What Is a Defined Benefit Plan?
A defined benefit (DB) plan promises employees a predetermined retirement benefit, typically calculated as a percentage of final salary multiplied by years of service. For example, a plan offering 1.5% per year of service would pay an employee with 30 years of service and a final salary of 8 million yen an annual pension of 3.6 million yen (8 million x 1.5% x 30). The employer bears all investment risk and must fund any shortfall.
The Shift from DB to DC
Globally, DB plans have been in steady decline. In Japan, the number of corporate DB plans fell from roughly 73,000 in 2000 to about 12,000 by 2023, as companies shifted to DC plans to remove pension liabilities from their balance sheets. In the U.S., only about 15% of private-sector workers now have access to a DB plan, down from 38% in 1980. The primary driver is longevity risk: as life expectancy increases, the cost of guaranteeing lifetime payments rises dramatically.
Key Considerations
If you are fortunate enough to have a DB plan, understand its vesting schedule (the minimum years of service required to earn benefits). Leaving a company one year before full vesting can forfeit hundreds of thousands of yen in future benefits. Also check whether the plan adjusts for inflation; many DB plans pay a fixed nominal amount, which erodes in real terms over a 20-30 year retirement. Supplementing a DB pension with personal investments in inflation-hedging assets is prudent.