RETIREMENT SCHEMES IN CHINA A PRESENTATION FOR THE APCBF 6 MARCH 2014

Transcription

1 RETIREMENT SCHEMES IN CHINA A PRESENTATION FOR THE APCBF 6 MARCH 2014 Alan Oates Greater China Retirement Leader Alan.Oates@mercer.com

2 Agenda A brief history China s retirement system and its challenges The growing occupational retirement pillar Recent tax changes and market reaction Case studies MERCER 14 March

3 Retirement in China: a lot has happened in 60 years 1951: Basic Old-Age Insurance System for Employees introduced. Guaranteed employment and pension for urban employees of SoEs. Funded through PAYG contributions and national pooling. 1956: Five guarantees introduced for the three no s in rural areas. 1970s-1980s: High rates of retirement driven by attractive replacement rates and increasing longevity place significant strain on PAYG system. 1981: Family Support Law obliges younger generations to support parents if needed. 1986: Rural retirement scheme pilots begin. 1995: Current three pillar system introduced and extended to private sector in State managed pillar one, partially funded through individual accounts; undeveloped occupational pillar two; property investment dominates pillar three. 2000: National Social Security Fund established introducing further prefunding and national pooling. 2007: CPC Congress commits to national social security coverage by : New Rural Social Pension Scheme established. Iron Rice Bowl Cultural Revolution / SoE Reform Urbanization : Trade unions abolished. SoEs assume responsibility for administrating and paying pensions. National pooling removed, though some industry pooling remains. Pensions funded by SoE revenues through PAYG. MERCER 1980s: SoE reform introduces employee contributions and increased employer contributions. Partial pooling re-introduced in 1986 through local social security agencies. 1991: Three pillar directive proved ineffective largely due lack of private sector participation. Rural areas still largely absent though pilots continue. 1998: Ministry of Labour and Social Security established (since renamed Ministry of Human Resources and Social Security). 1999: Rural scheme u-turn due to management concerns. 2005: Enterprise Annuity introduced as the main form of Pillar 2 occupational pensions. 2

4 China s three pillar model Contribution Rate Target Replacement Rate Pillar 3: Unlimited but no tax exemption Pillar 3: Voluntary Funded N/A Pillar 2: Employer: maximum tax exempt contribution 4-6% Pillar 2: Occupational Voluntary Funded 20-30% Pillar 1A : Employer: 20% Employee: 0% Pillar 1 B: Employer: 0% Employee: 8% Pillar 1A: Social Pooling Mandatory PAYG Pillar 1B: Individual Accounts Mandatory Funded Pillar 1A: 35% Pillar 1 B: 24% MERCER 3

5 Pillar 1 Government target rates only apply to lowest earners Replacement Ratio from Social Security at Age 60 MERCER 4

6 Pillars 2 and 3 Supplemental retirement ranks surprisingly high in China Source Mercer 2011 What s Working MERCER 5

7 From a global perspective, we note that today s China Pillars 2 and 3 are still relatively small Australia Superannuation USD 1.4 trillion Korea ERSA USD 5 billion Hong Kong ORSO DC USD 19 billion Hong Kong MPF USD 49 BN China Pensions USD 73 BN (EAs, Group pension, Individual pension, Trustbased savings) Singapore Section 5 USD 90 million Source: MPFA, MOHRSS, Mercer estimates, as at 2011 MERCER 6

8 Factors that contribute to the relatively under-developed Pillar 2 & 3 retirement market in China 1 Under-developed technical expertise Relatively new market dominated by domestic players who have thus far lacked innovative product development On the other hand, the more experienced foreign players are too small in scale 2 Real demand have not been recognized Retail customers relatively typically invest to accumulate wealth rather than to save for a specific need Traditionally heavy dependence on support from family but could change with an increasing dependency ratio as a result of the one child policy 3 Distribution channels need to develop The distribution channels are largely agency driven and lack differentiation Products might not reach the right customers due to a lack of the right channel 4 Regulatory restrictions suppress innovation Specific product restrictions continue to be in place; e.g. Variable Annuities were only allowed to pilot in selected cities in 2011 More generically, investment mix controls restrict freedom for innovative financial product design MERCER 7

9 Pillars 2 and 3 Comparison of available financial vehicles Book reserve Unfunded supplemental pension plan/ retention plan managed internally by the employer. Pre-2000 Commercial group pension insurance Enterprise annuity Trust-based savings Contract-based products purchased through insurance companies. Pension plan managed by licensed EA service providers under a trust. Similar to EA but not subject to the government EA regulations. Trust-based Enterprise Annuity Group pension insurance Unfunded book reserve plan MERCER 8

10 2013 Retirement Savings Survey Current Offerings Supplemental Retirement Plan Prevalence Chemical 65% 35% Energy & Resources 50% 50% Finance/Banking 50% 50% Electronic Manufacturing 40% 60% Consumer Goods 38% 62% Others 32% 68% Information 27% 73% Manufacturing 25% 75% Yes No A look back 60% % 40% 30% 20% 10% 0% Finance Energy & Chemical Hi-tech FMCG Type of Retirement Savings Plan - By industries Chemical 26% 21% 16% 11% 26% Energy & Resources 40% 20% 40% Finance/Banking 17% 17% 50% 17% Commercial pension insurance Electronic Manufacturing Consumer Goods Others 40% 40% 52% 40% 40% 13% 13% 20% 20% 22% Enterprise annuity Retention bonus plan Trust based savings plan Others Information Technology/ 50% 25% 25% Manufacturing 18% 45% 9% 18% 9% MERCER 9

11 Companies with no wealth benefit program The program that the company implements is most likely to be 7% 17% 28% Enterprise annuity Commercial pension insurance Trust based savings plan 24% 24% Book reserve Others Source: Mercer DC Survey in 2013 MERCER

12 Factors that influence a company to implement a wealth benefit program Source: Mercer DC Survey in 2013 MERCER

13 Areas of Review for the Next 3 Years The percentages represent the portion of the responses that indicates the company is likely to review in the next 3 years. Source: Mercer DC Survey in 2013 MERCER

14 Enterprise Annuity Operation Model Employers Employees Trust Agreement Plan Trustee Fee cap: 0.2% Administrator Max: $0.8/person/ per month Custodian Max: 0.2% Investment managers Max: 1.2% The only tax qualified pension plan in mainland China , regulation on EA set up and operation model , qualified EA vendors approved by MOLSS , updated EA implementation details , expand investment scope - 06/12/2013, Tax Incentive [#103] Must be managed by qualified vendors, with capped fees (see above) SoEs can only set up their occupational schemes via Enterprise Annuity MERCER 13

15 Enterprise Annuity Growing up slowly 21 Number of Employee Accounts (Million) 64,000 Number of Company Accounts 20 60, , , Q Q Q Q3 48, Q Q Q Q3 580 AUM (CNY Billion) MERCER Q Q Q Q3 14

16 Enterprise Annuity - Market Players (as at 30/09/2013) Trustee Employers Members Assets ($m) China Life Pension Company Limited 6,287 3,292,927 15, Ping An Annuity Insurance Company of China 20,057 2,500,038 11, Industrial and Commercial Bank of China 703 1,336,426 8, Changjiang Pension Insurance Company Ltd. 5, ,412 5, China Construction Bank Corporation 2,223 1,015,094 5, Taiping Pension Company Limited 6,833 1,060,653 4, China Merchants Bank Co., Ltd ,504 1, Taikang Pension & Insurance Co.,Ltd. 3, ,472 1, Hwabao Trust Co., Ltd , CITIC Trust Co., Ltd. 25 5, Shanghai Inerna onal Trust Corp.,Ltd ,533 10,787,868 54, Trustee companies dominate the SoE market 21 approved asset managers C. USD90BN AUM, mainly focused on fixed income Source: Chinese Ministry of Human Resource and Social Security (MOHRSS) MERCER Asset managers Number of Portfolios AUM ($m) Ping An Annuity Insurance Company of China ,584 China Life Pension Company Limited ,583 China Asset Management Co.,Ltd ,661 Taikang Asset Management Co., Ltd ,605 Harvest Fund Management Co., Ltd ,683 Changjiang Pension Insurance Company Ltd. 62 5,355 CITIC Securities Company Limited 165 5,210 Bosera Asset Management Co.,Ltd ,998 Taiping Pension Company Limited 225 4,848 ICBC Credit Suisse Asset Management Co., Ltd. 92 4,685 Fortis Haitong Investment Management Co., Ltd 77 3,875 China Southern Fund Management Co., Ltd. 74 3,842 China International Capital Corporation Limited 24 3,504 E Fund Management Co., Ltd. 69 2,957 Fullgoal Fund Management Co., Ltd. 32 1,925 PICC Asset Management Company Limited 36 1,021 Guotai Asset Management Co., Ltd China Merchants Fund Management Co.,Ltd Huatai Asset Management Company Ltd Gf Fund Management Co., Ltd Yinhua Fund Management Co.,Ltd ,445 89,252 Asset class Allocation Equity <=30% Fixed income <=135% Money market instruments >=5% Illiquid fixed income products <=30% 15

17 New Individual Income Tax (IIT) Policy on EA schemes Previous Regulation [TEE] Individual Income Tax (IIT) New Regulation (from 1 January 2014) [EET] Corporate Income Tax (unchanged) Employer Contributions Employee Contributions Treated as normal salary & compensation, but tax is calculated as if the employee does not receive any other salary or compensation. Tax is deducted when contributions are made. Cannot be deducted from personal income for personal income tax purposes. Tax free Up to 4% of employee s income* is deductible against personal income tax. Tax exempt within 5% of total amount of employee salary (Cai Shui [2009] No. 27) Investment Returns MERCER Not explicitly stated (although not taxed in practice) Investment returns will not be taxed when earned. Upon Benefit Not explicitly stated (although not Total amount withdrawn (i.e. Withdrawal taxed in practice) including investment returns) is to be treated as salary and * Note: Employee income is calculated according to the employee s average monthly income in the previous calendar year. It is also capped at 3 times compensation, and will be subject average monthly salary of the city where the employee is employed, according to the National Bureau of Statistics of China. to IIT at the time of withdrawal. 16

18 Flash survey in response to new IIT policy Have you implemented a supplementary pension plan? Reasons why EA plan was not implemented MERCER 17

19 New IIT Policy unlikely to change plan design Participants who have implemented an EA Plans to adjust the employee contribution rate after the Notice was issued Plans to adjust the employer contribution rate after the Notice was issued MERCER 18

20 Other vehicles still preferred to Enterprise Annuity Participants who have not implemented an EA Those with no plan Those with a non-ea plan MERCER 19

21 Case studies The Early Riser 10,000 employees Implemented Enterprise Annuity in 2007 as part of a flexible benefits program Wanted to maximise available tax relief Company allows employees to cash out flex credits equal to 50% of EA benefit to better appeal to younger generations EA participants account for only 25% of the workforce The New Kid On The Block 4,000 employees Implemented a Trust Based Savings plan in 2013 Budget constraints on providing retirement plan to all employees made Enterprise Annuity unattractive Group companies allowed to voluntarily participate in the group plan Around 1,000 employees are currently covered The Developer 6,000 employees Established Enterprise Annuity in 2006 to leverage tax benefits Review found lack of appreciation of Enterprise Annuity by many employees despite tax incentives Trust Based Savings plan introduced in 2014 to introduce more flexibility and options New EA vendor was also selected after performance issues The above are multinational companies. State owned enterprises must use Enterprise Annuity if they choose to implement an occupational retirement plan. MERCER 14 March

22 Summary China has come a long way But challenges are significant Focus continues to be on Pillar 1 Much more to come in Pillars 2 & 3 A tremendous opportunity And a tremendous responsibility MERCER 21

23 Disney China Savings Plan Overview of Our Plan & Experience Presented by Keith Busch to the APCBF Group March 2014 Meeting, Singapore

24 Mercer (Hong Kong) Limited