MPIfG Working Paper
01/5, August 2001
Corporate Finance, and Coordinated Capitalism: Pension Finance in Germany and
by Philip Manow
This paper analyzes 'globalization' as the interplay
between domestic and 'foreign' economic agents that seek to break up nationally
contained and/or institutionally constrained markets with the aim of altering
distributive outcomes in their favor. I take as my exemplary cases the recent
opening up of the Japanese and German pension markets. US-Japan trade
negotiations and European market integration provide foreign competitors with
entry into the pension market and increasingly allow domestic firms to exit the
national 'regulatory regime'. The internationalization of the market for
investment capital has made 'regime exit' more attractive for many German and
Japanese firms while the international convergence of transparency rules and
accounting standards are increasingly overhauling specific national business
Financial markets today are certainly the most
internationalized of all markets (Simmons 1998; Garrett 2000). It is here where
globalization is most advanced. Today the level of capital market integration
has clearly surpassed the level prevalent in the early heydays of 'globalization,'
which reached its first peak in 1914 (cf. Maddison 1991), while
international trade has only recently become as international as it once was in
the first decade of the twentieth century.
Japan and Germany, as the two most successful export
nations of the world, were and still are the foremost beneficiaries of the
liberal postwar trade regime, yet their trade performance seems to have been
based to a considerable degree on national financial systems that were not
particular liberal in appearance. Japan's and Germany's financial markets were
for a long time during the postwar period 'nationally contained' and/or
institutionally constrained markets with state-regulation of revenue, public
control of investment flows, financial targeting, an important role of the
public sector in savings and banking (postal savings, public saving banks, and
saving and loan cooperatives), and a rich legal and institutional framework that
made capital more patient than the 'rest- and reckless' capital in the
Anglo-American variant of capitalism (cf. Zysman 1983; Shonfield 1965; Ziegler
2000). Both in Germany and Japan, capital tends to be less 'liquid,' investments
are of a long-term nature rather than oriented toward the highest revenue to be
realized in the shortest period of time. Stable cross-shareholding (cf.
Wenger/Kaserer 1998: 505, Table 1)  underpins strategic
alliances between firms and between firms and banks, so that hostile takeovers
were almost unheard-of events both in Germany and in Japan until recently (for
Germany see Prigge 1998: 992, Table 25). Private households show a relatively
high propensity to save and hold their savings predominantly in the form of bank
deposits, while private shareholding has only recently become more prominent in
both countries. The Japanese main bank system and the German Hausbank
system gave business access to these relatively patient and 'modest,' that is
low-revenue expecting, household savings. It thus buffered managers from
shareholder control and allowed firms to strategically enter into new markets
and invest into new technologies with a long-term perspective (cf. Aoki/Patrick
1994; Baums 1994; Sheard 1994). In this respect, the financial systems of
Germany and Japan clearly diverge from the model of equity based corporate
finance in which the stock market figures as the prime source of investment
capital - the model prevalent in the UK and the US. In fact, one of the most
often mentioned differences between the liberal Anglo-American and the
non-liberal German and Japanese market economies is that, in the former model,
stock markets are at the center of corporate finance (equity finance; 'outsider
system,' 'external control'), while the latter model can be characterized as
bank-based systems (debt finance; 'insider system,' 'internalized monitoring';
Kaplan 1997; Franks/Mayer 1997; Hopt et al. 1998).
The recent liberalization of capital markets and
the changes in corporate finance that are associated with it can therefore be
expected to be much less advantageous for the world's two leading export nations
than has been the postwar liberalization of goods markets. Financial
globalization threatens to undermine a crucial element of both the Japanese and
German political economy: the stable long-term relations between lender and
borrower of investment capital, and subsequently, the practices of long-term
economic coordination between managers and workers in so far as these
practices critically depend upon 'revenue-satisficing' behavior rather than
the revenue-maximizing behavior of capital. Central for the long-term economic
coordination in Germany and Japan was the quid-pro-quo of workers' wage
restraint given in exchange for employers' credible commitment to reinvest the
major part of the profits into the company, instead of paying out high dividends
to the company's (share-)owners. This 'cooperative' outcome of the capital/labor
game (Eichengreen 1994; Lancaster 1973) led in the long run to high productivity
growth (due to high investments), low inflation (due to wage moderation), good
export performance (due to the combination of high productivity and low
inflation), rising real wages and increasing employment, and brought about what
in Germany has been called Mengenkonjunktur and what in Japan analogously
has been dubbed boom in volume (Hamada/Kasuya 1993: 177). Since the
mid-1970s, however, the traditional manufacturing sectors have grown far less
quickly and have even stagnated in terms of employment. Given this, the 'taming'
of investment capital that was once a particular advantage of the German and
Japanese political economies appears nowadays to have turned into a liability:
taming has turned into 'trapping'. If in the future German and Japanese firms,
in case they need to borrow money on an increasingly internationalized capital
market, will have to promise to reward capital with the same short-term, high 'rate of
return' that is guaranteed by their US-American competitors, the
cooperative equilibrium of the capital/labor game comes under strong pressure.
Where low 'instantaneous' revenue from investments does not translate anymore
automatically into high growth rates over the long run, investors become more
interested in maximizing their short-term profit. They therefore become
increasingly critical of all the institutional impediments for 'quick in/quick
out' types of investments, that is they become critical of exactly those
institutional features of the German and Japanese political economy that were
central in the old equilibrium for credibly committing capital to the
cooperative strategy in the capital/labor coordination-game. Thus, while the old
comparative advantages of their non-liberal orders diminish, the disadvantages
(efficiency loss) that had always been tolerated are perceived as less and less
acceptable, and indeed today have become much costlier.
The cooperative equilibrium of the capital/labor game has
produced particularly salient 'efficiency losses' in the German and Japanese
pension systems since in both countries the pension systems were used to
stabilize inherited practices of economic coordination, to safeguard trustful
employment relations, and to provide firms with patient capital, at the expense
of the financial solidity and long-term viability of the pension systems
themselves. Yet, the pension systems in Germany and Japan have each been thrown
into severe crisis by
||the poor return from 'politically' motivated
investments of Japanese pension capital or from company pension 'book reserves'
of German firms,
|| the growing labor costs due to generous 'defined
benefit' promises of German and Japanese employers in the past,
|| the massive use of early retirement provisions that
allow German firms to adjust inexpensively and 'peacefully' to a more
unfavorable economic environment,
|| and last but not least, the demographic consequences of
an economic model that has produced a distinctively gendered segmentation of the
labor market and gendered patterns of skill acquisition, and that has led the
two political economies into a 'low fertility equilibrium' (Esping-Andersen
According to OECD estimates, the future liabilities of the
German and Japanese pension system amount to 200 or even 300 percent of GDP by
2030 (see Table 1). This contrasts with the much better prospects for British
and US-American pension systems.
Table 1: OECD estimates of financial liabilities of public pension
programs (Germany, Japan, the UK, and the USA)
Public pension payments % of GDP
Net financial liabilities in % of GDP
Increase in tax/GDP ratio to keep net debt constant
Source: Disney (2000: 4); also see Tanzi/Schuknecht (2000).
It is therefore no surprise that the apparent superiority
of the Anglo-American model of corporate finance plays a prominent role
in the domestic German and Japanese reform discussions triggered by the changes
in the cost/benefit ratio of their established economic orders. And it is indeed
here where the liberal systems seem to outperform the coordinated political
economies most clearly. US-American fund managers ridicule the poor performance
of Japanese investment firms and pension funds, and Germany until recently was a
conspicuous laggard with respect to the establishment of an 'equity culture' and
to managers' regard for shareholder value. Not surprisingly, the superior
performance of the American model of financial capitalism has often been used as
a lever against Japanese and German ways 'to do (and finance) business.' In the
US-Japan trade negotiations, the United States has pressed for the opening up of
the huge Japanese pension fund market while German multinationals are
increasingly forced to respond to the profit requests of powerful institutional
investors, prominent among them being US-American pension funds. Moreover,
German banks and insurance companies are being increasingly challenged by their
European competitors who have been much longer active in the private pension
business under a much more liberal regulative regime - a regime that is now
being extended through the 'harmonization' of the European market. Both German
and Japanese multinationals have to employ more and more the accounting
standards and transparency rules proscribed by the US-American Financial
Accounting Standards Board (FASB) or the International Accounting Standards
Committee (IASC) if they want to avoid paying a risk premium for their access to
the international capital market (Clark et al. 2000, 2000a). These standards
clearly discriminate against the nonfunded or underfunded, defined benefit
corporate pension schemes prevalent in Germany and Japan that have been used
extensively in both countries for enhancing human capital and personnel
management, specifically as a means to instigate investments into firm-specific
skills and to secure low job turnover. Yet, "global markets may not
appreciate these virtues when 'pricing' German [or Japanese] firms" (Clark
et al. 2000a: 2, my addition). By assigning all investment risks to the firm,
defined benefit schemes are perceived as less transparent than defined
contribution schemes, which by definition cannot run into a deficit. 
To the contrary, defined contribution plans "shift costs and financial
risks to plan participants away from firm stockholders and management"
(Clark et al. 2000: 7). To this come the increasing costs of administering DB
pension plans. New US-American accounting standards like the FASB statement 87
have been associated with a trend in the US-pension market away from DB-schemes
and toward DC-schemes. The same can be expected to occur in Germany and Japan
with the spread of these 'generally accepted practices' to these countries. To
uphold the established practices of worker/management cooperation - underpinned
by workers' stable expectations about future income and by generational fairness
between different cohorts of workers of a firm (see below) - has thus become
much costlier, in fact too costly for many firms.
Yet, the spread of Anglo-American 'best practice' in
corporate finance is a process not only suffered, but often also endorsed by
domestic German and Japanese actors, who have become increasingly upset with
poor revenue from their investments, with restricted access to venture capital,
with the meager performance of pension funds or the almost total absence of a
private pension market. Especially private banks and insurance companies worry
about their comparative disadvantages vis-a-vis their Anglo-American competitors
due to the multiple restrictions and market distortions they have to face in
their home markets. The changes in pension finance in Japan and Germany are thus
prime examples for the fact that globalization is not simply an 'external
economic threat' to an economy but often works through "transnational
alliance building, in which domestic actors find allies abroad" to further
their specific domestic interests (Ziegler 2000: 197).
Yet, if the Japanese and German welfare states in general
and their pension systems in particular have crucially contributed to the
long-term stability of economic coordination (cf. Manow 2000, 2001) while at the
same time this economic side-function has undermined their long-term
sustainability, we are led to ask whether the (financial) crises of the German
and Japanese welfare states and the political responses triggered by them,
combined with financial market liberalization, will have a significant impact on
the long-established practices of economic coordination in both countries.
To answer this question, this paper will sketch the story
of the 'rise and demise' of the production/protection nexus in Germany and Japan
with a particular focus on the role that pension finance has played in corporate
finance,  corporate governance, and industrial relations.
I will describe some of the consequences for the German and Japanese pension
systems following from the fact that they have been deeply embedded in
and have 'functionally' contributed to economic coordination in both
political economies. Thus, the paper shares an interest in exploring the
systematic nexus between 'different variants of capitalism' and 'different
worlds of welfare' with a number of recent contributions to the comparative
political economy literature (Hall/Soskice 2000; Estevez-Abe et al. 1999; Mares
1997, 1997a, 2000; Iversen 2000; Huber/Stephens 2001; Swenson 1999, 2000;
Ebbinghaus/Manow 2001; Manow 1997, 2000, 2001a).
The paper is organized as follows: Section 2 will briefly
sketch the history of the postwar reconstruction of the German pension system
and its impact on corporate finance and industrial relations. I will then
describe how much the recent changes in the public and private pension system
will challenge core features of the established model of German capitalism.
Section 3 addresses the challenge to the Japanese model of corporate finance
that is posed by the deregulation of the Japanese pension fund market. In
particular, I will look at the interaction effects among the liberalization of
the financial sector, reforms of pension fund regulation, and changes in
corporate finance in Japan. Section 4 will give a short outlook on the 'life
expectancy' of economic coordination German and Japanese style in
a time of international capital markets.
To provide the reader with a short account of the role
that the private and public pension systems have played in the development of
the German political economy, we have to briefly describe the early postwar
period in which both public old-age insurance and company pensions were
re-established. This period ended with the important 1957 pension reform.
The most pressing problem for the West German postwar
government was to provide the 12 million refugees who arrived from the East
between 1945 and 1955 with housing and employment. This was an especially
problematic task since Allied bombing had caused enormous damage in many big
German cities - while less so to the old industrial centers of the Reich.
To handle the housing problem, massive government intervention seemed
indispensable. Compared with Japan, Germany certainly did experience a more
profound break with the etatist practices of the war economy and after the war
came to embrace a basically liberal economic policy. Still, the German
government in the early 1950s engaged in quite substantial economic steering in
cooperation with industry and its well-established institutions of
self-governance (see Shonfield 1965: 260; Adamsen 1981). The granting of special
tax privileges to selected sectors of the economy became an important tool of
economic policy and the government's least interventionist practice. Given the
high level of taxation prevalent in postwar Germany, this strategy proved to be
quite effective.  Especially the construction sector
enjoyed special tax privileges as a support for the quick reconstruction of the
large German cities.
The preferential tax treatment of investments in housing
and 'basic industries,' in turn, hindered the German stock market from
developing into the prime source for investment capital. This was because the
government at the same time had restricted maximum revenue from stocks in order
to make investment in government bonds, construction loans, or private saving
more attractive (Giersch et al. 1994: 83-84).  Long-term
interest rates were subject to state regulation, which limited interest on
mortgage to 5 percent p.a. and interests on industrial bonds to 6.5 percent
p.a.. Since rent control was perceived as absolutely indispensable given the
extreme shortage of housing, the state sought to minimize the attractiveness of
alternative investments. Yet, control of interest on industry bonds meant that
"the emission of securities played no more than a marginal role for
business finance" (Giersch et al. 1994: 83). Thus, business was in need of
other sources of capital. Again, tax privileges were employed to alleviate the
Already the Tax Law Adjustment Acts of June 1948 and April
1949 had granted massive tax incentives for savings and investments. "In
1950 the total amount deducted from individual and corporate income tax
according to para. 7 (a)-(e) Income Tax Law was about 0.9 billion DM, i.e. 4.2
percent of the aggregate gross income of all individual and corporate tax
returns. Forty-eight percent of this amount was expenditure on repairing
war-damaged equipment, and about 30 percent were housing loans. These numbers
suggest that tax privileges had great importance for capital formation"
(Giersch et al. 1994: 60-61; also see Adamsen 1981: 45-50). Thus, firms came to
cover their capital needs mainly through bank credit (backed by private saving)
or retained profits (Adamsen 1981: 45-50 and 257).  An
important part of these tax privileges became the preferential treatment of
company pension schemes (Kersten 1959; Kempkes 1964).
In order to compensate business for its restricted access
to the capital market, the government allowed firms to hold private company
pensions as book reserves, i.e. merely in form of an account position that
reported a firm's financial commitment in this respect (cf. von Wartenburg
1992). Book reserves became a "means of recycling employer pension
contributions as self-managed self-investment funds" (Clark et al. 2000:
22). Company pensions in the form of book reserves were subject to taxation only
at the time of payment. The tax privilege thus was considerable (DB-Research
1999: 30; Bundesbank 2001), and in light of this it is not surprising that still
today (1997) 56 percent of all company pensions are granted in the form of
direct entitlements toward the firm covered by 'book reserves' (and not, for
instance as in Japan, as payments of a firm on behalf of their employees to an
insurance company that then later pays out pensions to the retired worker;
DB-Research 1999: 14). Note that the whole arrangement not only benefited
employers by providing them with a source of cheap and 'unmonitored' internal
credit, but also provided workers with the assurance that profits would indeed
be reinvested, thus leading to productivity growth that in the longer run could
translate into real wage increases (cf. Eichengreen 1994). In effect, workers
became quasi co-owners of a firm with an interest in the long-term profitability
of investments. While company pensions as a fringe benefit for the core skilled
(male) workforce increased average job tenure, made the acquisition of
firm-specific skills in addition to the acquired industry-wide skills less risky
for the individual worker (Estevez-Abe et al. 1999), and gave the German work
councils a role in negotiating the 'social wage,' it also provided a rationale
for wage moderation both at the firm- and the industry-level. Work councils,
which in the German 'dual system' (see Thelen 1991) are prohibited from
bargaining over wages, became interested in having the wages set in the
collective bargaining between unions and employer associations leave enough room
for a positive add-up on top of the sector wage in form of company pensions or
other 'gratifications' paid by the individual firm (in contrast to wages, work
councils can negotiate with management about these fringe benefits).
Hence, work councils represented an important faction within the unions that had
an interest in moderate collective wage demands. Data on wage drift in
the 1950s and 1960s indicate that the wages set in collective bargaining were
indeed moderate enough to leave maneuvering room at the level of the individual
firm (Paque 1995: 25, Figure 1). Yet, granted in form of pension entitlements,
these benefits were to be reinvested so as to increase future pension
entitlements and real wage growth. That pensions were most often 'defined
benefit' (and followed seniority) burdened employers with the entire investment
risk and minimized problems of 'intergenerational justice' between different
cohorts of workers. Company pensions established a "social contract between
successive generations of company workers" (Clark et al. 2000: 22;
In the early period of economic recovery, tax-privileged
capital retained for 'social purposes' accounted for around 75 percent of all
business self-financing, and the share of self-financing varied according to
industry between 50 and 90 percent of total investments (Kerstner 1959: 34).
Where company welfare schemes historically had played a bigger role, in
particular in the heavy industry of the Ruhr region, capital earmarked for
company pensions amounted to almost 70 percent of total company capital (ibid.).
Since these private pension schemes were far from mature in the 1950s and 1960s,
and since the turnover, profits, and workforces of companies continued to grow
quickly until the early 1970s, company pension schemes represented a
particularly cheap source of internal credit that enabled rapid business
expansion. Compared with retained profits (in the form of tax-privileged company
pensions), the issuing of bonds as a means to finance new investments was
clearly less attractive. Until the mid-1950s, a free market for bonds in West
Germany virtually did not exist. The Kapitalmarktförderungsgesetz (Law
for the Encouragement of the Capital Market) of 1952 had lifted the interest
ceiling on bonds, but industrial bonds were still subject to discriminatory
taxation unlike bonds issued by public authorities. Private savings and retained
profit continued to benefit from tax exemptions as well. Moreover, private
saving was to some degree inelastic, i.e., private households showed a high
propensity to save despite relatively low interest rates. The lack of an easy
access to the stock market for private households played a role in this respect,
With respect to the postwar shortage of investment
capital, the public pension insurance could not be used like the way the
capital of the Japanese Employee Pension System (EPS) was used by the Ministry
of Finance's (MoF) trust fund bureau (see below). There were several reasons for
this. Firstly, the 1948 currency reform had affected not only private savings
and life insurance, but also the public pension system. For the second time
since the great inflation of 1922/23, the German old-age insurance had lost
almost all of its financial assets.  Secondly, even when
the old-age insurance started again to accumulate capital in 1949, the
investment of pension capital in stock or the provision of credit to firms was
legally prohibited, let alone a political use of pension capital to support
strategic sectors of the economy or for investments into the public
infrastructure like in Japan. The investment of pension fund capital had been
heavily regulated by the state ever since the establishment of the public
schemes in the 1880s. Painful experiences made during the crash of the early
1870s (Gründerkrach), which had led to the collapse and bankruptcy of
many banks and workers mutual funds, had left their mark on the young
Bismarckian welfare state. Investment of pension capital was restricted to
supposedly secure, risk-free (however: low-revenue) investments (mündelsichere
Anlage according to Articles 1807-1808 BGB [Bürgerliches Gesetzbuch -
Civil Code]), that is to public bonds, loans to housing associations, and real
estate. Investments into equities were illegal. 
After World War II, these provisions remained largely in
place.  As a consequence, pension insurance capital in the
1950s was primarily invested in loans to housing cooperatives, in public bonds
of the municipalities and the central government, and in normal bank deposits
(BMA 1956, 1957, 1961). The capital assets of the social insurance schemes that
were held in bank deposits, in turn, "greatly strengthen(ed) the ability of
the banks to grant credit to their customers" in the early 1950s (Giersch
et al. 1994) and thus underpinned the emerging stable bank-company relations
that were to become so characteristic for the German political economy. Finally,
the pension reform of 1957 changed the mode of pension financing from a fully
funded system to a (modified) pay-as-you-go scheme. Thereafter, capital assets
of the old-age insurance had the sole purpose to secure the basic liquidity of
the system. The size of the legally mandated reserve that was to be held by the
old-age insurance was reduced step by step, until in 1969 the reserve limit was
set at no more than the equivalent of a one-month pension payment (Drittes
Rentenfinanzierungsänderungsgesetz). This is why the overall volume of
accumulated capital remained rather small (today between DM 20 and 30 billion,
$10.75 and 16 billion) and why, given the concern for the short-term
availability of the reserve, the capital could not be held in the form of
The economic slowdown that began in the early 1970s,
combined with stricter regulation of company pensions (since 1974), has rendered
company pension schemes less and less attractive for business. In this context
it is probably of less importance that the Betriebsrentengesetz (Company
Pension Act 1974) and court rulings in the early and late 1980s forced employers
to adjust pensions to inflation every three years, and restricted the employers'
'freedom of design' in questions of eligibility,  since
these rulings made the pension promises not only more costly, but at the same
time also more credible. The same holds true for stricter vesting rules
introduced 1974.  Instead, firms had to reconsider the
profitability of company pensions against the background of the growing maturity
of these schemes and the changing age-composition of their workforce. Most
importantly, with lower economic growth rates, industry wages set in collective
bargaining tended to absorb an ever higher share of the productivity gains.
Therefore the dualism between sectorwide wages negotiated between the employer
association and the industrial union plus a top-up at the firm-level negotiated
between the management and the work council proved less and less viable. Yet,
this dualism had been so important for the combination of industry-wide
vocational training plus the acquisition of firm specific skills through long
job tenure (cf. Soskice et al. 1998; Estevez-Abe et al. 1999) upon which the
German production model is based. While companies had enjoyed strictly positive
returns from the establishment of company pension schemes in the early expansion
period of the 1950s and 1960s, the cost/benefit ratio today is much less clear,
if not outright negative. The coverage of company pensions decreased from 67
percent in 1981 to 61 percent in 1987 and has stabilized today around 64 percent
with stagnant benefits.
What is true with respect to the diminishing wage drift,
which in the past had allowed companies to provide their workers with additional
welfare, holds also for the public pension insurance. The rising costs of
the public scheme make it increasingly hard for companies to grant workers
additional entitlements on a voluntary basis. Total social insurance
contributions have risen from 26.5 percent of gross wages in 1970 to over 40
percent in the early 1990s. The contribution rate to the public pension scheme
alone was first raised in a sequence of rapid contribution hikes between 1968
and 1973 from 14 percent to 18 percent. It was then raised to more than 20
percent in the 1990s in the wake of Germany's unification crisis. Thus,
contributions to the public pension scheme account for more than half of the
excessive burden put on wages by the German welfare state. 
As a consequence and contrary to the proclaimed will of the government to
strengthen company pensions as the 'second pillar' of old-age insurance, public
pensions have become ever more important in recent years and increasingly crowd
out the private schemes. Today, 89 percent of male employees and 70 percent of
female employees in West Germany will receive a public pension at old age. For
the coming cohorts, this share will further increase (to 95 percent and 94
percent respectively). In the former East Germany, already almost 100 percent of
the workforce will receive a public pension (VDR 1999). Yet, only 36 percent of
all male employees in West Germany and only 9 percent of all female employees
receive a company pension at retirement. In East Germany, figures are even lower
(4 and 2 percent, respectively). Entitlements differ considerably in their level
as well. The average private pension benefit for a male employee (DM 632 per
month) is more than twice as high as for a female employee (DM 302 as of 1996).
However, both figures are inflated since they include retirement payments to the
middle and upper management. Even though public pensions became more important 'in scope and
scale' (i.e., with respect to coverage and entitlement levels)
than the private schemes, company pensions today still play an important role
for corporate finance. The continuing importance of company pensions for
corporate finance may be demonstrated by the following numbers: Between 1980 and
1990, German firms issued new equity valued at a total of DM 126.1 billion. This
is roughly comparable with company financing by means of pension reserves, which
increased during the same period by about DM 120 billion (Hauck 1994: 556; for
similar data for the time period 1982 - 1993, see DB-Research 1999: 1). Total
book reserves earmarked for company pensions in 1994 were equivalent to 33
percent of the stock market value of all listed domestic firms. Pension reserves
still amount to 10 percent of the balance sheet total of German firms or to DM
240 billion in 1990. They amount to around 50 percent of all company capital of
German firms (DB-Research 1999: 7). The easy access to cheap internal capital
thus remained important to companies beyond early postwar years of rapid
economic growth and capital scarcity.
Voluntary private social expenditures are marginal
compared to the statutory programs and are very likely to remain so in the
future. Company pensions contribute 5 percent to the old-age income of a German
worker, while they contribute about 25 percent in the United Kingdom
(DB-Research 1999: 9 and 15). The different public/private mixes in Germany, on
the one hand, and in the US and UK, on the other (comparable data on Japan were
not available), are shown in Table 2.
Table 2: Social expenditure indicators 1993-1995, as a
percentage of GDP
Public social expenditure
Mandatory private social expenditure
Voluntary private social expenditure
Total social expenditure
Source: OECD, SOXCs Data set.
With the decreasing attractiveness of company pensions as
a source of internal credit and with the increasing costs of the statutory
schemes, many firms feel 'trapped' in a system that they once perceived as
especially advantageous. Particularly small and medium enterprises are upset
with the status quo since they are much less able to make efficient use of the
multiple pathways into early retirement that the German public pension insurance
so generously provides and that enables firms to downsize and rejuvenate their
workforce without risking much shop-floor unrest. Smaller firms are much more
dependent on older workers with their skills and their experience, and they are
less able to use early retirement as an instrument of personnel policy (Mares
1997). Hence, a growing number of firms think they would be better off if they
could link wages and welfare benefits more tightly to the firm's economic
performance and thus opt out of an industrial relation- and production-system
crucially based upon sectorwide economic coordination. Their interests coincide
with those of German banks and big insurance companies who have realized that
old-age insurance has an enormous market potential if only the encompassing and
generous public scheme would allow more room for private initiative. German
banks and the insurance industry increasingly perceive the broad coverage and
relative generosity of public pensions as 'foregone profit' and as a main factor
for their comparative disadvantage relative to their Dutch, British, or Irish
competitors who have long been active in the pension fund business and thus have
acquired much more experience. In this context, European market integration is
of crucial importance, in particular since the Capital Liberalization Directive
will contribute to a further 'de-nationalization' of the life-insurance and
private pension market in the coming years, and will lead - if not to the
harmonization of tax rules - at least to a uniform regulation of investments,
portability, and vesting (cf. FT 12/11/1998, p. 4; Davis 1995: 262-265;
EU-Greenbook 1997). This most prominently includes uniform 'prudent man'
investment standards, which measured against the restrictive German practice
will bring about a significant liberalization. For instance, German regulations
stipulate that mutual insurances (Pensionskassen) can hold no more than
35 percent of their total assets in equities. In fact, in 1998 only 9 percent of
their totals assets were domestic or foreign equities, whereas the percentage
for British pension funds that operate under much more liberal rules was 75
percent of total capital (DB-Research 1999: 12 and 20). The European Commission
aims to replace the restrictive German quantitative rules with the much
more flexible qualitative 'rules of prudence' under which British or
Dutch pension funds are allowed to operate. Moreover, the European Commission
has also announced that it is preparing a proposal "requiring all EU listed
companies to prepare their consolidated accounts in accordance with ...
International Accounting Standards" (quoted from Clark et al. 2000: 6). IAS
will be binding for all European listed companies from 2005 on (FAZ 14.2.2001).
Since 1998, German firms have been allowed to use FASB or IASC standards, and
larger firms have been very quick in adopting these standards even though the
majority of them are still not listed on either the London or New York stock
exchange (Clark et al. 2000: 16). Yet, these standards provide firms with strong
incentives to switch from defined benefit plans to defined contribution plans
despite the fact that defined contribution plans cannot provide workers with the
kind of benefit predictability and benefit equality so critical for the
functioning of long-term economic coordination. 
Thus, German banks and insurance companies perceive the
crisis of the public scheme as an opportunity to gain market shares in the
promising new market of private pensions. The recent pension reform, which will
introduce partial funding of pension entitlements for the first time since World
War II and which will allow the establishment of pension funds (although these
will not be fully designed along the line of the British or US-American model),
proves that the government as well sees the funding and privatizing of pensions
as a chance to fight the crisis of the public scheme and, at the same time, to
strengthen the domestic financial sector within the new European market.
According to estimations, the 2001 pension reform will lead to the build-up of
capital stock equaling DM 64 billion within the next six years. This is not an
overly impressive figure if compared with the total volume of investment fund
capital (DM 90 billion in 1999) or private life insurance (DM 110 billion in
1999; DB-Research 1999), yet the new pension capital will have a recognizable
effect on the German stock market. Thus, the demographic pressures exerted on
the German pay-as-you-go system are not the only factors prompting the
government to seek to stimulate growth of private pensions as a substitute for
social security. The crisis of the German public pension system coincides with
the opening of the German insurance market under EU law (Capital Movements and
Capital Liberalization Directive; cf. Rabe 1997) and the interest of powerful
domestic economic players to move out of an 'equilibrium' that for most of the
postwar period was based upon the 'institutional taming' of investment capital.
The interplay between changed domestic constellations of interests and external
pressures has already led to a visible erosion of Germany's stakeholder model of
corporate governance (Ziegler 2000). The reform of the public pension system has
to be understood in this context, in particular together with the recent reform
of the tax code in which banks selling their holdings are exempted from paying
taxes for the significant profits thus generated. Stable shareholding German
style apparently has lost most of its charm. The reform of pension finance
indicates that Modell Deutschland is currently undergoing fundamental,
structural change.  Yet, the reform of coordinated
capitalism - as we will see in the next section - appears to be even more
profound in Japan.
Postwar Japan also practiced a sophisticated 'social
control of consumption'. As in Germany, the Japanese government discriminated
against consumption after the war while supporting investments into heavy
industry and public infrastructure. High levels of private savings were
channeled into 'strategic sectors,' key industries, and important
infrastructure-projects, which had been pre-selected by the central bureaucracy.
Interest rates were strictly controlled. Again like in Germany, these
"controls created subsidies for priority sectors in the form of low
interest rates, which in turn necessitated the control of bank deposit
rates" (Uede 1999: 93). Interest rates on government bonds set the pattern
for the rates on corporate bonds, and the former were held at artificially low
levels. High rates of private saving, limited options to hold these savings, and
the political usage of this capital helped provide business with inexpensive and
relatively patient capital. This, in turn, was one of the crucial preconditions
for the stability of a production regime that was critically based upon stable
employment patterns, the acquisition of firm-specific skills, and the exchange
between wage moderation and a high investment rate.
In postwar Japan, Postal Savings and Postal Life Insurance
were the most important instruments by which the state fostered high private
household saving rates and was able to siphon capital into strategic sectors of
the economy. In the absence of well-developed social insurance programs in the
1950s, these were the few options for citizens who wanted to save for their old
age. The capital of Postal Savings was (and still is) transferred to the Fiscal
Investment and Loan program (FILP) under the administrative responsibility of
the Ministry of Finance (MoF) and its trust fund bureau. The same is true for
the capital of the Employee Pension System (Kosei Nenkin Hoken, KNH), which was
originally founded in 1941 and re-established in the early 1950s. FILP is the
important shadow budget of the Japanese government, roughly half as big as the
official budget, but entirely beyond parliamentary control. Decisions over the
FILP funds are the sole prerogative of the government, in particular of the MoF's trust fund bureau.
Yet, the increasing complaints by business about total
government control over the capital that was levied from employers and employees
by the Employee Pension System motivated the government in 1964 to establish
Employee Pension Funds (Kosei Nenkin Kikin, KNK; starting in 1966). Employee
Pension Funds offered firms the opportunity to contract out of the public
scheme. Given the consent of the company union and given the fulfillment of
certain requirements (e.g., 30 percent higher benefits than those paid by the
Employee Pension System), a firm was allowed to opt out of EPS and to
hand the company pension fund over to a life insurance company or trust bank
(Watanabe 1998; Estienne 1999). A firm could opt out of the EPS but then had to contract
out the pension fund to a life insurance company or trust bank. This means
that, contrary to Germany, large firms were not allowed to run internal schemes
(for instance, in the form of book reserves).  This took
into account unions' concerns about the potential misuse of company pensions as
paternalistic devices to control and discipline workers. Especially, the
contracting-out provision represented a credible commitment of employers to
honor in the future the pension promises given at the time and it reduced the
dependence of employees on employers in a labor market based on 'internal
careers,' where exit and job switches were rare events. But the provision also
served the MoF's goal to support the domestic life insurance industry and the
The Japanese government had taken measures to support the
life insurance industry even before 1964. In 1947, it had licensed life
insurance companies to sell Group Insurance Plans; and in 1962, the government
introduced Tax Qualified Corporate Pension Plans, which again only life
insurance companies and trust banks were allowed to handle. Similar to German
company pensions, Tax Qualified Pensions offered primarily small- and
medium-sized firms an opportunity to inexpensively finance their investments out
of retained profit. Thanks to these administrative measures, the Japanese life
insurance industry grew rapidly and today is one of the largest in the world,
while also being one of the least confronted with foreign competition
(Estevez-Abe 2001: 11).  With 71 percent of premium income
earned and 77 percent of assets held by the seven largest companies, the
Japanese life insurance market is also "the most highly concentrated (…)
among developed nations" (Probert 2001: 5).
However, government regulation of the emerging pension
market did not only support the domestic life insurance industry. The government
had also developed an interest in forestalling 'excessive competition' between
firms for scarce labor in times of high growth and full employment through ever
more generous company welfare schemes. Tight state regulation of pensions was
supposed to help prevent intense 'welfare drift' from emerging. Firms had an
interest in 'standardizing' careers based on long-term labor contracts. 'Employer
hopping' or poaching among employers for scarce (skilled) labor was to
be avoided. This meant also to standardize the welfare entitlements and to link
them to seniority and job tenure. Thus, contracting out pensions did not mean
that Japanese pensions were privatized or liberalized. Legislation had subjected
the funds to tight and uniform regulation, including the pooling of funds
and the stipulation of a uniform revenue rate for all out-contracted pension
funds (the rate was set at 5.5 percent annually and remained at that level for
almost thirty years; in April 1994 it was cut to 4.5 percent, then to 2.5 in
April 1996 and finally to 1.5 percent in 2000; Probert 2001: 11, Fn. 19; see
Estienne 1999, 1999a; Watanabe 1998). Later, the government also ordered the
indexation of private pensions and strictly linked the EPF pensions to the
movement of benefits in the public EPS pensions (Estienne 1999: 94). Moreover,
the state regulation of the 'private' contracted out schemes secured that
company welfare was more than a simple fringe benefit granted and withdrawn by
employers at will, that it was more than a voluntary commitment that could be
expected to be revoked in the next economic downturn. While especially large
companies were able to stabilize their workforce by offering more favorable
provisions as compared with the public schemes, the state continued to tightly
regulate company welfare, forced uniform standards upon the larger part of the
industry, and lent credibility to the promises of business. The state played the
role of a "direct structurer and overseer of occupationally-linked
pensions" (Shinkawa/Pempel 1997: 170; cf. Estienne 1999: 94).
Japan's dual industrial structure had been replicated in
the dual structure of the Japanese welfare state. Once they had the opportunity,
most large firms chose to opt out of the Employee Pension System, while workers
in the many small- and medium sized firms usually remained in the EPS and/or
enjoyed the preferential tax treatment of the Tax Qualified Pensions, while
self-employed workers most often were members of the National Pension System.
Within this system, lower premiums, less co-payment, higher benefits prevailed
in the statutory 'public' company schemes (EPS), and even more generous were the
contracted-out company schemes in health and pension insurance (EPF), while
residual provisions, lower benefits, and longer qualifying periods prevailed in
the lower tier of the public pension and health program (National Pension System
[NPS, 1959] and National Health Insurance [NHI, 1938/1958]; Estevez-Abe 1996;
Estienne 1999). Government regulation of pension funds helped the
standardization of company-based social benefits in very much the same way as
Germany's public pension scheme did for German pattern wage bargaining. Yet, the
out-contracted pension funds, which were based on the 'defined benefit'- and
seniority-principle like German public pensions, established "intra-company
inter-generational solidarity," whereas the German pension system
established "society-wide inter-generational solidarity" (Estevez-Abe
1996: 9). Because this intra-firm solidarity was based on income redistribution
from younger to older workers, "workers had an added incentive not to quit
before they began receiving back their share of the contributions" (ibid.).
In this context it is important to distinguish between the
public provision and the public regulation of social welfare, and
it is often highlighted as a distinctive feature of the East Asian welfare
regimes that they tend to put particular emphasis on regulation rather than
provision (Jacobs 1998; Goodman et al. 1998). The common assumption that the
private provision of social benefits automatically is proof of the liberal,
'commodifying' character of a welfare state regime (Esping-Andersen 1990; for
Japan especially see Esping-Andersen 1997: 183) ignores this important
difference and underestimates the degree to which 'private' but publicly
regulated welfare schemes differ in their impact on the market from what would
have been obtained as a pure market 'liberal' equilibrium. Although at a glance
they resemble US-American welfare capitalism in many respects, Japan's 'private'
company pension schemes differ profoundly, given the high degree of governmental
regulation that secure similar entitlements across firms and industries. One
indication for this is that the EPF pensions are inflation-indexed, 'defined
benefit' schemes in contrast to 'defined contribution' schemes like the
US-American 401(k) pensions. In a detailed assessment of the Japanese pension
funds, Jean-Francois Estienne thus concludes that 'contracting out' in the case
of the Kosei Nekin Kikin (EPF) appears "in a version quite different from
the Anglo-American model, since there exist links between the private and the
public schemes both in organizational terms and in terms of performance"
(Estienne 1999: 94; my translation). Within the Japanese "welfare
production regime" (Estevez-Abe et al. 1999), the Japanese welfare state
came to underpin business coordination much more than purely voluntary schemes
would have been able to do.
Again, as in the German case, pensions also helped firms
get access to relatively patient capital. One of the initial motives for the
introduction of Employee Pension Funds was to permit "employers to merge
part of the corporate cost of retirement payments [with] the statutory pension
programs, thereby reducing overall labor costs" (Estevez-Abe 2001: 17). The
shift from lump-sum 'gratitude payments' financed out of a company's reserves
toward pension funds contracted out to a life insurer or trust bank that took
place in the mid-1960s was fostered by simultaneous changes in the tax system.
While the tax exemptions for those capital reserves that were earmarked for
retirement benefits were significantly reduced in the fiscal year 1962 (from 100
percent to 40 percent), the 1966 introduction of employee pension funds and the
1962 introduction of Tax Qualified Pensions made it more attractive for firms to
provide income security for their retirees in these new ways, in particular
since the contributions of employers and employees to both schemes were made
fully tax deductible.
All this came together with a shift from individual to
institutional shareholding that took place in the first half of the 1960s. This
shift turned Japanese life insurance companies into major institutional
investors and thus strongly supported the emergence of patient lender/borrower
relationships in Japan. During the so-called 'securities recession' from 1961 to
1965, the Nikkei-index dropped at an annual rate of 14 percent after an
unprecedented boom period during which it had risen annually at an impressive 29
percent from 1955 to 1961. Life insurers used the stock market recession to
significantly increase their ownership of shares (from 7.88 percent in 1964 to
nearly 11 percent in 1966).  Most importantly, life
insurance companies became the largest shareholders of city banks and major
local banks (see the data given in Estevez-Abe 1997: 14). The occupation forces
had attempted to establish an 'equity democracy' by breaking up the old Zaibatsu
and by supporting dispersed individual shareholding along the lines of the
American model. Yet, during the baisse at the Tokyo stock market, the
proportion of individual shareholding dropped from 46.68 percent in 1963 to only
42.36 percent in 1967. Individual share holding has been in constant decline
since then and accounted for no more than 24 percent in 1994 and even fell to
18.9 percent in 1998 (Kanda 1998: 928, 930, Table 2; Suto 2000: 13, Table 2),
while banks (22 percent) and life insurance companies (11 percent) today own 33
percent of all stock.
As an upshot of these developments, business relations
between firms and life insurers became very close. Life insurance companies
became "key players in (...) stable shareholding arrangements"
(McKenzie 1992: 83) and an important source of 'patient,' 'modest,' 'silent'
capital. While the life insurance companies themselves are mostly mutual
corporations and thus cannot be direct partners in cross-shareholding
arrangements,  pension contracts provided a functional
equivalent to the 'mutual hostage-holding' between listed firms in the form of
reciprocal shareholding (McKenzie 1992). Japanese pension fund sponsors
allocated management business to trust banks and life insurance companies of
their industrial group under the condition that the life insurer or trust bank,
in turn, would buy shares of their company. Since competition in terms of
performance between the life insurance companies was strongly restricted by the
MoF (see below), and since market entry by new competitors was blocked as well -
thus restricting the number of life insurers to no more than twenty companies
until the 1980s - life insurers were responsive toward these demands (McKenzie
1992). This established long-term exchange relations in which the "life
insurer becomes a stable shareholder in a company and in return the company has
its employees buy pension schemes and group life insurance from this particular
insurer" (Baums/Schaede 1994: 639; McKenzie 1992: 85 and 92; Estevez-Abe
1997; Komiya 1994: 382, Fn. 7; Suto 2000).
Given that the rate of return from pension funds was set
at a moderate annual 5.5 percent for all funds, life insurers developed no
particularly strong interest in the performance of their portfolios as long as
this official target was met. Profits from the increased value of stocks were
not passed on to policyholders, but were retained as latent earning (fukumieki;
see Probert 2001: 1). The officially mandated rate of return allowed fund
managers to pool just about all their pension fund assets, out of which all
firms then received the same proportional return. The lack of transparency due
to the pooling of assets meant that contracting firms lacked interest in the
performance of their particular fund as well. This was also caused by the
relatively young age of the workforce in the 1950s and 1960s, combined with the
high growth rates during these years which made it easy to meet the officially
set 'rate of return'-target. Competition between insurance companies and banks
for the pension fund business in terms of performance was further restricted by
the detailed regulation of pension fund investment (5:3:3:2 rule). 
Hence, life insurance companies had no incentives to interfere much with a firm's management.
They rather remained 'silent partners' and therefore became a
major source of patient capital for industry. The pension fund business became
part of the complex of 'total transactions' so characteristic for inter-company
relations in the Japanese economic system. Given the tight state regulation of
competition and performance, Japanese pension funds did not develop into
aggressive institutional investors that pressed firms hard for a better rate of
return. Only recently has performance become a matter of greater concern.
Furthermore, as long as companies could count on a steady supply of patient and
modest capital, hostile takeovers remained alien to the Japanese economy. This,
in turn, helped make the private commitments of companies toward their labor
force credible, since in the US-American mergers and acquisitions business,
pension plans were often terminated after the merger, and pension fund assets
"that remained after the satisfaction of all plan liabilities" were
capitalized (Sass 1997: 283-84, Fn. 29). This asset-stripping endangers the
long-term credibility of private pension promises even if pension entitlements
of employees are vested after a relatively short period of time.
While the literature usually treats the Japanese and the
US-American company pensions as similar cases of private welfare, and while the
high share of private social spending is often said to justify a
characterization of the Japanese social protection system as liberal and
residual, both systems do indeed follow an entirely different logic, as the
reconstruction of the incentive effects of the Japanese EPFs demonstrates. While
Japanese pension capital underpins stable relations between borrower and lender
of capital with life insurance companies and trust banks at the center of these
stable relations, pension funds in the US are among the most prominent
institutional investors pressing firms hard for an ever better rate of return.
This supports the claim that in Japan as well as in the US "in many ways,
the design of 'funded' welfare programs shaped and was shaped by the
prevailing financial relations" (Estevez-Abe 1997: 8; emphasis added).
The importance of life insurance companies as major
shareholders can be seen in Table 3. Although British life insurance companies
hold a similar percentage of the total of stocks (see Table 3), one has to bear
in mind that the number of firms in this sector is much smaller in Japan than in
Great Britain due to the strict market-entry control performed by the MoF.
Japanese banks held 26 percent of all common stocks in 1994, but there are more
than eighty banks, but only twenty-five life insurance companies, of which
sixteen account for most of the business. No more than twenty-one life insurance
companies and seventeen trust banks managed the entire Japanese pension fund
business, comprising nearly 1,900 funds with about 12.1 million people enrolled
as of March 1996 (roughly 38 percent of the members of the EPS). The assets
added up to 41.6 trillion Yen. While equities account only for 27 percent of the
portfolio of Japanese pension fund, the oligopolistic structure of the industry
concentrates economic power and influence in the hands of only a small number of
firms. Compared to the British and American funds (see Table 3), "a meager
16 mutual life insurance companies are the most influential 'owners' of Japanese
big business" (Komiya 1994: 366). At the same time, Japanese life insurance
companies have become an important source for long-term credit. Since they are
not only major shareholders, but also provide long-term credit (see the share of
bonds and loans of total assets in Table 4), they have developed into central
economic actors within the Japanese economic system. Growing takeover fears of
listed Japanese firms have even increased the importance of life insurance
companies as stable shareholders in the 1980s and 1990s (Komiya 1994: 382). 
Table 3: Ownership of common stock (percent at year end)
1. Financial sector
1.2 Insurance companies
1.3 Investment funds
1.4 Pension funds
1.5 Mutual funds
2. Non-financial sector
2.1 Non-financial enterprises
2.2 Public authorities
Source: See below, Table 4
Table 4: Portfolio composition of pension funds in the UK, US, Japan, and
Of which foreign
Source: Davis (1998: 97)
Yet, this arrangement, which had been so beneficial for
key economic actors in the first three postwar decades, came with costs. These
became ever more visible in the 1980s and 1990s. The relatively poor rate of
return from Japanese pension funds is the prime example for a potential long-run
trade-off between the 'productivity of industry' and the 'profitability of
investments' in a coordinated political economy. If the cooperative outcome of
the capital/labor game is based upon the credible commitment that profits will
remain 'within the firm' and will be reinvested (Eichengreen 1994), 
this can 'trap' capital if investments in the traditional industrial sectors do
not translate any more into high economic growth. In other words, the
cooperative equilibrium proved advantageous during the initial period of
catch-up, when rapid productivity increases in the key manufacturing sectors set
the whole economy on a high growth path. However, the structural change from an
industrial to a service economy and the rise of vibrant new industrial sectors
like the software- and internet-industry are trends to which the German and
Japanese coordinated economies have responded much less impressively.
The effects for pension finance are clearly visible today.
That pension capital figured as a prime source of patient investment capital
meant to sacrifice a good rate of return. Estimations hold that in 1994, 29
percent of all EP funds were underfunded on a book-value basis and 56 percent at
market value (Davis 1995: 101). Sacrificing optimal performance of pension funds
in a rapidly aging society like the Japanese necessarily leads into a financial
crisis of the pension system. Poor performance was a result first of all of
tight state regulation of investments: Unlike in the US, where pension funds are
relatively free in their investment behavior, the way in which Japanese fund
managers can invest pension capital is limited to stocks, bonds, cash deposits,
and real estate (see above). Furthermore, the MoF's practice of 'guiding' the
investments of life insurance companies has contributed to poor pension fund
performance as well. While in the 1950s and 1960s the MoF guided EPF investments
into targeted sectors (especially electricity, steel, coal, and shipbuilding)
and into public housing (more than 40 percent of all loans were granted upon
governmental request; Estevez-Abe 1997: 11), in the 1990s, life insurance
companies were regularly urged by the MoF to invest into the Tokyo Stock
Exchange when very few institutional investors were willing to enter the
sluggish Japanese market (cf. Murdo 1993: 14). The MoF also used the capital of
Postal Savings and of the Employee Pension System for these 'price-keeping
operations' without showing much concern for the poor returns resulting from
these interventions. With respect to the political influence exerted on the
investment behavior of Employee Pension Funds, one may even speak of the
Japanese government's 'third budget' besides the FILP and the official 'first'
budget (cf. Estevez-Abe 2001).
Moreover, pension fund assets were valued at their
historic costs rather than at the actual market value. While this helped fund
managers conceal losses caused by the enormous fall in asset prices in the early
1990s, it also inflated the value of the shares held in the portfolio since many
stocks had been bought during the stock market 'bubble' of the 1980s. This meant
that pension fund managers could not invest in the stock market when prices were
low since their overvalued old portfolio already bumped up against the maximum
30 percent ceiling that regulators allow fund managers to invest in stock. Fund
managers also had problems to sell poorly performing blue chips in order to
invest into more dynamic industries or new firms, since this would have meant to
acknowledge undeclared losses incurred since the 1980s and would have forced
firms to raise pension contributions, a step that all involved, fund managers as
well as companies, wanted to avoid. Thus, capital remained trapped in the old
firms.  What is more, the low interest rate policy
employed by the government to stimulate economic recovery also reduced the
interest paid on bonds and thus further depressed pension fund performance. For
instance, average revenue from pension fund assets had been at 5.74 percent in
1997. In the financial year 1998, investment return for the overall pension
funds dived to 2.49 percent sending the pension funds into the worst fiscal
condition since the Kosei Nenkin Kikin fund system was introduced in 1966 (Jiji
Press, April 14, 2000). Many firms had to register negative pension fund yield.
Due to a strong increase in stock prices, the return of pension funds in 1999
was much better, but the recent drop of the Nikkei index again puts pension
funds and life insurance companies under serious stress. Because of the sharp
reduction in asset prices after the burst of the bubble economy, the annual
average yield of Japanese pension funds calculated from 1984 to 1996 was
practically zero, compared with an annual return of 9 percent in the United
States over the same period (EU 1999: 45, Appendix 2; cf. Suto 2000: 18, Fn.
14). US-American pension funds not only produced a much higher yield, but often
were so profitable that revenues overcompensated the company payments set aside
for pensions, thus contributing positively to consolidated corporate earnings
(Clark et al. 2000: 8-9). Owing to the negative yield gap, i.e. the low return
from pension assets but high guaranteed insurance premiums for the insured,
seven Japanese life insurance companies have already been forced out of business
(Nissan Mutual , Toho Mutual , Taisho Life, Dai-hyaku Mutual, Chiyoda
Mutual and Kyoei [2000; the insolvency of Kyoei Life with a debt of 4.53
trillion Yen was as yet the largest insolvency in Japan's postwar history],
Tokyo Mutual Life ; see Probert 2001: 5 and FAZ 24.03.2001). A similar
trend can be observed for pension funds themselves. The number of dissolved
funds has steeply increased since the second half of the 1990s (starting with
one dissolved fund in 1994, one in 1995, seven in 1996, fourteen in 1997,
eighteen in 1998 and twenty-three in 1999; Suto 2000: 22, Table 7, and Japan
Economic Newswire, 13 May 2000).
The increasing maturity of the existing public and private
pension schemes and the unfavorable demographic trends are, of course, the most
salient factors that have rendered the status quo increasingly unattractive. The
trade-off between an interest in good performance of pension funds and in
upholding the traditional stable shareholding relations thus has become more
Yet, the political measures taken in response to these
growing problems since the mid-1980s reacted primarily to external pressures
(Higachi/Lauter 1990: 268-269). Since the early 1980s the 'domestic market
outsiders', Japanese securities firms, combined forces with 'foreign outsiders',
in particular U.S. banks, and "pressured the Ministry of Finance to
deregulate" the pension market (ibid.: 268). Deregulation of the Japanese
pension market then became a prominent topic in the U.S./Japan trade
negotiations in 1983-84 headed by finance Minister N. Takeshita and Secretary of
the Treasury D. Regan. Against considerable resistance of the domestic banking
and insurance sector the MoF finally aggreed to the admission of foreign banks
to the pension market - either alone or in cooperation with Japanese trust
banks. "Not to be left out, securities firms and other foreign institutions
created investment advisory companies to interact with the pension fund
market" (ibid. 269). These advisory firms were granted market access
starting in 1990. This marked the beginning of the opening up of the Japanese
pension market - a process that has accelerated considerably over the course of
Several domestic trends have fuelled this development.
Because the 'silent shareholders' in the past have not claimed a large share of
corporate profits, many firms were able to accumulate their own internal
capital, which now finances their investments. There is clear indication that
the role of banks as the main provider of investment capital for companies has
been in steady decline since the 1980s and that Japanese firms today are no more
dependent on bank debt than US-American companies (Yafeh 2000: 79, Table 1). A
similar if perhaps less spectacular trend seems to hold true for the traditional
stable shareholding arrangements (see Fn. 21). Also the booming stock market in
the 1980s made it easier for firms to resort to equity finance and to invest
their internal funds into stocks or to issue bonds to raise capital. Moreover,
an increasing number of Japanese firms now have overseas operations and prefers
to raise capital in local currencies to eliminate exchange risks.
Given that 'equity finance' has gained in importance over 'debt
finance' and that an increasing number of Japanese firms are
internationally listed, American accounting standards have become more important
for Japanese firms as well. Especially in keeping with the No. 87 US Federal
Accounting Standards, Japanese firms have begun to disclose their pension fund
deficits (Miyake 1998: 2). This, in turn, adds more pressure to quickly improve
pension fund performance and to substitute defined contribution schemes for the
traditional defined benefit schemes. This is only one among several reasons why
especially US-American and British investment houses were successful in
expanding their market shares in the huge Japanese pension fund market lately.
Starting from zero in 1990 when the deregulation of the Japanese pension market
began, the market share of pension managers other than the traditional life
insurance companies and trust banks had reached 14 percent by the end of 1998,
and especially foreign companies have benefited from this trend because of their
better performance (Pensions & Investments 1998, Nov.: 16). In 1998, foreign
companies already held 30 percent of the investment advisory business. An
increase in the number of business partnerships between foreign and Japanese
asset managers (e.g. Dresdner Kleinwort Benson with Meiji-Life Insurance, Putnam
with Nippon Life, and Alliance Capital with Sumito Trust) is just another
indication of the profound changes within the pension fund market toward a much
more performance-oriented Anglo-American model of corporate finance and
governance. Another opportunity for market entry by foreign firms has been the
numerous bankruptcies that have occurred recently among Japanese life insurer
(see above).  A corresponding 'internationalization' of
the pension business results because Japanese trust banks and life insurance
companies are pressured to increase their holding of foreign stocks (after the
tight MoF-regulation with respect to their portfolio composition has been
abolished). The revenue on domestic stock and assets nowadays is too poor to
even meet the moderate 5.5 percent return target traditionally set by the
Ministry of Finance. This forces "Japanese financial institutions to direct
their investment to where it can achieve the highest returns, not simply to
outdated keiretsu-partners" (Katz 1999: 98).
The reform of the Japanese pension system has proceeded so
far in a piecemeal fashion. However, liberalization accelerated over the course
of the 1990s, and today the various steps add up to a quite significant change.
To name but a few of these reforms: In the Fiscal Year (FY) 1990 foreign banks
and investment advisory companies were allowed to compete for the administration
of newly founded pension funds as one of the measures agreed upon in the
U.S./Japan trade negotiations in the mid-1980s. Market entry was extended for
foreign insurance companies in the wake of the US/Japan Structural Impediment
Initiative in 1991-2 until the market was being completely opened for foreign
investment firms due to the US-Japan Financial Services Agreement in 1995. In FY
1996 the 5-3-3-2 rule was revised, in 1998 the rule was abolished altogether.
The year 1997 saw the introduction of segmented accounting and the introduction
of market-value accounting. Pension funds were allowed to set independently
expected pension fund yield on the basis of the maturity and risk of the fund.
Starting in 1996, companies with funds with capital above 50 million Yen were
allowed to administer their funds internally; since June 2000, this rule has
been extended to smaller funds as well, and the provision that restricted
investments of these in-house funds solely to domestic government bonds was
abolished. In October 1999, the Pension Fund Association (PFA) allowed fund
managers to put money into 'alternative investments' including derivatives,
venture capital- or buyout-vehicles or hedge funds. It has also issued
guidelines urging trust banks and life insurance companies to exercise their
voting rights at shareholder meetings "in consideration of the investment
returns to pension funds". Next reform steps will include the deregulation
of Tax Qualified Pensions holding assets of about 22 trillion Yen (about $180
billion) as of 1998. Moreover, postal savings and pension fund capital will not
be administered anymore by the Trust Fund Bureau of the MoF. Since FY 2000, new
accounting standards force Japanese firms to declare all their retirement
liabilities on their balance sheets in accordance with US Generally Accepted
Accounting Principles (GAAP). Nonfunded pension liabilities will have to be
amortized within the next fifteen years starting from FY 2000. The Japanese diet
passed a law in early 2000 permitting firms to set up 401(k)-style pensions
schemes, although tax incentives in support of these new defined contribution
schemes are not as favorable as in the US. 
This incomplete list of reforms of the Japanese pension
system indicates that the general trend in the Japanese private pension market
clearly goes in the direction of the Anglo-American shareholder model of
corporate governance. This has already provoked calls to legislate a Japanese
equivalent to the US Employee Retirement Income Security Act (ERISA) since the
old guarantees for the security of pension entitlements that were based on
inter-firm coordination and stable shareholding seem to quickly evaporate. While
these reforms will certainly make the Japanese pension sector much more
effective and will yield higher returns on pension capital, they will also
undermine the old practices of cross-shareholding and the role of life insurance
companies and trust banks as patient and silent providers of long-term credit to
Japanese firms, which will have important consequences for the Japanese
stakeholder model of corporate governance.
In this paper I have argued that the systems of social
protection have played an often ignored, yet very important role in the
coordinated political economies of Germany and Japan. They were critical for
upholding long-term economic coordination between capital and labor, and this
coordination lay at the heart of the stunning economic success of both countries
in the first three postwar decades (Eichengreen 1994). Particularly the pension
systems of the two countries, dissimilar as they are, have provided firms with
patient capital and have allowed firms to credibly commit themselves to the
promise to reinvest profits in exchange for workers wage moderation, thus
setting the German and Japanese economy on a spectacular high growth, high
productivity trajectory in the 1950s and 1960s. In various additional ways, both
the public German and the private but tightly regulated Japanese pension system
have allowed firms and workers to enter into long-term economic coordination:
the pension systems supported long job tenure through seniority related benefits
(Oshio/Yashiro 1997), offered complete status protection in case of dismissals,
were obviously able to alleviate union collective action problems posed by wage
moderation by securing intergenerational fairness, and provided workers with
incentives to invest in industry-specific and/or firm-specific skills (cf.
Estevez-Abe et al. 1999).
Today's crisis of both models of economic coordination has
spilled over into the welfare state and appears here in form of a financial
crisis. As has been shown in the preceding sections, the political attempts to
tackle this financial crisis, in turn, have profound feedback-effects on the
traditional, non-liberal forms of corporate finance and governance in Germany
and Japan exactly because 'protection' and 'production' were so intimately
intertwined in both postwar economies. All the available evidence on the
direction of the recent welfare- and, more specifically, pension-reforms
suggests that these reforms will not counteract, but will contribute, mostly deliberately
contribute to the further erosion of the traditional business practices in
Germany and Japan. Both countries have, albeit to different degrees, begun to
embrace "pension fund capitalism" (Clark 2000) Anglo-American style.
Yet, we should not necessarily expect simple convergence on the Anglo-American
model. In Germany, the establishment and administration of company pensions
falls under the co-determination law. Hence, the increased importance of pension
funds due to the 2001 pension reform may also prove advantageous for the German
unions. In Japan, the dissolution of the old inter-company ties and the
conversion of the life insurance companies and 'investment advisors' into
revenue-maximizing institutional investors may result in a "fusion between
a market-based system and a relationship-oriented system" of corporate
finance (Suto 2000: 33) rather than lead to a simple copy of the American model,
given that pension funds themselves still cannot exercise their shareholder
rights and investment decisions directly but remain dependent on financial
intermediaries (ibid.). Despite these retarding moments, we can clearly trace a
process of fundamental change in German and Japanese corporate finance. The
established practices of economic coordination in both countries have become
endangered species within a new economic environment that has put them at an
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Acknowledgements: I would like to thank Oliver Treib
and Raymund Werle for very helpful comments, and the
participants of the Germany-Japan Conference, June 23-26,
1999, Max Planck Institute for the Study of Societies,
Cologne, for a fruitful discussion. I also would like to
thank Jocelyne Probert for allowing me to learn from her as
yet unpublished work on the Japanese life insurance
industry. Many thanks also to Dona Geyer for correcting the
English. I am particularly indebted to Wolfgang Streeck for
detailed critique, helpful discussions, generous support,
and - much patience.
1 Market capitalization of publicly quoted domestic
companies in percent of GDP, 1985
Source: Wenger/Kaserer (1998: 505).
2 'Defined benefit' pensions (DB) represent a fixed
'payment promise,' they define the amount paid out, i.e. the benefit (like $500
monthly or 70 % of the last wage), while 'defined contribution' pensions (DC)
only define the amount paid in. Pension entitlements then depend on how these
contributions have been invested. In the DB case, the entire risk remains with
the side that grants the pension; in the DC case, the risk is borne entirely by
the side that receives the pension payment.
the general hypothesis that there "seems to be a strong
interdependence between the size, the strength and
importance of national equity markets and the national
old-age systems" (Hauck 1994: 556).
the high tax level in postwar West Germany was due to the
felt need to massively invest into housing, infrastructure,
etc. and to restrict consumption (see Shonfield 1965:
265-269). Moreover, the German Ministry of Finance
systematically underestimated the rate of growth and
consequentially the overall tax revenue.
this context it is important to note that even the Nazis had
substantially curtailed the importance of the stock market
in the wake of the war economy; (cf. Boelke 1985).
accounted for only about 1.9 % of all private investments in
1949 and 1950, while retained profits and short-term credit
accounted for about 70 % in 1949 and 53.4 % in 1950 (Adamsen
the German pension insurance was much more mature than the
Japanese Employee Pension System, the misuse of its capital
for war financing had much more devastating consequences
(Manow 1997; Boelke 1985). While war financing was one of
the prime goals that had stood behind the establishment of
the Japanese EPS as well (cf. Collick 1988: 210), the level
of contributions and the amount of accumulated capital in
the EPS paled when compared to the German pension schemes.
blue-collar and white-collar old-age insurance funds were
mandated to invest at least a quarter of their capital
assets in government securities.
simply erred when he wrote that "German social security
funds have a quite unusual freedom in the conduct of their
investment policy" (Shonfield 1965: 270).
freedom in the design of company pension schemes was further
restricted in 1989 by the European Court of Justice that
ruled against exclusive eligibility to company pensions for
the long-term and full-time (i.e. predominantly male)
employed in the name of women's equal workplace rights
1974, entitlements were vested after ten years (before only
after fifteen years). The 2001 reform will require only five
contribution rate had been stable at 14 % for the first ten
years after the major 1957 pension reform.
benefit private pension schemes as well as
wage-indexed public pensions surmount "problems
of intergenerational equity" between different cohorts
of workers in the case of wage coordination/wage moderation
(Eichengreen 1994: 49). "Wage moderation now which
translated into higher incomes later might benefit future
generations at the expense of present ones, a fact which
might cause those currently working to hesitate to defer
their gratification. Governments therefore indexed pensions
not just to changes in the cost of living, but to increases
in the living standards of the currently employed"
and large German employers like Volkswagen have
already declared that they will establish defined
contribution pension funds. At the same time, the
association of German mechanical engineering firms (VDMA)
complains about the retreat of banks from the traditional
credit business. The predominantly small- and medium-sized
firms in this sector are mostly not listed, have a thin
capital stock, and act in a volatile environment. They
therefore depend on long-term, 'patient' credit.
the small firms outside the EPF system, this was still an
option and the "popularity of book reserve plans in
Japan [among small firms; P.M.] despite of their
unfavourable tax treatment indicates the high value that
firms appear to place on the availability of this form of
corporate financing" (Turner/Watanabe 1995: 57).
16 In terms of
comparative market penetration, foreign insurers in major European markets hold
a much higher percentage than foreign insurers in Japan, e.g., in 1996, 13% in
France, 33% in Italy, and 19% in the UK. Foreign insurers in Japan have about
2.7% (EU 1997).
the anti-monopoly law as of 1947 ruled that firms are not
allowed to own more than 5 % of a firm's stock and life-
insurance companies no more than 10 %, these restrictions do
not seem to have been generally binding.
four of the twenty Japanese life insurance companies are
joint stock companies. These four firms are rather small in
size and have much lower economic importance than the mutual
companies (Komiya 1994: 366-367, 379).
50 % bonds and loans; maximum: 30 % equity, 30 % foreign
denominated assets, 20 % property/real estate.
to one estimation, 44 % of all equities were part of stable
shareholding arrangements around 1980, 51 % around 1990 ? a
number which has declined today to an estimated 40 % (FAZ
2001 January 16., p. 29). Suto (2000: 14, Table 3) reports
the following data: 41.1 % of all shares in 1990 were part
of stable shareholding arrangements, but only 35.7 % in
1997. Of course these numbers have to be interpreted with
Germany, company pensions in the form of book reserves
represented the promise that profits would remain within the
firm, in Japan the 'functional equivalent' was the
contracting out of pension funds to a life insurer or trust
bank in exchange for the purchase of shares of the
contracting company by a fund-managing firm.
put it the other way around: stable shareholding or bank
finance and bank-dominated corporate governance are
apparently "suitable for the financing of 'traditional'
manufacturing industries, but [are] not appropriate for
financing innovation. When the technology is novel and
unknown, a large and liquid stock market with a 'diversity
of opinions' is required to evaluate future prospects"
(Yafeh 2000: 80).
the following takeovers or merges among 'unequals' AXA -
Nippon Dantai; Aetna - Heiwa; GE Edison - Toho; Manulife -
Dai-hyaku; Artemis - Aoba Life.; AIG - Nissan Mutual
Chiyoda; Prudential - Kyoei; Winterthur - Nicos Life; etc.
(see Probert 2001: 5, Fn. 5).
the increasing number of mergers, hostile takeovers and
bankruptcies, the risk of 'defined benefit'-schemes have
increased, which makes the investment risks in 'defined
contribution'-schemes look less serious. In FY 1999, of the
twenty-three pension funds that were discontinued, seven
were suspended because of corporate mergers (Japan Economic
Newswire, 13 May 2000).
Copyright © 2001 Philip Manow
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