Guide to Transitioning Retirement Benefits to Corporate Pension Plans (DC/DB) | Explaining Key Considerations and Benefits of System Changes

In today’s business environment, many companies are reviewing their traditional retirement benefit systems and transitioning to corporate defined contribution (DC) plans or defined benefit (DB) corporate pension plans.
Not a few people feel anxious about their future financial security upon hearing news like “My company’s retirement system is changing” or “My lump-sum retirement payment is being replaced by a corporate DC plan.”
While lump-sum retirement payments upon leaving a company were once the norm, recent years have seen a major shift: from a “salary-based system” to a “point-based system,” and from “company management” to “self-management.”

This article clearly explains the transition process and key points we should verify, based on specialized materials.

The Overall Structure of Japan’s Pension System and the Role of Corporate Pensions

Japan’s pension system is often likened to a “three-tiered” structure.
The first tier is the National Pension (Basic Pension), which all citizens join. The second tier is the Employees’ Pension Insurance, which company employees join. These are public pensions operated by the government.

The third tier, built upon these, consists of private pensions like corporate pensions and Individual-type Defined Contribution Pension (iDeCo), designed to enrich retirement living.
While lump-sum retirement payments received in cash upon leaving a company were once the norm, corporate pension systems—such as employer-sponsored defined contribution (DC) or defined benefit (DB) plans where companies contribute premiums—now play a crucial role as a pillar for asset building, supplementing public pensions.
Recently, cases where employees can use both employer-sponsored DC plans and iDeCo have increased, highlighting the growing importance of individuals proactively preparing retirement funds at their own discretion.

Two Main Patterns for Transitioning from Lump-Sum Retirement Payments to Corporate Pensions

When companies reform their retirement benefit systems, two primary transition patterns are typically considered.
One is transitioning to a “defined benefit corporate pension (DB)”.
This system involves the company guaranteeing future benefit amounts and bearing the investment responsibility.
For employees, it offers a sense of security similar to traditional retirement pay systems and the characteristic feature of making future payout amounts easier to predict.

The other is transitioning to an “Employer-Sponsored Defined Contribution Pension Plan (Employer-Sponsored DC)”.
Here, the company contributes premiums, and employees manage their own assets.
While it offers the advantage of potentially increasing future benefits based on investment performance and the portability of assets when changing jobs, individuals also bear the investment risk.
Crucially, verifying whether the company’s “assumed rate of return” aligns with one’s actual investment performance is key to determining future benefit amounts.

The Point-Based Retirement System: Shifting from Seniority to Performance

Alongside these system changes, more companies are shifting their calculation method from a “salary-based system” to a “point-based system.”
The traditional salary-based system multiplied the base salary at retirement by a coefficient reflecting years of service. In contrast, the point-based system accumulates points annually based on job skills, position, and contribution level. The retirement payout is then calculated by multiplying these accumulated points by a point value.
This change stems from companies’ desire to eliminate seniority-based systems and directly reflect current contributions.
While younger employees who attain positions early have the chance to accumulate points sooner, the era where retirement pay automatically skyrocketed just for long service is ending.
A major feature of this system is its ability to visualize how one’s current work performance directly impacts future retirement pay.

Essential Checkpoints to Avoid Disadvantages from Plan Changes

When your company explains plan changes, don’t just listen passively. To protect your assets, you must verify certain items.
First is “Preservation of Accrued Benefits.”
Always check whether retirement funds accumulated before the plan change will be transferred to the new plan without reduction.

Next, if transitioning to an employer-sponsored defined contribution (DC) plan, verify the “assumed rate of return” setting.
This is the interest rate used as the basis for the company’s contribution calculations. If the actual investment returns fall below this rate, the theoretical payout could potentially be lower than the expected amount under the old system.
Furthermore, it’s crucial to understand the flexibility in how you receive your assets. Will all assets be transferred to the DC plan, or is there an option to receive a portion as an “advance retirement payment” alongside your salary?

Summary: The Era of “Managing Your Own Retirement Funds” Has Arrived

Retirement funds are no longer something you simply “leave to the company” and only learn the amount upon retirement.
We have entered an era where you must accurately understand “which plan you are in and how much is being accumulated” during your working years and proactively manage your investments as needed.
Especially if your company offers a defined contribution (DC) plan, carefully evaluating the company’s product lineup and regularly reviewing your asset allocation is the most reliable way to grow your retirement savings.
While plan changes may seem complex at first glance, correctly understanding the mechanisms should help you build a more robust future life plan.
Start by reviewing your employment rules and any plan change materials, then begin simulating your future asset situation.