Appended Note 3-12 Estimation of potential cost to eliminate under-funding of retirement benefits

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(1) Outline of the estimation

We estimated how much Japanese companies will have to set aside retirement benefits each year if they are to fill the gap between retirement allowance obligations and pension assets over 10 years from the March 2004 business year and then calculated the ratios of those amounts to capital spending (their ratios to expenditures on tangible fixed assets). We tabulated these ratios by increments of 10 percentage points and then calculated the ratio of the number of companies in each group to the total number of companies surveyed (1,016). Our estimation drew upon: Simon Kwan, "Underfunding of Pension Plans," FRBSF Economic Letter No.2003-16.

(2) Data used and assumptions for the estimation

Corporate financial data used are from the Nikkei NEEDS database for 1,016 companies, for which necessary data are available, out of companies listed on the First Section of the Tokyo Stock Exchange. Outstanding retirement allowance obligations, pension assets and expenditures on tangible fixed assets are all as of the end of March 2004. We assumed an annual increase of 0.3% in retirement allowance obligations and an investment return of 1.5% on pension assets. In assuming the rate of increase in retirement allowance obligations and the investment return on pension assets, we drew upon Chapter 7 of the report by the "Study Group on the Retirement of the Baby-Boom Generation and the Japanese Economy" of the Policy Research Institute of the Ministry of Finance.

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