Retirement systems in Japan – under revision but but lacking clarity

I am sometimes asked in my training sessions what the retirement age and policy is in Japan, and I usually say something about how it is very similar to the UK, with the government raising the pension age from 60 to 65, and as of April 2021 to 70, and then move swiftly on, because I know the reality is far more complex.

Companies in Japan were meant to offer three options to their employees who have reached 60 – retirement at 65 or “continued employment” meaning flexible working on a yearly contract basis to 65 or dropping the mandated retirement age altogether. Further options have been added in 2021 of offering work to employees as freelancers, and assisting/subsidizing employees to work for not for profit organisations. Continued employment has proved to be the most popular choice amongst Japanese companies.

Trading company retirees “spectacularly well treated”

Diamond Online has taken a look recently at the current retirement policies in trading companies Itochu, Mitsubishi, Toyota Tsusho, Mitsui and Sumitomo Corporation. Japan’s trading companies are well known to have very high salaries compared to other large Japanese companies, earning around Y0.5bn (US$3.7m) in a lifetime, or around Y15m/US$112,000 a year on average.  A mandatory retirement system “would be a big blow” to those on high salaries, so some trading companies have abolished a mandatory retirement system, but now there is fierce competition amongst employees for positions under the new system.

Around 20-30% of employees at trading companies stay on after retirement age (around 58) but they are often seconded to subsidiaries. Annual income drops by 30-40%. Mitsubishi Corporation has abolished its retirement age system for senior executives, but after the age of 60, senior executives are being treated like those who are not in managerial posts – offered the option of re-employment on a yearly contract until 65. A more meritocratic system had been introduced in 2019, which has meant that even though people in their 30s can become department managers, (apparently around 10 people have achieved this in 3 years), managers in their late 50s no longer have mandated retirement, so if they are high performers, they can continue to work, in effect causing more competition for top management jobs for those in the ranks below, who are also watching their backs for the younger higher performers.

At Itochu there are fixed retirement ages dependent on position for executive officers – 65 for the president and vice presidents, 62 for managing directors and 60 for executive officers, but no mandatory retirement age otherwise. Sumitomo Corp has a principle of retirement at 60 for managerial positions but no mandatory system. Salaries for post retirement positions are set according to actual duties, rather than the position the person had achieved before retirement.

Mitsui does not disclose any specific ages for retirement (but you bet Mitsui employees all know what they are). Once removed from managerial duties, they will be paid the same salary as employees who are not in managerial positions, and are a similar cohort, through seniority based promotion. Mitsui also has a temporary secondment scheme, where employees in their late 50s are posted back to the Mitsui mothership, and attempts are made to match them to another company for secondment.

Sony’s harsh system

Sony introduced a mandatory retirement age system in 2013, at the time that President Kazuo Hirai restructured the electronics business. Managerial staff at the time accounted for around 40% of all employees, with a high average age and salary. Sony’s retirement system is a harsh system says Diamond Online, that targets all managers below the division manager and downgrades them to regular employees.  They cite the case of a general manager who retired from his position at the age of 55 and dropped three ranks as a consequence. His Y13m salary is now Y10m. This reduction was not just because of the drop in rank.  Sony has bonuses that are highly influenced by evaluations, and the GM was evaluated very negatively by his new younger bosses.  Sony has achieved its original goal of reducing the absolute number of managers and their average age.  However the system is now being abolished at several subsidiaries, in favour of a personnel system that is not bound by seniority.

Will a job based system fit Panasonic’s culture?

Panasonic abolished mandatory retirement for managerial positions in 2022 and is intending to introduce a job based personnel system (where salaries are based on job content). The details have not yet been decided, so for the time being, managers who have reached 60 can be re-employed, on annual contract basis, as a part timer, until the age of 65. Diamond Online comments that it is unclear if this job-based system will fit Panasonic’s culture of a membership based organisation, based on seniority and lifetime employment, and whether it will lead to a generational change.

Other electronics companies are more clearcut – for Fujifilm, section chiefs must retire when they reach 55, department managers when they reach 57 and 58 for divisional managers. At Casio, although there is a retirement age system for executives, the actual situation is very flexible, and salaries are not much reduced. At Omron there are exceptions to the retirement age system “because there are no successors.”

The retirement age systems that were introduced 10 or so years ago are now being revised, but where they will end up is still not clear.

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Japanese employees don’t want to study or go abroad

Japanese employees don’t want to study or go abroad and don’t like their current employer very much either.  But at the same time, very few are considering changing jobs. These were some of the conclusions from a recent Japanese Ministry of Economy, Trade and Industry report (Vision for Human Resources of the Future).

Further depressing conclusions were:

• Japan is not attracting highly skilled labour from abroad
• The level of employee engagement is one of the lowest in the world
• Japanese general managers are earning less than their Thai peers
• Japan is bottom of the league with regard to investing in human resources
• Japan’s workforce is losing its competitiveness
• The number of Japanese people studying abroad is decreasing
• The proportion of graduate recruits who do not want to work overseas is increasing
• Most senior managers worked their way up the company and tend to be very similar to each other
• The number of women in executive and management positions is still very low

Consultant Dr Kawai Kaoru criticises this report in the Nikkei Online, asking what the point of it is, and who it is addressed to. The conclusions are well known, and have appeared in previous reports over the years. If the message is how important it is to invest in your people, surely if this is news to any company, that company is on the road to bankruptcy anyway, she argues.

Kawai thinks the money spent on the 109 page report would have been better used elsewhere. For a start, she thinks the civil service ought to get its own house in order. 50% of the staff at the Ministry of Health, Labour and Welfare are on temporary contracts, and 50% of unemployment counsellors are also on temporary contracts. The civil service is also suffering from low employee engagement.  This, and many of the other issues raised above may sound wearily familiar to readers in the UK.

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