Negative Rates Not All Bad as Mizuho Sees Pension Business Boost

(Bloomberg) -- Negative interest rates aren’t necessarily all bad news for Japanese banks, as companies flock to lenders for advice on how to manage their pension programs under the policy, according to Mizuho Financial Group Inc.

The Tokyo-based bank sees an opportunity to earn more fees from employers that are shifting toward 401(k)-style retirement plans as sub-zero rates make it more difficult for them to meet existing pension obligations. It’s seeking to expand the 1.7 trillion yen ($16.6 billion) of defined-contribution plans it manages for companies’ employees by 30 percent over the next three years, according to Koji Imuta, a senior manager in the asset-management business development department.

The Bank of Japan’s negative-rate policy is driving momentum for companies to reconsider their employee pension arrangements, Imuta said in an interview in Tokyo. “Our customers are acutely aware of this as an issue and inquiries are growing,” he said.

Pension Strain

Even before the BOJ announced negative rates in January, years of plunging bond yields squeezed returns from retirement funds in a nation where the aging population is also placing a strain on the pension system. Imuta’s goal to increase retirement assets reflects a push by Chief Executive Officer Yasuhiro Sato to boost non-interest income amid the risk that the central bank may take rates further below zero, crimping loan profits.

By arranging pension plans for employers and investing the funds on their behalf, Mizuho will earn fees that could help to reduce the impact of negative rates on profit, Sato said in May, without providing specific targets. The bank has forecast the BOJ’s policy will crimp its net income by 40 billion yen in the year ending March.

More firms are seeking to switch to defined-contribution plans from defined-benefit arrangements because swelling retirement liabilities are jeopardizing their financial health, Imuta said. “We see this as an opportunity,” he said.

The total pension shortfall for listed companies in Japan expanded about 43 percent over the past year to 25.6 trillion yen as of March 31, according to Nomura Holdings Inc. Japanese government bonds with maturities as long as 10 years are yielding less than zero even after a recent steepening of the curve.

Making Switch

Defined-contribution plans exist on top of Japan’s public pension system, allowing employees to select how their money is invested. The amount retirees receive fluctuates depending on returns, unlike traditional defined-benefit pensions where employers must pay out a set amount regardless of how much they earn from investing the pooled funds.

Employers are tailoring their pension programs, with some fully making the shift and closing defined-benefit plans and others maintaining aspects of their existing arrangements, Imuta said.

A total of 5.5 million company employees had defined-contribution plans as of March, up 8.5 percent from a year earlier, according to Ministry of Health, Labour and Welfare figures. More than 5,000 companies including Skylark Co. and Panasonic Corp. offered these to their employees as of July, the data show.

Mizuho plans to take advantage of its April 2016 conversion to an internal company structure to bolster cooperation between its bank and trust units on the pension business, Imuta said. About 250 employees work in Mizuho’s retirement operation across the two units, which previously conducted the business separately.

To contact the reporters on this story: Gareth Allan in Tokyo at gallan11@bloomberg.net, Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net. To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward, Darren Boey