Reasons for Adopting Defined Contribution Retirement Benefits Plan -Exchange of Characteristic of Retirement Benefits-

• In Event: Debt Financing and Debt Contracting

Abstract

The Accounting Standards Board of Japan (ASBJ) has announced the Accounting Standard No.26 "Accounting Standards about Retirement Benefits Accounting" and Accounting Standard Application Guidance No.25 "Application Guidance of Accounting Standards regarding Retirement Benefits Accounting” on May 17, 2012. As stated in this announcement, the way of dealing with unrecognized difference of mathematical calculations and unrecognized past duty expense (known as unrecognized liabilities) will change from the conventional Accounting Standards. Instead, immediate recognition of unrecognized liabilities will be adopted. We predict that this immediate recognition will obviously increase debt, decrease net assets. Therefore, companies could take measures in two ways. First, to change the Pension Accounting to a Defined Contribution Pension Plan (DC), as the influence of immediate recognition in financial statements has not reached to DC. Second, to switch from investment in stocks to in investment in bonds, as the outbreak of Unrecognized Liabilities is controlled by making stable operation policy of retirement benefits assets. In this study, we will focus on the first way of the pension policy. The purpose of this study is to clarify the factors involved in adopting DC. At first we define the financial risks of Employees' Pension Funds Plan (EPF plan). Second, based on the theory, we attempt several hypotheses. In the end, we use financial statement data to verify the hypothesis. The companies under JPGAAP adopts “Wage Deferred Payment Theory”. However, it is understood that employees regard retirement benefits as a life guarantee opinion. Because an aspect of the uneasy financial unstable for the life of the old age is huge for employees. Therefore, it is understood that the companies regard retirement benefits as an economic guarantee opinion. And the companies choose a suitable pension plan for economic guarantee in the old age of employees. In the EPF plan, the amount of retirement benefits is guaranteed. In other words, it may be said suitable from an economic guarantee opinion. However compared to the DC plan, the companies bear the financial risk. Therefore, to avoid the risk, companies will choose to shift to the DC plan. If the financial situation goes worse, the employees should receive damage. Based upon the foregoing, Employees should manage their pension by taking responsibility for their own economic guarantee after retirement.

Authors

• Masamichi Yoshioka, Science University of Tokyo

• Yasumi Goto, Tokyo University of Science

• Zhang Wan, Science University of Tokyo