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Article | Global News Briefs

Japan: Changes to DC plan contribution limits proposed

Retirement|Total Rewards|Health and Benefits

By Yukihiko Nakano , Toshiyuki Kinugasa and Nicolas Guiho | April 16, 2021

Proposed changes would base tax-effective DC contribution limits on DB equivalent accruals for employers offering both plan types.

Employer Action Code: Act

Since defined contribution (DC) plans were first introduced in Japan in 2001, their relatively low contribution ceilings have been viewed as a barrier to companies establishing DC plans as their primary retirement savings vehicles. As a result, employers today often sponsor both DC and defined benefit (DB) plans; in fact, a recent survey by Willis Towers Watson reveals roughly two-thirds report having both.

Currently, the total monthly (employer and employee) contribution limit for DC plans is 55,000 yen (about US$500), which is halved when employers also have a funded DB plan (¥27,500), irrespective of the level of DB provided. It has been argued that this lower DC contribution limit is “unfair” for companies sponsoring a funded DB plan with a relatively low benefit level. To address this, the Social Security Council of the Japanese Ministry of Health, Labor and Welfare (MHLW) is proposing changes to DC plan contribution limits, which could significantly affect companies with both a DC plan and a funded DB plan over the long term.

Key details

The main aspects of the proposal include:

  • The maximum DC contribution (¥55,000 per month in total) would be unchanged, but in cases where employers have both a DC and a funded DB plan, the DC plan contribution limit would be determined by subtracting the DB plan equivalent accrual from the maximum DC contribution.
  • In cases where the DB equivalent accrual is determined to be less than ¥27,500 per month, the resulting DC plan contribution ceiling would be higher than under current rules. Likewise, if the DB plan accrual is greater than ¥27,500, the DC plan ceiling would be lower than it is today.
  • DB accruals would be determined based on the DB plan’s benefits as well as certain actuarial assumptions (e.g., discount rate, salary increase rate). It is expected that the accruals would be assessed for the full plan population (i.e., not individually) every three to five years.

For example, under the proposed changes, a company with an equivalent DB accrual of ¥10,000 (per month) could contribute up to ¥45,000 a month to its employees’ DC accounts (Figure 1). However, a company with an equivalent DB accrual of ¥50,000 could contribute only ¥5,000 per month per employee to its DC plan.

Employer implications

The impact of the changes would vary among employers. For companies with an equivalent DB accrual below ¥27,500, the changes would allow for higher contributions and create opportunities, such as the possibility to introduce employee contributions. Meanwhile, companies offering higher DB benefits could be forced to close their DC plans (given that a high equivalent DB accrual would not leave any room for DC contributions). The changes are not expected to affect employers that only have a DC plan or a combination of a DC plan and an unfunded Retirement Allowance Plan.

Note that the DC limit of personal DC plans, iDeCo, is expected to be set in a similar way. Consequently, an employee participating voluntarily in iDeCo may be affected by the changes if his or her employer sponsors a funded DB plan.

While the proposal from the MHLW is still being discussed and — if accepted — is not expected to take effect before October 2022, companies should begin reviewing their retirement plans and consider the impact of the proposed changes to identify any potential challenges or opportunities. It should be noted that under the proposal, companies negatively affected by the changes (i.e., those with a new DC limit lower than ¥27,500) might not have to comply with the new rules immediately but rather only when they amend their current DC or DB plan rules.


Yukihiko Nakano

Director, Head of Retirement, Japan

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