A DB plan promises a benefit calculated by formula, usually from salary, service or points, and paid as an annuity, a lump sum or a mix. Plans take one of two forms: a contract-type plan, where the employer contracts with a trust bank or life insurer, or a fund-type plan run by a separate pension fund. Many plans are cash balance designs, in which each member's notional account earns a credited rate tied to an index, which shares some of the risk with employees. In the Pension Fund Association's fiscal 2024 survey, 45.7% of its member DB plans and 28.2% of non-member plans used a cash balance or similar design.
DB plans grew out of two older systems. Tax-qualified pension plans were abolished at the end of March 2012, and most employees' pension funds, which also managed part of the state pension, were dissolved or converted after 2014 reforms. That pushed many retirement allowance schemes into DB plans. Since then the number of plans has fallen every year, while defined contribution membership has risen; in March 2025 there were 8.87 million DB members against 8.62 million in corporate DC.
The employer bears the cost if investments fall short. Plans must be valued regularly and deficits made good, and the obligation appears on the balance sheet under accounting rules. Contributions are deductible for the employer and not taxed as employee income; benefits are taxed as retirement income when taken as a lump sum and as pension income otherwise.
What it means for a foreign employer
- Candidates from large Japanese companies may be leaving one. A DB entitlement, often running alongside a retirement allowance, is part of what a senior candidate gives up. Ask for the projected value, not just the current balance.
- Short service may still pay out. A plan must pay a leaver lump sum to anyone who leaves after the qualifying period, which may not be set above three years, and must offer a pension to anyone with 20 years' membership. Leavers can take the lump sum or transfer it to a DC plan or iDeCo, but the formula often rewards long service steeply, so a mid-career move forfeits the most valuable years.
- Acquisitions bring obligations. Buying a Japanese company with a DB plan means taking on its funding position and benefit promises. Changes to benefits need employee consent processes under the act.
- You are unlikely to start one. Few foreign subsidiaries set up a DB plan today. If you do not offer one, address the gap through cash, equity or DC rather than ignoring it.
Sources
- Defined Benefit Corporate Pension Act (2001, in force April 2002), Article 36 (pension eligibility of no more than 20 years) and Article 41 (leaver lump sum, qualifying period of no more than three years).
- Pension Fund Association, corporate pension survey results for fiscal 2024, summary edition (December 2025).
- Trust Companies Association, Life Insurance Association of Japan and JA Kyosairen, overview of defined benefit corporate pension plans (March 2025).
- Resona Bank, overview of corporate pensions and iDeCo as of March 2025 (July 2025).