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Finance

Japanese companies grapple with rising pension obligations

Through their effect on pension obligations, subzero rates are pressuring earnings at such companies as Nissin Foods.

TOKYO -- Negative interest rates are starting to squeeze corporate profits by forcing businesses to set aside more funds to pay for future pension benefits.

     Companies that offer defined-benefit pensions must reserve a certain amount of money to cover future obligations. But because they invest these funds, they do not need the full amount immediately. A discount rate -- representing expected returns on these investments -- is used to calculate a company's projected benefit obligations, or the present value of future retirement benefit payments.

     The discount rate is based on returns on such safe investments as long-term government debt. As such, it declines when market rates drop. A lower discount rate increases the projected benefit obligations of a business. This shortfall must be reflected in earnings, though timing differs between companies.

     Yields have sunk below zero on bonds carrying maturities of up to 10 years. With many companies' discount rates between 0.5% and just over 1%, adjustments are likely in the offing. A 1 percentage point cut can raise a company's projected obligations by 10-15%. This is an unwelcome side effect of a monetary policy intended to spur economic activity by encouraging borrowing.

     Nissin Foods Holdings, which lowered its discount rate after negative interest rates were put in place, plans to book several billion yen in related costs this fiscal year, dragging down profits accordingly. Sumitomo Realty & Development is seen with several hundred million yen in additional costs this year, while Mitsui Mining & Smelting's expenses could run into the billions of yen.

     Some businesses have already booked such costs. Lixil Group expects to report a group net loss of 20 billion yen ($178 million) for fiscal 2015, down from the previous fiscal year's 22 billion yen profit, owing partly to a roughly 10 billion yen rise in domestic pension expenses. Daiwa House Industry posted an extraordinary loss of 84.9 billion yen last fiscal year. Sumitomo Forestry's pension costs jumped 11.5 billion yen after the company cut its discount rate from 1.2% to about 0.5%.

     The Accounting Standards Board of Japan said in March that it would allow discount rates of zero or lower. No companies have opted to use negative rates yet.

     Falling interest rates could erode pension fund returns as well. Yields on pension funds at major companies were negative for the first time in five years in fiscal 2015, a survey by Rating and Investment Information shows.

(Nikkei)

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