A review of international experience

Tax-Qualified Pension Plans

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Tax-Qualified Pension Plans 
The TQPP, introduced in 1962, used to be one of the two major occupational pension 
schemes in Japan. It was an externally funded, tax-favored retirement benefit plan. Because 
there was no minimum participation requirement, TQPPs were popular among small to 
medium-size companies.
TQPPs had no benefit eligibility requirements (unlike EPFs and New Defined Ben-
efit Plans), and benefits were paid upon termination of employment (in contrast, EPFs 
and New Defined Benefit Plans pay benefits when participants attain a prescribed age). 
The form of payment had to be either a fixed annuity of five years or longer or a life annu-
ity (most TQPPs provided only fixed annuities). Beneficiaries could opt to receive a lump 
sum instead of annuities, but the amount of the lump sum was less than the present value 
of annuities calculated with the interest rate stipulated in the plan document. TQPPs 
could provide survivor benefits but not disability benefits.
Policy makers eventually recognized that TQPP regulations were inadequate to pro-
tect employees’ rights to receive benefits. As a result, employers were required to convert 
TQPPs to other types of pension plans by March 2012. Some TQPP sponsors switched 
to other types of pension plans; most simply terminated their TQPPs, leaving employees 
without any retirement plan. 
New Defined Benefit Plans
Two kinds of New Defined Benefit Plans—the fund type and the agreement type—were 
introduced in April 2002, in order to unify regulations and enhance protection of vested 
benefits for participants.

Fund-type plans are similar to EPFs, with separate governing boards but without 
contracted-out benefits. The legal minimum number of participants for the fund type is 
300. Existing EPFs can switch to the plans by surrendering contracted-out benefits to the 
Agreement-type funds replaced TQPPs, which had problems protecting vested ben-
efits because plan operations were not fully regulated and there were no minimum stan-
dards to ensure the annual evaluation and maintenance of full funding status. They are 
similar to TQPPs. They have a contract with a lead manager, but, unlike TQPPs, they are 
subject to minimum funding rules, fiduciary duties, and disclosures.
There is no legal minimum number of participants for an agreement-type plan. 
Benefits must be provided as a fixed annuity of at least five years or as a life annuity. Old-
age annuity benefits must begin to be paid between the ages of 60 and 65 for normal 
retirement but can begin as early as age 50 for early retirees. Beneficiaries can opt for a 
lump-sum payment instead of annuity payments. The lump-sum value must be equal 
to or less than the present value of annuities for a guaranteed period. Maximum benefit 
eligibility requirements are 20 years of service for an annuity and 3 years of service for a 
lump-sum payout. Survivor and disability benefits are permitted.
To protect vested benefits for participants, strict funding rules apply. Employers 
make contributions to fund plan assets. Employees are permitted to contribute up to 
50 percent of total contributions if plan documents allow them to do so. Actuarial valu-
ation must be performed at least every five years. Each employer determines an assumed 
interest rate, based on long-term expected investment returns. However, the rate must be 
equal to or above the minimum assumed interest rate set by the Ministry of Health, Labor 
and Welfare.
The New Defined Benefit Plan law also permits cash balance–type plans. Pay credit 
is given to notional accounts, along with an interest credit based on the following rates:
• A fixed rate
• A government bond rate or other objectively measurable stable index (the 
national wage index or the cost of living index is acceptable; the equity index 
is not)
• A combination of a fixed rate and a government bond rate
• A fixed or government bond rate with applicable minimums or maximums.
The conversion rate between annuity and lump-sum payments can be indexed 
regardless of the plan design structure. 
In 2011, there were 610 fund-type and 11,593 agreement-type defined benefit plans 
in Japan, together covering 7.3 million employees.
Defined Contribution Plans 
The number of defined contribution plan documents approved by the government has 
constantly increased since the plans were first introduced in Japan in October 2001. Still, 
as of the end of October 2011, only 4,013 plans had been approved, covering just 16,000 
employers. The numbers of participants were 4.1 million in corporate-type defined con-
tribution plans and 132,000 in individual-type defined contribution plans.

One motivation for this trend is that many companies are replacing seniority pay 
systems with performance-based compensation. Traditional retirement benefit plans 
that favor long-term workers are inconsistent with this approach to managing human 
More and more companies are trying to reflect individual work performance in the 
design of retirement benefits. Companies are also trying to improve employees’ under-
standing and appreciation of retirement benefits. More-visible retirement plans, such as 
defined contribution plans and cash balance plans with individual accounts, are perceived 
as advancing this objective.
The Japanese labor market is also becoming more fluid and workers more mobile. 
Traditional retirement plan designs based on a lifetime employment model are not suit-
able for attracting and retaining talented people.
Mergers and acquisitions have also become prevalent since the deregulation of busi-
ness reorganization rules. Harmonization of retirement benefits is required in merger 
and acquisition situations. The need for flexibility to accommodate these organizational 
changes has provided an important impetus for the emergence of defined contribution 
There are two types of defined contribution plans in Japan: corporate-type and indi-
vidual-type plans. The amount of employer contributions is fixed regardless of its profits: 
contribution formulas must be a fixed percentage of participants’ pay or a fixed amount 
for every participant. Employee contributions were not originally allowed in corporate-
type defined contribution plans, but they have been allowed since January 2012.
In individual-type defined contribution plans, employees or self-employed workers 
can contribute to the plan at their discretion. Employers, however, cannot make matching 
contributions to individual-type defined contribution plans. (In Japan, “matching contri-
butions” in defined contribution plans refers to employee contributions that are made to 
match those of the employer rather than employer matching of employee contributions
as in the United Kingdom and the United States.)
Regular employees who are covered by the KNH are eligible for corporate-type 
defined contribution plans once their employer establishes such a plan. There are two 
separate contribution limits for corporate-type plans. If employers maintain an EPF or a 
New Defined Benefit Plan along with their defined contribution plan, contributions to 
individual accounts are limited to ¥25,500 a month. If they do not maintain such plans, 
the limit is ¥51,000 a month.
If employers do not sponsor a defined benefit plan or a corporate-type defined con-
tribution plan, employees are eligible to participate in individual-type defined contribu-
tion plans. The contribution limit for these plans is ¥23,000 a month. Self-employed 
workers can participate in individual-type defined contribution plans, with a limit of 
¥68,000 a month on their combined contributions to the plan and to the National Pen-
sion Fund. Public sector employees and full-time housewives/househusbands are not eli-
gible for either corporate-type or individual-type defined contribution plans.
Participants select investment options from a list presented for their individual 
account. At least three options must be provided. Bank deposits, mutual funds (invest-
ment trusts), and insurance products are commonly presented as investment options. One 
of the investment options must be a principal-guaranteed product, such as a time deposit 

or guaranteed investment contract. Securities of the employer can be one investment 
option, although they are rarely offered. No real estate investment option is permitted. 
Participants can change their investment options every three months. Plan administrators 
must provide information on account balances to participants at least once a year.
Benefits are payable when participants with more than 10 years of participation reach 
age 60. If participants leave the company before age 60, they must roll over the account 
balances to a new employer’s defined contribution plan or an individual-type defined con-
tribution plan. There are two exceptions to this rule. If an employee leaves with no more 
than three years of participation and becomes ineligible for any type of defined contribu-
tion plan (as would be the case for full-time housewives/househusbands or public sector 
employees), the vested account balance, if any, can be paid out in cash. If an account bal-
ance is ¥500,000 or less, a lump-sum withdrawal payment can be received regardless of 
the participation period. These exceptions were made to eliminate recordkeeping burdens 
and the maintenance of small account balances.
Participants can start receiving benefits any time between age 60 and 70, but they 
must begin receiving benefits by age 70. Benefits are paid in a lump sum or in installments 
extending over 5–20 years. Life annuities can also be offered. After three years of service, 
participants are 100 percent vested in corporate-type defined contribution plans.
When a participant in an individual-type defined contribution plan changes jobs to 
become an employee, his or her account balance must be rolled over to the new employer’s 
corporate-type defined contribution plan. If the new employer does not sponsor a corpo-
rate-type defined contribution plan, the account balance remains with the individual-type 
defined contribution plan.
In corporate-type defined contribution plans, employer contributions are a tax-
deductible business expense and are not treated as taxable income for employees. In indi-
vidual-type defined contribution plans, participants can deduct contributions from their 
taxable income, and investment earnings are tax deferred. Rollover is tax free. Lump-sum 
benefits paid to beneficiaries are favorably taxed as retirement benefits (with a service-
related deduction). The contribution period is considered as the service period. Annuity 
benefits are also subject to a special income deduction.
Employee Matching Contributions to Defined Contribution Plans
Pension legislation was enacted in August 2011 that authorized the launch of employee 
matching contributions under current defined contribution plans beginning in January 
2012. This new matching scheme is structured as follows (see Endo 2011 for more details):
1. Employee matching contributions for corporate-type plans are voluntary.
2.  Employees’ matching contributions cannot exceed their employers’ contributions. 
3. The combined total of the employee and employer contributions cannot exceed 
the upper limit for tax privileges.
4.  Employers are responsible for ensuring that contributions do not exceed the limit. 

5. Employee contributions are deducted by the employer from each employee’s sal-
ary. They are tax deductible at the contribution stage. Investment earnings are not 
taxed if they remain in the plan.
6. Benefits are payable only after age 60. They represent taxable income when 
received, although subject to a special income deduction.
The tax privileges and gains from earlier contributions are two selling points for the 
new scheme, which is intended to make corporate-type defined contribution plans more 
attractive. Critics have noted, however, that the second and third requirements make 
the employee matching contribution redundant. Given that the combined tax limit is 
¥51,000 a month, the maximum combined contribution of ¥25,500 from an employer 
limits the employee maximum contribution to the same amount. If the employer con-
tributes less than ¥25,500, the maximum contribution from the employee must decrease 
accordingly. Consequently, the employee matching maximum contributions will vary 
depending on the employer contributions, which can result in a different level of allow-
able contributions among employees of different firms with the same salary.
The new scheme for matching contributions imposes additional handling costs on 
employers. If the employer contribution to the defined contribution plan is proportional 
to the salary of each employee, then every year employers are forced to review and confirm 
whether their employee matching contributions fall below the approved upper limit.
Tax privileges for employee contributions have become both more complicated 
and less fair, it can be argued, because individual-type defined contribution plans allow 
monthly matching contributions of up to either ¥23,000 or ¥68,000, whereas corporate-
type plans allow matching contributions up to ¥25,500. The wall between individual- 
and corporate-type plans has been virtually dismantled, but inequalities among individual 
employees in making contributions to defined contribution plans remain.
Future Prospects for Defined Contribution Pension Plans and 
Matching Contributions
More than 10 years have passed since defined contribution plans were introduced in 
Japan. At the time of their introduction, it was widely expected that they would expand 
rapidly. This did not happen. In March 2011, the aggregate amount of accumulated assets 
in occupational plans was only about ¥5.5 trillion for defined contribution plans and 
about ¥80 trillion for defined benefit plans.
Why has the growth of defined contribution plans been so slow? The major factor is 
the restriction of cash-out only after age 60. Most small and medium-size companies used 
to pay lump-sum retirement benefits to early leavers or employees reaching the mandatory 
retirement age from their occupational pension plans. The fact that defined contribution 
plans are not able to do so makes them far less attractive to workers and employers than 
the existing defined benefit plans, which have no such restrictions.
Another factor is the very low maximum imposed on contributions to defined con-
tribution plans (existing defined benefit plans have no maximums). This limit has led 
potential service providers who might promote the arrangements to believe that defined 
contribution plans are not a profitable business.

A third factor is that reducing benefits of a defined benefit plan requires the consent 
of two-thirds of plan participants. When employers want to introduce a defined con-
tribution plan by replacing part of their existing defined benefit plan, this requirement 
becomes a bottleneck, thereby discouraging them from switching.
A fourth factor is very low (or negative) returns observed in the domestic capital 
markets for nearly two decades. As of October 2011, about 60 percent of plan participants 
in Japan had incurred a loss of principal on their accumulated defined contribution assets.
The future of defined contribution plans in Japan will likely depend on whether 
the design limitations evolve to allow employees to take cash payments at the termination 
of employment before age 60 and on the potential for a significant increase in the upper 
limit for contributions. Japan has a long history of not providing tax incentives for per-
sonal savings. Saving for retirement is the single exception to this rule. The requirement 
restricting the ability to cash out before age 60 was imposed in order to provide defined 
contribution plan contributions with preferential tax treatment similar to that afforded 
employer-sponsored plans. Individual contributions to defined contribution plans are 
obliged to follow this rule to receive this tax privilege.
Employer contributions, however, are not necessarily regarded as personal savings 
but rather as retirement benefits. It is therefore inconsistent with the treatment of other 
employer-provided benefits to restrict the ability to cash out the benefit upon a change of 
employment to employer contributions in these plans.
The matching contribution provisions that now apply to defined contribution plans 
are very recent; the effect these provisions will have on growth within these plans is there-
fore not yet known. Concerns have already been raised regarding the potential the provi-
sions will have to stimulate meaningful expansion of the nascent defined contribution 
system. The design of the new arrangement that allows employees to contribute only to 
the extent that the employer is willing to pay into the plan is the opposite of the approach 
in other countries, where the sponsor’s match provides an inducement for employees to 
join and contribute. This reversed design does not provide strong incentives for either 
party, and it imposes additional restrictions and potential burdens on both.
The limited acceptance of these new plans likely will provide a strong example of 
the importance of context, cultural norms, and perceptions on behavior and the influence 
that the historical development of a pension system has on the capacity of design innova-
tions such as matching contribution to expand participation and levels of saving. In the 
presence of a well-established social security system providing meaningful basic benefits 
to the full population and a relatively high prevalence of supplementary defined benefit 
arrangements (as indicated in the evidence from other countries in the Organisation for 
Economic Co-operation and Development presented in chapter 2), there is not likely to 
be strong demand for supplementary defined contribution savings.
Defined contribution plans could grow in Japan in the long run, but their short-
time prospects are weak. Development of these plans crucially depends on the extent to 
which the schemes evolve to better fit the Japanese environment, meet the needs of par-
ticipants, and become user friendly.

1.  Currency values in this chapter are given in Japanese yen; ¥ 1 = $0.0128.
2.  The contribution rate of Japan’s principal pension program for private sector employees, the 
Kosei Nenkin Hoken (KNH), is to be raised annually until it reaches 18.3 percent in 2017, 
after which it will essentially become equivalent to a defined contribution plan with pay-as-
you-go financing. 
3.  More detailed explanations of Japan’s social security pension system can be found in Takayama 
(2003, 2004, 2006).
4.  Before 1937, old-age security for employees in the private sector and self-employed people in 
Japan was provided mainly by families. Some companies voluntarily set up their own occupa-
tional retirement benefit schemes as a means of strengthening the loyalty of their employees 
and to pay a lump-sum benefit to employees who were terminated. Public sector workers in 
Japan have been receiving both pension annuities and a lump-sum retirement benefit since 
1875 (see Sakamoto 2011).
5.  In the 1960s and 1970s, social insurance coverage worked as a major selling point for employ-
ers in recruiting employees.
6.  The transfer from general revenue in the National Pension was changed in 1976 because of 
budget restrictions. It was converted into a matching contribution at the time of benefit pay-
ments; one-third of flat-rate pension benefits had begun to be funded by then.
7.  This entitlement raises contentious issues (see Takayama 2009 for details).
8.  About 5.5 million people were exempted from paying contributions in 2010 (Ministry of 
Labor, Health and Welfare 2009).
9.  The transfer from general revenue to the KNH earnings-related benefits was abolished in 
1986, and has been concentrated to match the flat-rate basic benefits of the National Pension. 
10.  The number of atypical employees in Japan almost doubled between 1990 and 2010, ris-
ing from 8.8 million to 17.1 million. The KNH contribution rate rose from 11.3 percent to 
15.7 percent over the same period.
11.  About 40 percent of nonregular employees and self-employed people are delinquent in paying 
contributions, equivalent to about 8 percent of the total number of active participants in all 
social security pension programs in Japan.
12.  This section is a revised version of Urata and Takayama (2006). See also Clark and Mitchell 
13.  According to a 2008 survey conducted by the Ministry of Labor, Health and Welfare, 64 per-
cent of employers who paid lump-sum retirement benefits utilized RAPs.
14.  The plus alpha benefits must be at least 10 percent greater than the contracted-out portion.
15.  The Pension Fund Association was founded in 1967 as a federation of EPFs. The main objec-
tive of the association is to provide pension benefits to those who seceded from EPFs after a 
short period and to pay contracted-out benefits to those whose EPFs are dissolved, as well.
Clark, R. L., and O. S. Mitchell. 2002. “Strengthening Employment-Based Pensions in Japan.” 
NBER Working Paper 8891, National Bureau of Economic Research, Cambridge, MA.

Endo, T. 2011. “Pension Reform in Japan: The 2011 Law and Future Issues.” Benefits & Compensa-
tion International 41 (5): 15–22. 
Ministry of Labor, Health and Welfare. 2009. The 2009 Actuarial Report on Social Security Pensions
2009. (In Japanese.)
Palacios, R., and D. A. Robalino. 2009. “Matching Defined Contributions: A Way to Increase Pen-
sion Coverage.” In Closing the Coverage Gap: The Role of Social Pensions and Other Retirement 
Income Transfers, ed. R. Holzmann, D. A. Robalino, and N. Takayama, 187–202. Washington, 
DC: World Bank.
Pension Fund Association. 2012. Statistical Figures on Occupational Pensions. (In Japanese.)
Sakamoto, J. 2011. “Civil Service Pension Arrangements in Japan.” In Reforming Pensions for Civil 
and Military Servants, ed. N. Takayama, 113–29. Tokyo: Maruzen Publishing Co., Ltd.
Takayama, N., ed. 2003. Taste of Pie: Searching for Better Pension Provisions in Developed Countries
Tokyo: Maruzen Publishing Co., Ltd.
—. 2004. “Changes in the Pension System.” Japan Echo 31 (5): 9–12.
—. 2006. “Reforming Social Security in Japan: Is NDC the Answer?” In Pension Reform: 
Issues and Prospects for Non-Financial Defined Contribution (NDC) Schemes, ed. R. Holzmann 
and E. Palmer, 639–47. Washington, DC: World Bank.
—. 2009. “Pension Coverage in Japan.” In Closing the Coverage Gap: The Role of Social Pensions 
and Other Retirement Income Transfers, ed. R. Holzmann, D. A. Robalino, and N. Takayama, 
111–18. Washington, DC: World Bank.
Urata, H., and N. Takayama. 2006. “Pension Regulation in Japan: Issues and Reforms.” In Labour 
Market Regulation and Deregulation in Asia, ed. C. Brassard and S. Acharya, 197–218. New 
Delhi: Academic Foundation.
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