Measurement Overview June_ 2001

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Measurement Overview June_ 2001 Powered By Docstoc
					               The Actuarial Profession -
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               Ageing Population


                        “Pension Reform in China”
                                             BY
                        STUART H. LECKIE, O.B.E., J.P., F.F.A., F.I.A.
                              CHAIRMAN, GREATER CHINA
                                   HEWITT ASSOCIATES
                                    TEL: (852) 2147 9278
                                    FAX: (852) 2147 2822
                               E-mail: stuart.leckie@hewitt.com
                                       21 January 2002




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           Contents
                       Map of China
                       PRC Population
                       Old System („Iron Rice Bowl‟)
                       World Bank
                       Pension Principles for the Future
                       New System („Safety Net‟)
                       Financing
                       Pension Assets
                       Develop Capital Markets
                       Implementation Issues
                       Supplementary Pension Plans
                       Opportunities for Fund Managers
                       National Social Security Fund
                       Liaoning Experiment
                       Comparison of Hong Kong and PRC
                       Possible Developments in China
                       Major Factors for an Ideal Retirement System
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           Map of China




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           PRC Population

           Total:                         Exceeds 1.2 billion
           Rural Population:              900 million
                   +                         +
           Urban Population               400 million
                                          Ages:
           Consider:
             One Child Policy                0-14       100 million
             Greatly improved life           15-64      275 million
              expectancy                      65+         25 million
             Dependency Ratio
              deteriorating rapidly




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      Old System („Iron Rice Bowl‟)

                   Workers employed for life by State Owned Enterprises (SOE)

                   Low Wages but Total Security

                   Pension at 60 (Males) or 55 (Females) = 80% of final salary

                   Pensions paid by SOEs

                   No Pre-funding or Reserves (i.e. pay-as-you-go), but what if
                    SOEs unable to pay pensions?

                   China is very concerned about social unrest resulting from
                    unpaid pensions and the unemployed




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           World Bank

                       In early 1990s, World Bank studies how best to solve
                        the ageing issues in China
                       World Bank suggested a three pillar approach
                        • Government run basic pension
                        • Privately run individual accounts
                        • Voluntary employer/individual savings
                       1993 and 1996 announcements on social security
                        reform
                        • Unify social security pension
                        • Create individual accounts within basic social security
                        • Enhance with supplementary pension plans



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           Pension Principles for Future

                       Reduce pension expectations
                       Cost burden to be shared by employer and employee
                       Move towards pre-funding


           Reasons?

                       Population projections
                       SOE restructuring
                       Develop domestic capital markets




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           New System („Safety Net‟)

                       New Unified Pension System Reform (July 1997)
                       Expand coverage to all urban employees
                       Gradually raise retirement age (to 65 years for men & women)


           Benefits
                       Pillar I = Basic Pension of 20% of average provincial wages
                       Pillar II = Individual account based on 11% contributions
                       Pillar III = Voluntary Supplementary Benefits




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           Financing

                       Employee       = 4% salary contribution
                                       increasing by 1% every 2
                                       years up to 8%


                       Employer       = Approx 20% of salary
                                       contribution
                                       (Subject to salary maximum
                                       and local variation)




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          Pension Assets

                Pillar I and II pension assets approximately RMB 125bn,
                 (US$15bn) in government bonds and deposits, managed by Social
                 Security Bureaus; however not enough for future obligations

                Pillar III pension assets managed by insurance companies; fully
                 funded schemes

                The government is considering several initiatives to meet the
                 pensions shortfall

                        • Special taxes

                        • Lottery

                        • Issue of recognition bonds

                        • Sale of State Owned assets

                        • Launch of Chinese Tracker Fund

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           Develop Capital Markets

                       SOEs to be restructured: 1,000 – 2,000
                       Merge, close, downsize or corporatize
                       List on stock Market through A shares?
                       How much capital is required in the next 5 years? 10 years?
                       How to apply pension assets to capital markets and maximize
                        returns (deposits + bonds + equities + mutual funds + real estate +
                        infrastructure)
                       World Bank estimates pension assets of US$1.8 trillion by 2030




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           Implementation Issues

                       Compliance
                       Administration
                       Preservation
                       Portability
                       Affordability
                       Education
                       Taxation




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           Supplementary Pension Plans

                       Employer sponsored retirement schemes: Group pensions
                        through domestic life companies
                       SPPs to be offered by provinces licensed by Ministry of Labour
                        and Social Security
                       “Enterprise annuity” proposals by MLSS
                       Tax position on pensions not clear
                       But tax concessions likely to encourage SPPs
                       By 2005 international insurers can write group business




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           Opportunities for Fund Managers

                       Pillar I; No
                       Pillar II;
                        • Short term – No;
                        • Medium Term – Outsourcing by Social Security Bureaus;
                        • Long-term – 401(k) plans?
                       Pillar III; Via Insurance Companies;
                        • Later segregated funds?
                       National Social Security Fund; Possible




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           National Social Security Fund


                       In the event that some provinces have insufficient
                        funds for Pillars I & II, the State Council has
                        established an “emergency fund”
                       Income: 10% of IPO‟s
                       National Council for Social Security Fund to act as
                        Trustees
                       Investment Management: will appoint external
                        managers
                       Outgo: to be decided



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           Liaoning Experiment

                  Liaoning – industrial province in north east
                  Very serious funding problems
                  Document 42 (July 2001)
                  Basic pension – 30% of local average earnings
                  Individual account
                        • Employees‟ contributions only (8%)
                        • Must be properly funded
                  Major problem of back funding to be solved




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           Comparison of Hong Kong and China

                       2 aspects to every retirement system
                        • Design
                        • Funding
                       How do HK and PRC measure up?


                                           Hong Kong           PRC
                              Design              X
                              Funding                          X


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      Possible Developments in China

                       Open-ended Funds
                       Chinese Tracker Fund
                       JV Investment Companies
                       Merging of A and B Shares
                       Merging of Stock Markets
                       Free Market for Foreign Insurance
                       Liberalisation of Pension and Insurance Funds Investment
                       Development of Unit-linked Insurance and 401(k) Pensions
                       Privatisation of Second Pillar Pensions( Individual
                        Accounts)
                       Convertibility of Renminbi
                       International Investment by Institutions




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H                   Major Factors for Ideal Retirement
                    System

                    1.   Integrated long-term approach to ensure adequate
                         retirement income
                    2.   Recognizes changing employment structure, family
                         patterns and personal interest
                    3.   Maximises coverage and participation
                    4.   Leads to savings culture by individuals
                    5.   Increases national savings and economic growth
                    6.   Has widespread support from community and political
                         leaders
                    7.   Has effective regulatory structure
                    8.   Is simple to understand




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           Conclusion


           Pension Reform in China
           - This is not the end or the beginning of the end,
             but it may be the end of the beginning!




                             THANK YOU



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