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Toyota, Sanyo Electric and Others Design Measures to Comply with the Revised Senior Employment Opportunity Expansion Law

By Masako M. Osako, Ph.D.
(Member of ILC-USA Project Advisory Committee)

Main Theme: The Revision of the Law

In order to deal effectively with the challenge of a rapidly aging population, an expansion of employment opportunities for older workers is essential. This is one of the major objectives of the recent revision of the Law Concerning the Stabilization of Employment of Older Persons that became effective on April 1, 2006. Japanese companies have implemented the revised law with a vast variety in design and objectives, reflecting their diverse economic and human resource conditions.

Under the revised law, a company that presently imposes a mandatory retirement on its employees is obligated to 1) raise the retirement age from the currently common 60 to 65 in steps by April 2013, 2) abolish the retirement practice, or 3) introduce a viable plan to continue the employment of post-retirement age workers through either re-hiring or other means. According to the result of a survey recently conducted by the Ministry of Health, Labour, and Welfare ("MHLW"), a large majority of companies prefer the flexibility allowed by option 3) which allows them to determine the re-hiring or retirement extension criteria by agreement with a trade union and thus help the company to avoid retaining unproductive elderly staff.

Background

Japan is aging rapidly. The proportion of working age people to Japan's entire population is also sharply declining. By 2050, it is expected that one in every 3 people will be 65 years old or over. Encouraging older workers to remain healthy and work longer is one viable strategy to cope with the challenge of population aging.

For a program to expand work opportunities for seniors to be effective, it must be consistent with the spirit and practice of corporate employment in Japan. Risking over-simplification, one might say that Japanese companies reward continuous service and, except in extreme cases, do not generally discharge employees. Under this system an employee's salary generally increases parallel to financial needs at different stages in life, from a single young person to a family man with children, and hence to an elderly head of household without children to support. At the end of a few decades of service for a company, an employee is rewarded with a sizable severance payment. These practices have helped companies to maintain a stable work force. However, at the same time management must adopt measures to maintain vigor and productivity in the work place.

Until recently, Japanese companies have dealt with the negative impact of a graying work force largely with 1) a mandatory retirement system and 2) the gradual reduction of salary beginning around age 55. According to a MHLW survey conducted in 2005, approximately 90% of companies had a mandatory retirement rule, commonly set at age 60. According to another survey conducted by the Prime Minister's office in January 2005, over 85% of polled companies restructure older workers salaries downward when they reach 55 to 60. The median salary reduction is 20-30%.

The traditional mandatory retirement at age 60 became a problem when, in 2004, the government raised the national pension eligible age from 60 to 65 by year 2013, creating a gap between retirement and pension eligibility ages. Closing this gap is one of the main goals of the revision of the Stabilization of Employment of Older Persons. The revised law recommended a mandatory retirement age to synchronize the pension eligibility schedule: i.e. 62 years by 2006, 63 years by 2009, 64 years by 2012, and 65 years in 2013.

Implementation: Vast Diversity Found in Senior Employment Expansion Programs

While available data are still fragmentary and scarce, even a handful of cases as shown below indicate a vast diversity in the contents of the plans adopted by companies. Kawasaki Heavy Industry has summarily extended the mandatory retirement age to 63 for all non-managerial employees. For this company, securing of a skilled labor force is critically important in its effort to maintain market competitiveness. Sanyo Electric opted for rehiring of all retirees, but only a small portion of their applicants have applied for rehiring. Unlike these two, Toyota Motor Company rehires retirees on a selective basis depending on the applicants' qualifications.

Kawasaki Heavy Industries, Ltd
Kawasaki Heavy Industry, a leading manufacturer of motorcycles, ships, and aircraft, is concerned to secure a sufficiently skilled work force. Given the population structure of its work force, it forecasts 5,000 to 6,000 of the current 11,000 employees will reach the traditional retirement age of 60 within the next 10 years. Streamlining the compensation and retirement systems has been a major concern. A plan was announced, following intense negotiation between the management and the union under a program called TAR-GET (or "Total and Active Reform for Grasping an Excellent Tomorrow") which started in 2003. The plan extends the retirement age from 60 to 63 for all non-managerial employees and provides a re-employment program for managers. On reaching 60, an employee's base pay will be reduced to 50-60% of the level received in his 50's.

Sanyo Electric Co., Ltd
Sanyo Electric Co., a major electrical equipment manufacturer, has opted to offer a re-hiring program for up to 5 years beyond the designated retiring age for those desiring to be rehired. The re-hiring program is applicable to all non-managerial workers. Those aged between 60 and 65 can choose a suitable work schedule, changing from full time to part-time, for example to 4-days a week or 6-hours a day. On reaching 55, employees should notify the company whether they wish to extend the retirement age when they become 60. An employee opting for rehire will receive a reduced salary for the period between age 56 and 60, which will be about 70-75% of his salary at age 55, in exchange for the opportunity to work longer employment tenure. The annual retiree pool for each year from 2000 to 2006 is slightly over 400, but only about 3% have decided to apply for rehiring. A reason for this low percentage may be that the company's retirees have sufficient private pensions to rely on, as they are allowed to annualize up to 70% of their lump-sum retirement severance pay.

Toyota Motor Corporation
Toyota's plan focuses on the expansion of its retiree re-employment program. The auto manufacturer is going to gradually increase the age limit for retirees in the company's senior re-employment program to 65 from the current 63. The re-hiring program which is applicable to all employees at age 60 (previously available only for factory staff), is now applicable to everyone. Applicants for re-employment are evaluated on the basis of their performance from age 55 in respect of 1) health conditions, 2) skill level and work performance, and 3) work attitude including the capacity for team work. For fiscal year 2006, the company expects to re-hire about 700 workers from the 2006 potential retiree pool of 1260.

Conclusion

The 2004 Revision of the Law Concerning the Stabilization of Employment of Older Persons provides companies with a great deal of flexibility in designing a customized senior employment opportunity expansion plan. The diversity of plans reflects differing constraints experienced by companies. In the case of the above three, and virtually in all instances, an employee's salary substantially declines at age 55 - 60, saving the company a substantial amount of personnel expenses. This arrangement is accepted by employees probably because it is consistent with the widely held view in Japan that compensation should reflect not only the employee's productivity but also his financial needs that can change depending on the stage of his life.

Sources:
Ministry of Health Labour and Welfare web site, http://www.mhlw.go.jp
Ministry of Health Labour and Welfare, 2005 White Paper on Aging Society (Kourei Hakusho), Tokyo, 2005
Rousei Jihou, "Employment Beyond Age 60," (Special Edition) July 2005 (in Japanese) Nihon Keizai Shinbun, "Extension of Retirement Age Does Not Necessarily Mean a Gain," (in Japanese) April 3, 2006
Yomiuri Shinbun, "Implementation of the 2004 Revision of the Law Concerning the Stabilization of Employment of Older Persons," (in Japanese), March 1, 2006.
Yomiuri Shinbun, "Expansion of Employment Opportunities of Seniors-Varied Modes of Implementation," (in Japanese), April 1, 2006

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