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Thursday, June 17, 1999

Prudential to step into Japanese pension market


Staff writer

U.S. financial group Prudential will announce plans next week to enter Japan's pension management business and establish a foothold ahead of reforms expected to allow "defined contribution" pension plans, Prudential Executive Vice President Rodger Lawson said.

Lawson, who is in charge of international investments and global marketing communications at Prudential, declined to discuss details of the move during an interview with The Japan Times. However, the New Jersey-based group is expected to strengthen its existing investment advisory unit in Japan, Prudential Investment Advisory Co., so it can begin to manage pension funds under the defined benefit format.

Defined benefit corporate pension systems obligate companies to pay their employees a 5.5 percent annual return on invested funds. But the actual returns on most corporate pension funds are much lower, requiring employers to fill the gap.

This has prompted calls for introducing a corporate pension system similar to the U.S. 401(k) format, under which employees make a fixed contribution each month. Their benefits vary according to how well their company invests the contributions.

Lawson said the upcoming announcement will mark the Prudential group's first step toward tapping the enormous Japanese pension market, joining other foreign money managers who are increasing their presence here.

"I think the existing market, what we call the defined benefit market, that itself is very very attractive," Lawson said. "There is no question that Japan is strategically the most important outside the United States. You will see more and more evidence of Prudential's desire to start new businesses there."

Lawson said defined contribution plans, expected to be introduced as early as fiscal 2000, must be accompanied by a change in attitude toward investing.

Much of Japan's 1.2 quadrillion yen in personal assets is sitting in bank accounts, Lawson said, noting that many people are still reluctant to put their money into equities because they don't trust brokerages, and also because the market has performed so poorly over the last several years.

"So in reality, you have this hardworking, very conservative group of savers, looking at the securities market and saying, 'This is almost like going to Las Vegas and gambling,'" Lawson said. "What one should do is put one's money into more conservative forms of investment."

The government as well as the private sector should educate people about diversifying their portfolios, which will eventually help them grow their retirement savings, he said.

"In the whole process of creating new retirement plans, what the government has to do is to ... educate Japanese individuals to the fact that, sure, you can get a 1 percent guarantee or probably less with their bank account, but that probably doesn't even cover inflation," Lawson said.

Three major groups of financial institutions, including one led by Industrial Bank of Japan and Nomura Securities Co., are competing to create record-keeping systems to run and manage individual defined-contribution accounts in Japan.

As defined-contribution plans evolve, however, the attention will shift from how to build such record-keeping systems to educating employees on how to invest to better prepare for retirement, he stressed.

Prudential provides a wide range of pension services in the United States, including investment of funds, record-keeping and employee education.

Its clients range from small companies to large ones, such as Kmart, with "several hundred thousand" participants on its plans, he said. On some plans, Prudential just provides money management; on others it offers all of the services in a bundle.

As for how to position itself in the 401(k) business in Japan, the financial group will take a wait-and-see attitude at least through the end of the year, Lawson said, although other various options are being considered.

"Frankly, at this stage of the game, I don't know what's the best way to do it," he said. "From our point of view, what we think we have to do is to get ourselves in a position that, whichever way the market evolves, we can participate.

"We will have all our capabilities lined up, but we are not going to make any rushed decisions as to how to best enter the market," he said, "because even after the legislation (for 401(k) plans) is passed, we do think there will be a rapidly changing environment."

Prudential is best known for its life insurance unit, Prudential Insurance Co. of America, which is the biggest life insurer in the U.S.

It is also a leading U.S. pension manager. As of December, it had $61.2 billion in defined contribution assets under its management and $102 billion in defined benefit assets.

In Japan, the group has a life insurance company, which is devoted to selling insurance policies against death. It also has an interest in Prudential-Mitsui Trust Investments Co., an investment trust firm jointly set up with Mitsui Trust & Banking Co.



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