“Prince Charming Syndrome?” Gender gap in preferences for defined contribution pensions in Japan

ABSTRACT

Using survey data collected by the Japan Institute of Life Insurance in 2002, this study finds that a significant gender gap existed in defined contribution (DC) pension knowledge among workers employed at small- to medium-sized private firms in Japan. Even with similar DC knowledge, however, men and women reveal different preferences for DC pensions, indicating that their perceptional responses may widely differ from actual behaviors. Apart from the knowledge gap, the result shows evidence of the Prince Charming Syndrome among female employees as a significant source of the gender gap in DC participation rates. Among corporate pension-covered employees, the gender difference in the efficacy of DC portability is a more significant gap-generating factor. DC tax advantage is particularly favored by pension-covered female employees over male counterparts, reducing the DC preference gap. No similar evidence is found for employees with no corporate pension coverage.

KEYWORDS:

• Defined contribution pensions
• gender gap
• Japanese employees
• Prince Charming Syndrome

Acknowledgments

The author would like to thank seminar participants at Hitotsubashi University, National University of Singapore, and APPAM for valuable comments and suggestions on an earlier draft of this article. The data set used in this article, conducted by the Japan Institute of Life Insurance, may be obtained upon request from the Institute of Social Sciences at the University of Tokyo, Japan. Research results and conclusions expressed in this article are those of the author’s and do not reflect the views of JILI and ISS-University of Tokyo.

Notes

¹ Author’s translation of Kigyō no fukuri kōsei seido ni kan suru chōsa.

² There are 65 employees whose corporate pension eligibility status is unknown and who are eliminated from our analysis.

³ See, for example, Chapter 7 in Ippolito (1997) and Poterba and Wise (1999) for an overview of the recent expansion of these plans in the United States.

⁴ Limitations of the conventional DB plans, for which the Ministry of Health, Labour and Welfare of Japan claims to be the primary reasons for implementing the new DC scheme, are listed on its website (http://www.mhlw.go.jp/topics/bukyoku/nenkin/nenkin/ kyoshutsu/gaiyou.html). The first reason cited is the fact that the conventional DB pension scheme has not been implemented by many small- to medium-sized firms in Japan, leaving workers at these firms at a disadvantage with no private retirement programs. The second issue pointed out by the Ministry is the inability of DB benefits to be rolled over as workers change their jobs. It is claimed that these two issues have historically put female workers in Japan at a disadvantage because women tend to work for smaller firms with no corporate retirement benefits and have an interrupted career as they reach the childbearing stage of life. Moreover, from the employers’ viewpoint, the introduction of the DC pension scheme was imperative, as the corporate-sponsored DB retirement programs have imposed an enormous financial burden on many insolvent employers in the past decade (Japan Business Federation, 2006). Muto and Ishizuka (2002) report that Kōsei Nenkin Kikin and Tekikaku Taishoku Nenkin, Japan’s two most popular privately managed DB retirement programs, have been undergoing insufficient reserves due to frail performance of stumbling domestic investment markets since the burst of Japan’s economy bubble.

⁵ However, conditions require that an individual must be employed by a firm for at least 3 years. Moreover, the individuals may not receive allowances out of their DC savings before they reach the age of 60.

⁶ More precisely, the Defined Benefit Corporate Annuity Law was enacted, followed by the Defined Contribution Corporate Annuity Law, which came into effect in October 2001 and April 2002, respectively.

⁷ These numbers do not represent the employees who made a complete switch from a DB pension to a DC plan. Presumably, the majority hold a mixture of both plans, with DB pension as the primary coverage. However, there exist no data available to substantiate the DB/DC pension coverage shares at an individual level. At an employers’ level, a survey conducted by the Pension Fund Association (2006) finds that 39.2% of DC-implementing firms in Japan offer solely the DC plan, and 60.8% offer a DC plan in combination with other DB alternatives. Ippolito and Thompson (2000) find that the complete termination of DB pensions in favor of DC plans is a rare event for U.S. firms.

⁸ Olivia S. Mitchell (1988), using the 1983 Survey of Consumer Finance, finds that women are better informed than men along several pension dimensions in the United States. More recently, however, a study by Transamerica Center for Retirement Studies (2007) finds that full-time female workers tend to fall behind men with respect to retirement savings, confidence, information, and knowledge. One could also attribute the male–female differential to the availability of a DC plan at their current job. Smaller firms are less likely to provide corporate-sponsored retirement benefits due to relatively higher administrative costs. However, if an employer does not offer a DC pension or provides no corporate-sponsored retirement plans at all, then the new pension laws allow Japanese workers to enroll individually in a DC plan available at private financial institutions (i.e., banks, insurance companies). The new DC pension laws also permit self-employed workers to set aside their partial earnings into an individual DC pension account at these financial institutions. The individual-based DC enrollment, of course, hinges on whether employees are knowledgeable about the availability of these services offered by the financial institutions.

⁹ One may also attribute the enrollment gap to the employer discrimination against female employees, as contributions to corporate retirement savings in Japan are typically made solely by employers and not individual employees. As demonstrated in Table 1, a larger fraction of full-time female employees are ineligible for corporate pension benefits than male employees. However, the focus of this article is placed on the “preferences” for DC pensions, and the analysis is conducted with a prospective view of individual workers without employer’s bias. As explained in footnote 8, the new pension laws allow the Japanese workers to enroll voluntarily in a DC plan available at private financial institutions in the case that their employer does not offer a DC pension or provide no corporate-sponsored retirement plans at all.

¹⁰ The fact that the Japanese government has terminated Tekikaku Taishoku Nenkin, one of the most popular corporate DB retirement programs, also increases the relative importance of the DC pension alternative.

¹¹ For all the survey respondents, regardless of the level of their prior DC knowledge, the questionnaire described the specific merits and demerits of a DC plan. The questionnaire then asked, “Of the following DC features, which would you consider the merits of a DC pension?” and allowed respondents to circle the items such as “Being able to carry over the benefit as one changes a job” and “Being able to view own account balance any time” if they agree. If a respondent circled the item, the response was entered as 1 and 0 otherwise. Similarly, the questionnaire asked, “Of the following DC features, which would you consider the demerits of a DC plan?” and listed items such as “Require knowledge of finance and investment commodities” and “Account balance may greatly decrease if managed poorly.”

¹² Some exceptions are Hinz et al. (1997) and Bajtelsmit and VanDerhei (1997), who studied gender difference in retirement portfolios from the viewpoint of individual risk aversion for U.S. workers. No similar studies are found in Japan.

¹³ The underlying constructs are extracted using the principle components method with varimax rotation, and the factor scores are computed using the regression method.