FALLING LIKE DOMINOES

Tarumi Taxi is a cautionary tale of the knock-on impact of winding down a troubled pension fund.

The current corporate pension system dates back to the 1960s when the government allowed companies to borrow a portion of the national employee pension fund to leverage their investments, a system that worked well before 1990 when Japan's bubble economy and share prices collapsed.

In the aftermath mostly large companies with the financial strength to pay back the borrowed portion did so because this allowed them to either dissolve their pension funds, lower the payout target or switch to a 401K-style defined contribution scheme. These changes put the burden of managing the pension on the employees themselves.

"Bigger companies have the ability to allocate more funds to the pension reserves and pay back the government portion. But small companies cannot do this. This is a problem for society,"said Tsutomu Okubu, a lawmaker in the ruling Democratic Party and a member of a task force tackling the issue.

As a result the number of pension funds dropped dramatically, and most of those remaining are co-operatives too weak financially to return the borrowed portion to the state. They are made up of groups of companies in the same industry like gasoline stands, printing shops or the Hyogo prefecture taxi pension fund to which Tarumi Taxi belongs.

In 2006, the Hyogo taxi co-operative decided to bite the bullet and pay back the 7 billion yen it owed to the state scheme. Of the 50 companies in the fund, 21 had the ability to pay off their share in a lump sum, ending their obligations. The remaining 29 opted for installments stretched over 10 years at about 15 million yen per year, a tidy sum for a small taxi firm.

In 2007, the first company went bankrupt, leaving an increased burden for the remaining 28. By the end of last month another 14 had gone under. It is the first known string of bankruptcies triggered by the dissolution of a pension co-operative, according to Tokyo Shoko, a bankruptcy research firm.

Tarumi Taxi needs to raise about 100 million yen by August to wipe the slate clean. If it fails to meet that deadline its burden will automatically ratchet up to 440 million yen as it would be required to foot the bill for a larger number of failed members. This would surely bankrupt his firm, Nagata says.

Similar crises could play out among any of the more than 200 pension co-operatives that are in the red on the government portion of their pension assets, warned Tokyo Shoko analyst Kunio Hashimoto.

"In the future they are likely candidates for dissolution, and the situation could develop along the lines of Hyogo taxi,"Hashimoto says. "That's just how grave this problem is."