Japan updates defined contribution pension contribution limits
Defined contribution (DC) pension contribution limits applicable to employees in Japan that participate in both a DC plan and a funded DB plan will change from 1 December 2024, in a move designed to give companies more flexibility.
An overview of these changes
Currently, the total monthly contribution limit for defined contribution (DC) plans is JPY 55,000, but if a company has both funded defined benefit (DB) and DC plans, the DC monthly contribution limit is halved (JPY 27,500) regardless of the DB plan benefits.
Instead of the existing contribution limit of JPY 27,500 per month to DC plans, the new limit will be JPY 55,000 minus the DB equivalent contribution, measured across the plan basis (not on an individual basis). The DB equivalent contribution will be remeasured at each local funding revaluation (typically every 3 or 5 years).
The impact of this change will vary – if the benefit level of the DB plan is low, the sponsor company could be allowed to contribute more to the DC plan under the new rules, but if the benefit level of DB plan is higher, the sponsor company could be allowed to contribute less to the DC plan. The lowered limits will be applicable from the latter of 1 December 2024, and when any amendments are made to the existing DC or DB plans.
It’s important to note that these limits to the DC plan contributions also include any contributions being made to individual DC arrangements (“iDeCo”).
Practical challenges we believe plan sponsors will face
- The maximum permitted DC contribution may change at each funding revaluation, which would complicate communication and administration.
- The limit on contributions to the DC plan may be reduced from the time the first amendment is made to either of the existing DB or DC plans after 30 November 2024, even if this amendment does not materially change the value of the benefits being earned.
As a result, we are seeing many companies impacted looking to move instead to a combination of a DC plan and an unfunded DB plan (“RAP”) i.e. freezing the existing funded DB plan and/or transferring the accrued benefit entitlements to the DC plan. The process to make such a change requires time for consultation and to obtain the required regulatory approvals, and so we recommend that companies impacted determine their preferred strategy soon.