 

7.  MATCHING DEFINED CONTRIBUTION PENSION SCHEMES IN JAPAN 
151
TABLE 7.2  Japanese occupational and individual pensions at a glance
Plan type
2001
2011
Defi ned benefi t plans
Lump-sum retirement benefi ts
a
TQPP
Number of plans
73,582
8,051
Number of members (millions)
9.16
1.26
Amount of accumulated assets (¥, trillions)
19
4
EPF
Number of plans
1,737
595
Number of members (millions)
10.9
4.5
Amount of accumulated assets (¥, trillions)
57
28
New Defi ned Benefi t Plan
Number of plans
316
10,053
Number of members (millions)
1.35
7.27
Amount of accumulated assets (¥, trillions)
—
42
National Pension Fund
Number of members (thousands)
787
548
Amount of accumulated assets (¥, trillions)
1.5
2.6
Defi ned contribution plans
Corporate type
Number of plans
361
3,705
Number of members (millions)
0.33
3.71
Amount of accumulated assets (¥, trillions)
—
5.5
Individual type
Number of plans
7,481
79,639
Number of members (thousands)
14
132
SOURCE: Pension Fund Association 2012.
NOTE: — = not available.
A. Around 94 percent of employees have a lump-sum retirement benefi t scheme. In 2011, a private sector employee with 
20 years of service or more received ¥25 million from his or her employer as the present value of all retirement benefi ts, 
out of which around ¥10 million was paid as lump sum, on average.

152 
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
usually made in lump-sum form only. RAPs provide employers with more flexibility to 
change than do other plan types.
13
Employee Pension Funds 
The framework for EPFs was introduced in October 1966. An EPF is a separate inde-
pendent legal entity established by a single employer or jointly by several employers with 
approval by the Ministry of Health, Labor and Welfare. It is an externally funded plan 
whose principal purpose must be the payment of old-age pension benefits to participants. 
EPFs are integrated with the social security system. Every EPF contracts out a part 
of the earnings-related old-age pension under the KNH and provides an additional pen-
sion from the fund on top of that portion. In return for paying the earnings-related old-
age pension on behalf of the government, an EPF receives a contribution rebate. The 
entire system under an EPF is called the Daiko system.
For the part of the benefit that is contracted out, the EPF must provide a benefit 
that is greater than the benefit that would have been received under the social security 
system (what is known as a “plus alpha benefit”) and an additional benefit on top of 
this contracted-out benefit.
14
 The distribution of benefits must be nondiscriminatory. The 
contracted-out benefits and the plus alpha benefits are called the “basic part”; additional 
benefits are known as the “additional part.”
Eligibility for receiving benefits for the basic part is one month of participation in 
an EPF. Benefits must be paid in the form of a life annuity. If a participant terminates 
employment within 15 years of service, the assets equal to the present value of the accrued 
benefits are transferred to the Pension Fund Association, which takes over the respon-
sibility of paying benefits.
15
 For the “additional part” benefits, the maximum allowable 
eligibility requirements are 20 years of service for an annuity and 3 years of service for a 
lump-sum withdrawal. Annuity payments must begin no later than age 65. More than 
half of accrued benefits for the additional portion and the plus alpha portion must be 
paid as a life annuity, with the maximum guarantee period of 20 years or the maximum 
guarantee age of 85. Beneficiaries can opt to receive a lump sum instead of a life annuity, 
but the amount of the lump sum must be less than the present value of the life annuity 
calculated using the statutory minimum assumed interest rate. An EPF may provide dis-
ability benefits and survivor benefits.
Employers usually pay all contributions for plus alpha and additional benefits, 
although employee contributions are allowed. Employer contributions to an EPF are tax 
deductible and are not treated as taxable income to employees. Employee contributions 
can be fully deducted in calculating income tax. This tax treatment distinguishes the EPF 
taxation from TQPPs and New Defined Benefit Plans (described below).
Investment earnings are tax deferred. Plan assets are generally not subject to an 
annual special corporation tax. However, plan assets that exceed 2.84 times the contracted-
out benefits are subject to a special corporate tax. Lump-sum benefits paid to beneficiaries 
are taxed as retirement benefits (with a service-year-related deduction), for which the tax 
rate is lower than for earned income. Annuity benefits are subject to a special income 
deduction. Survivor benefits are tax free.
Mainly because of an unfavorable investment environment, many EPFs were dis-
solved during the past 15 years. The Ministry of Health, Labor and Welfare must approve 

7.  MATCHING DEFINED CONTRIBUTION PENSION SCHEMES IN JAPAN 
153
EPF dissolutions before EPFs settle their assets. Stringent prerequisites must be met before 
approval of dissolution is granted. If EPF assets are less than the value of the correspond-
ing contracted-out benefits, a one-time contribution to cover the shortfall is required. 
Once an EPF is dissolved, assets with a value corresponding to contracted-out benefits are 
transferred to the Pension Fund Association, which takes over responsibility for paying 
contracted-out benefits. Any residual assets are allocated to participants and beneficiaries 
according to the rule of distribution stipulated by the EPF plan documents. Participants 
can choose to receive these benefits as a lump sum or to transfer them to the Pension Fund 
Association for future annuity payments.
Employers must compensate for the investment loss derived from the contracted-
out portion and recognize the projected value of benefits for the contracted-out portion 
on their books. The contracted-out portion used to bring in extra profits to EPFs. Once 
the investment environment turned adverse, however, the contracted-out portion began 
to hurt EPF operation.
Many employers and trade unions lobbied for legislation that allows EPFs to return 
the contracted-out portion to the original social security regime. Since April 2002, it has 
been possible for EPFs to do so (Daiko-henjo). Once EPFs return the contracted-out 
portion, additional benefits and plus alpha benefits are transformed into New Defined 
Benefit Plans.
The number of EPFs reached a peak of 1,225 in 1997. Thereafter it began to 
decrease sharply, falling to 568 in 2011, covering 4.4 million employees. The Daiko-henjo 
amounted to 813 by 2009.