Japan Inc.'s pension obligations shrink for first time in eight years
Smaller shortfalls could spur businesses to put cash hoards to work
TOKYO -- Listed Japanese companies' total pension obligations shrank in fiscal 2016, the first drop in eight years, as long-term interest rates stabilized and businesses adjusted retirement policies in hopes of lightening the load.
Aggregate pension obligations -- the amount employers must set aside to cover future retirement benefits -- at 3,672 companies stood at 92.62 trillion yen ($852 billion) at the end of fiscal 2016, down 1% on the year, data from annual securities reports shows. Nippon Telegraph and Telephone and Hitachi each recorded declines of around 170 billion yen, while Panasonic saw a nearly 120 billion yen reduction.
This improvement owes mainly to interest rates. The yield on benchmark 10-year Japanese government bonds improved from below zero to 0.065% at the end of fiscal 2016. Higher rates let companies assume greater returns on pension assets, meaning less money is needed to cover the same present value of future liabilities.
Some companies, such as Honda Motor, benefited from policy changes like raising retirement ages. NGK Insulators' pension obligations shrank by roughly 5 billion yen to 95 billion yen, with a higher retirement age accounting for about 1.8 billion yen of the drop.
Pension assets rose by 2.33 trillion yen to 69.67 trillion yen, thanks to better returns on domestic and foreign stocks.
Unfunded pension liabilities -- the gap between obligations and assets -- shrank by about 3 trillion yen to roughly 23 trillion. Companies must book a portion of such shortfalls as a cost each year, dragging down earnings. NTT's pension expenses are expected to fall by around 9 billion yen in the fiscal year ending March 2018.
"Swelling pension obligations are one reason why Japanese companies have been hoarding money, so a reduced burden will serve as an opportunity for them to take such steps as investing or returning money to shareholders," argued Mikiharu Noma, an associate professor at Hitotsubashi University.
Sony intends to boost capital spending 20% this fiscal year, including adding production capacity for image sensors. Hitachi has laid out plans to spend roughly 1 trillion yen on acquisitions by fiscal 2018. Companies may also become more willing to lift wages.
Domestic and foreign equities made up 22% of the investment portfolios of corporate pension funds at the end of March, according to J.P. Morgan Asset Management. Should stocks or long rates decline, pension shortfalls could grow again.