By TAIKI KOIDE/ Staff Writer
April 7, 2022 at 17:04 JST
The Tokyo branch of Nippon Life Insurance Co. (Asahi Shimbun file photo)
Nippon Life Insurance Co. is lowering its estimated rate of return on corporate pension insurance policies, it announced April 6, marking the first time it has slashed its estimated rate in 21 years.
As of April 2023, the estimated rate of return will drop to 0.50 percent from the current 1.25 percent.
The move, which reflects a long period of low long-term interest rates, means that some 5,200 companies will have to increase their contributions to employee pension programs.
The reduced estimated rate of return will apply to the defined benefit corporate pension program offered by Nippon Life Insurance.
About 12,000 companies have purchased these pension programs, covering about 9.33 million employees--roughly 23 percent of all workers at private-sector companies.
Such pension programs are normally managed by trust banks and life insurance companies. The total amount handled in the defined benefit corporate pension programs is 67.5 trillion yen ($546 billion).
While 75 percent of that is handled by trust banks, Nippon Life Insurance has the largest share among life insurance companies, handling some 5.6 trillion yen--about 10 percent of the overall total.
During the 1990s, Nippon Life Insurance’s estimated rate of return hovered above 5 percent. But it was decreased to 1.25 percent in 2002. The company was forced to further trim the estimated rate of return because officials concluded they would be unable to promise the higher rate of return in the future.
Companies often combine several pension products in providing their workers with a defined benefit pension program.
According to the Pension Fund Association, the average estimated rate of return that companies promise their employees is between 2.1 and 2.2 percent.
Reducing the estimated rate of return for a product where fund management is stable means companies may have to turn to other products that may promise higher returns at greater risk to come up with the pension funds to pay retirees.
The effects will be larger for small companies that may not be able to respond through other pension investments in the same way as major companies.
Dai-Ichi Life Insurance Co. cut its estimated rate of return down from 1.25 percent to 0.25 percent in October 2021.
The two other major life insurance companies that offer the defined benefit pension product are Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co. While both companies still have a 1.25 percent estimated rate of return, the latest move by Nippon Life Insurance may have an effect.
Life insurance companies must receive approval from the Financial Services Agency before lowering their estimated rate of return.
The agency approves the requests if it concludes the companies could not have foreseen changes in the interest rate or economic trends when the contracts for the pension products were signed.
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