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Lower guaranteed interest rates and the impact on DB plans in Japan

By Nicolas Guiho , Toshiyuki Kinugasa and Yoichi Okamoto | June 3, 2021

Low interest rates continue, putting pressure on insurers and defined benefit (DB) plan sponsors.
Retirement|Ukupne nagrade |Health and Benefits

The protracted very low interest rate environment in Japan is causing insurers to consider reductions to the guaranteed interest rate they offer on their General Accounts (GAs). One of the main insurers has already announced a reduction. To cope with these changes, sponsors of defined benefit (DB) retirement plans with assets invested in GAs are advised to review their investment and funding strategies.

Key details

  • GAs are an investment product, offered by insurance companies, that provide a guaranteed interest rate and possibly a dividend (depending on the type of GA and the performance of the underlying assets).
  • Insurers have generally maintained a 1.25% guaranteed interest rate on their GAs for some time, despite the low interest rate environment, which has made GAs a relatively attractive investment product (in particular as an alternative to Japanese bonds). Approximately 20% of the DB plan assets in Japan were invested in GAs as of November 2020.
  • The prolonged accommodative monetary policy of the Bank of Japan is putting significant pressure on insurers. The annual yield on 10-year government bonds has been slightly below or above zero since 2016. As a result, insurers are struggling to maintain a 1.25% return on their GA products. Dai-Ichi Life (one of the main life insurers in Japan) announced last year that it will decrease the minimum rate on its GA product from 1.25% to 0.25% in October 2021, which will reduce the attractiveness of its GA as a DB plan investment. Meiji Yasuda Life has also signaled that it might reduce its GA rate in 2024. Other insurers would be expected to follow.

Employer implications

For DB plan sponsors with assets in a GA, any decrease in guaranteed interest rate is not good news as the lower return could lead to higher contributions or additional risks. We have highlighted below three basic options available to companies to cope with the changes:

  1. Accept to pay higher contributions.
  2. Increase the plan’s equity exposure to maintain the plan’s target long-term return (this may, however, result in more volatile returns and a higher likelihood of funding deficits and recovery contributions in the future).
  3. Diversify the plan’s asset mix (e.g., by investing in non-traditional asset classes) to optimize return objectives subject to volatility constraints.

There is no one-size-fits-all solution to dealing with decreased interest rates. The most appropriate course of action will depend on an array of factors, including the funded status of the plan and the risk appetite of its sponsor. Companies sponsoring DB plans should review their investment and funding plans and consider the impact of the changes on their portfolio to identify any potential challenges or opportunities. Willis Towers Watson provides pension asset-liability modeling and funding services in Japan and can support you doing so.


Director, Retirement

Director, Head of Retirement, Japan

Director, Retirement

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