Time For Enterprise Annuity? --- China EA Tax Incentive Update (Dec 9, 2013)

Content 1. New EA Tax Incentive 2. What s EA? 3. China Retirement System at a Glance 4. 2013 Aon Hewitt Retirement Survey Wealth Accumulation Plan EA Market Survey 5. About Aon Hewitt 1

Tax Incentive Update Dec 2013 On December 6, 2013, China government announced its new tax incentive on Enterprise Annuity (thereafter refers as EA ), the qualified supplemental retirement plan. The new regulation reduces the Individual Income Tax (IIT) in a large degree by using tax deferral mechanism, and it is expected to be effective on January 1, 2014. Employer Contribution: Tax exempt, the contribution percentage depends on plan design, according to earlier EA requirement, employer s total contribution is capped at up to 8.33% of last year total salary; Employee Contribution: Tax exempt within 4% of last year employee s salary, capped at 3 times of City Average Salary; Investment Income: Tax exempt; Benefits Withdrawal: Tax is paid when plan participants reach retirement age. Their monthly withdrawal will be added to taxable income and subjects to Individual Income Tax. The IIT will be withheld by plan trustee. For companies already implemented Enterprise Annuity, employees past contribution, which already paid relevant tax, will not be taxed again. There is no changes on employer tax. Based on earlier regulation, EA contribution is tax deductible within 5% of total salary. 2

Comparison of New and Old Regulation New Regulation Old Regulation Employer Contribution Tax exempt Subject to IIT Capped at up to 8.33% of last year total salary Employee Contribution Tax exempt within 4% of last year employee s salary * After-tax Wage Investment Income Tax exempt Unclear to Subject to IIT or Capital Gains Tax Benefits withdrawal Subject to IIT Tax exempt Notes: For employee contribution, tax exempt within 4% of last year employee s salary, capped at 3 times of City Average Salary 3

Our POV on Regulation Changes Aon Hewitt Point of View EA experienced a slow development since its debut in 2006, one of the key reasons being a lack of tax incentive. The new tax relief is expected to boost the development of the EA market. For an employee with monthly income of RMB 12,000, with an EA plan that collects a contribution of 8% on the employer side and a contribution of 4% on the employee side, his or her tax deferred pension contribution will be 12% (RMB1,440), when tax is paid upon withdrawal at retirement, tax savings will be generated due to the lower tax bracket used. EA contributions becomes the only tax deductible benefits items for Chinese employees, now employers need to re-consider their total reward strategy, especially how to maximize the return to employees. Based on Aon Hewitt 2013 TCM survey, the all industry salary increase in China market is 8.5%, and only about 23.2% of the company established supplemental retirement plan. The new regulation may alleviate the situation of Cash is the King in China, and push employers to consider talent attraction and retention from total reward perspective. The adjusted EA plan looks more like a Chinese version of the 401(k) plan. Like all other qualified plans, EA carries restrictions on plan design and implementation - such as plan eligibility (must be open to all employees), compulsory employees contribution, plan features to be approved by union and local labor bureau, no benefits withdrawal before retirement, etc. Employers are advised to choose the appropriate supplemental retirement vehicles based on their rewards strategy and philosophy. The impact of total reward position to employees can be elaborated by following examples: 4

Case Study Employee A Case 1 Give a 8% Increase of Basic Salary Entitle an EA plan with 8% ER contribution (Under Old Policy) Entitle an EA plan with 8% ER Contribution (Under New Policy) Current Monthly Basic Salary 10,000 10,000 10,000 New Monthly Basic Salary 10,800 10,000 10,000 EA Employer Contribution % 8% 8% EA Employee Contribution % 4% 4% IIT Amount of New Monthly Salary 408 315 275 IIT Amount of Current Month EA ER contribution IIT Amount of Current Month 408 339 275 Take-home Cash 7,908 6,961 7,025 Take-home Cash plus EA Contribution 7,908 8,161 8,225 24 The new policy will bring 4% more of total income for employee and 33% less of IIT burden 5

Case Study Employee B Case 2 Give a 8% Increase of Basic Salary Entitle an EA plan with 8% ER contribution (Under Old Policy) Entitle an EA plan with 8% ER Contribution (Under New Policy) Current Monthly Basic Salary 60,000 60,000 60,000 New Monthly Basic Salary 64,800 60,000 60,000 EA Employer Contribution % 8% 8% EA Employee Contribution % 4% 4% IIT Amount of New Monthly Salary IIT Amount of Current Month EA ER contribution 14,689 13,114 12,926 405 IIT Amount of Current Month Take-home Cash Take-home Cash plus EA Contribution 14,689 13,519 12,926 46,507 40,477 41,070 46,507 47,677 48,270 The new policy will bring 4% more of total income for employee and 12% less of IIT burden 6

Content 1. New EA Tax Incentive 2. What s EA? 3. China Retirement System at a Glance 4. 2013 Aon Hewitt Retirement Survey Wealth Accumulation Plan EA Market Survey 5. About Aon Hewitt 7

What Is Enterprise Annuity (EA) Enterprise Annuity Plan is A supplemental pension program sponsored by the employer, who must meet the following criteria: Sound financial status Complying with basic pension contributions Employee endorsement Plan is set up on a voluntary basis A defined contribution (DC) plan Plan eligibility must include all employees Plan operation is trustee approach Plan needs to be filed with and approved by labor authority 2004 # 20doc Regulation for EA plan set up and overall operation model 2005 # 5 doc The First 37 qualified EA service providers selected by MOLSS 2011 # 11 doc Updated EA Implementation details rolled out 2013 # 23 24 doc EA investment scope expanded EA collective portfolio regulation rolled out 2013 #103 Doc Tax Incentive 2004 2005 2011 2013 8

EA Plan Design and Filing Plan Design: Eligibility: eligible for all employees who contribute social security Total employer contribution: no more than 1/12 of total salary amount in last year Total employee contribution: no more than 1/12 of total salary amount in last year Vesting: employer s contribution and related investment return can be vested due to different vesting schedule Distribution: fund can be distributed upon employee s death, emigration, retirement. Portability: EA account can be rolled over to next employer upon employee s job changes Internal approval process: approved through labor union or employee representatives congress Plan Filing: Plan design: report to local labor department once approved internally, government will respond in 15 working days Plan contracts: report all related contracts between EA vendors to local labor department 9

EA Operation Model and Investment Employee Record Keeper EA Operation Model Trust Agreement + Plan Trustee: (Internal or External) Custodian Bank Employer Investment Manager Operation Fees EA plan must be managed by qualified vendors, their fees is capped by government: Trustee: 0.2% Custodian Bank: 0.2% Investment Manager: 1.2% Investment Restrictions Record Keeper: 5 RMB/person/monthly Monetary products: >=5%, including monetary funds, bank notes, less than 1 year term deposit etc. Fixed income products: <=135%, including fixed income funds, bonds, more than 1 year term deposit repo etc. Equity products: <=30%, including shares, equity funds, equity insurance products Non-tradable fixed income products: <=30%, including the financial products issued by authorized EA vendors, such as trust products, infrastructure bond, bank wealth management products, their common features are: non-tradable, low liquidity, low risk, moderate return. 10

Content 1. New EA Tax Incentive 2. What s EA? 3. China Retirement System at a Glance 4. 2013 Aon Hewitt Retirement Survey Wealth Accumulation Plan EA Market Survey 5. About Aon Hewitt 11

China-A Dramatically Greying Giant China s population is aging more rapidly than what has been observed in other economies Population 65+ as % of labor force (15-64) Population per 5 year age group Japen Male Female Western Europe 65+ US China 20~64 Russia Brazil India 0~19 2010 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1950 2010 2050(Projected) 65 + The old age dependency ratio as % of people 65+ over 20-64 will increase to Projected population of over 65 yrs old in 2050 reaches The shape of population structure will change from a triangle in 2010 to 20~64 45% 439 Mln a Kite in 2050 0~19 Data Source: UN Population Prospects; US Census Bureau International Database 2050 (Projected) 12

China Retirement System Framework III Pillar I Government Mandatory Program Tier II Funded DC Individual Account Tier I PAYG Social Pooling Employer contribution of average 20% of total wage bill, subject to max. of 300% and min. of 60% of average wages in the locality China Pension System Pillar II Occupational Pension Program Operation Model: Enterprise Annuity EA-Like Trust Group Insurance Book Reserve Bank Savings Pillar III Private Savings & Investment Retirement Saving Vehicles: Savings Investment Insurance Since 1990s, China adopted 3-pillar system on pension system, the current challenges is: Pillar 1 Inadequate & financial shortfall Pillar 2 Under development Pillar 3 Strong individual savings Motive State Council Document 26, 1997 13

Pillar I is NOT Enough Replacement Ratio (%) 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 46% 38% 32% 29% 27% 24% 21% 14% 11% 7% 5% 1500 2000 3000 4000 5000 8000 10000 15000 20000 30000 40000 Post Retirement Living Standard Decent 50%+ Reasonable 40%~50% Low 30%~40% Very Low 15%~30% Extremely Low 15%~30% Pre-retirement Monthly Salary (RMB) A replacement ratio is a person s gross income after retirement, divided by his or her gross income before retirement, representing the person s standard of living after retirement as % of pre-retirement income 14

Great Growth Potential for Pillar II Pillar II&III Pension Asset as % of GDP in 2010 160% 140% Switzerland Netherlands We anticipate Pillar II Pension will increase due to 120% 100% 80% 60% 40% Chile Ireland US Australia UK Canada Japan Inadequacy of Pillar I Pension Governmental promotion of employer and employee s responsibility to compensate post-retirement income Pillar II Pension still calls for sufficient tax incentive 20% 0% India Brazil China Hong Kong SAR, China 0% 10% 20% 30% 40% 50% 60% Old Age Dependency Ratio as % of 65+ over workforce in 2025 Note: The size of each pie presents its relative size of GDP per capital in 2010 15

Strong Motive for Pillar III Individual Saving Market 35% Dramatic Aging Demographic is Pushing the Saving Rate Increasing Steadily Canada Household Saving Rate- An International Comparison 30% 25% Sweden Switzerland U.S. 20% Netherlands 15% Japan Italy 10% Germany 5% 0% 1990 1995 2000 2005 2010 France China 0 5 10 15 20 25 30 35 Household Saving Rate Old Age Dependency Ratio Household Saving Rate % Private Insurance Market Private insurance market is a strong component of Pillar III and covering three types of pension insurance products: Universal Life Insurance, Participating Insurance and Unit Link Insurance. The current market size of the private pension insurance has reached an annual premium of RMB 7,240.13 bln. Source: Demographic Patterns and Household Saving in China, the National Bureau of Economic Research U.S.,2011; OECD Economic Outlook 83 database 16

Content 1. New EA Tax Incentive 2. What s EA? 3. China Retirement System at a Glance 4. 2013 Aon Hewitt Retirement Survey Wealth Accumulation Plan EA Market Survey 5. About Aon Hewitt 17

Wealth Accumulation Plan Plan Prevalence 23.2% of survey participants provide supplemental pension plans 36.2% supplemental pension plans are Enterprise Annuity Plans Plan Prevalence Provide 23.2% Plan Type Non-Enterprise Annuity 63.8% Not Provide 76.8% Enterprise Annuity 36.2% Data Source: Aon Hewitt 2013 TCM Study 252 leading companies in 1 st Tier cities 18

Aon Hewitt EA Survey Operation Model Aon Hewitt observation: Trust based plan is common adopted pension vehicles globally; In the last 2-3 years, over 70% of the new wealth accumulation plans are set up in form of Enterprise Annuity (EA) or EA-Like Trust: EA offers tax incentive to employees EA-Like Trust plan offers the flexibility on plan design while take advantage of EA governance model 19

Aon Hewitt EA Survey Plan Contribution Contribution Others 28.6% Matching Employee s Contribution 9.5% Others 4.8% EE Contribution ER Contribution By Job Level 4.8% Fixed Rate Fixed Rate By Service Year 66.7% Flat Amount 76.2% 4.8% 4.8% EE Contribution ER Contribution (Fixed Rate) Average 3.4% 75%tile 4.8% 50%tile 3.0% 25%tile 2.0% Average 6.3% 75%tile 8.0% 50%tile 5.8% 25%tile 5.0% 20

EA Investment Performance Plan Type Portfolio Type Number of Portfolios(2013) Asset under management in portfolio(billion RMB) Investment return rate (2012) Single plan Collective plan Other plan Total Pure Fixed Income 409 5.1805 5.04% Include Equity 1,660 39.8538 5.84% Total 2,069 45.0343 5.77% Pure Fixed Income 56 2.5193 5.51% Include Equity 84 2.2843 5.12% Total 140 4.8036 5.33% Pure Fixed Income 15 0.5953 4.58% Include Equity 20 0.5349 3.66% Total 35 1.1302 4.18% Pure Fixed Income 480 8.2951 5.17% Include Equity 1,764 42.673 5.77% Total 2,244 50.9681 5.68% Aon Hewitt observation: EA Investment is dominated by fixed-income products, therefore generated an average return around 5% in past years ; Most employers would make investment options rather than employees 21

Content 1. New EA Tax Incentive 2. What s EA? 3. China Retirement System at a Glance 4. 2013 Aon Hewitt Retirement Survey Wealth Accumulation Plan EA Market Survey 5. About Aon Hewitt 22

About Aon Hewitt Overview of Aon Hewitt With offices in over 90 countries, Aon Hewitt is the world s premier destination for the broadest range of human capital consulting and outsourcing services. We offer three key services: Consulting, Benefits Management, and HR Business Process Outsourcing Key Facts #1 human capital consulting and outsourcing firm in the world 29,000 employees in the world 90 countries 16 markets in Asia Pacific $4.3 billion combined revenue Serving more than half of the Fortune 500 23

Aon Hewitt: One of the Largest 401(k) Provider in US Most-used DC record keepers Ranked by mentions by the top 200 plan sponsors as of Sept. 30, 2010, based on Pensions & Investments' survey of the nation's largest plans. Aon Hewitt Retirement Offer Rank Firm 1 Fidelity 2 Aon Hewitt Consulting Investment Administration 3 ING 4 ACS 5 Great-West 6 J.P. Morgan 7 Nationwide 8 Vanguard 9 Prudential 10 FASCore 11 Mercer 12 Pension Specialists Data Source: Pension & Investment Our Leadership Position on investment Consulting $3.8 trillion worldwide assets under advisement more than any other firm Total global investment staff of over 400 associates Over 700 global investment clients Client retention rate of 95%+ 24

Aon Hewitt EA Credential in China Government Project and Advisory Aon Hewitt was selected by the Asian Development Bank to reform the Social Security system in Liaoning Province. This project led to the nationwide project to extend the supplementary pension system and the EA legislation. Aon Hewitt provides on-going advisory work to Ministry of Human Recourse and Social Security on pension legislation development; Aon Hewitt was selected as the only consulting firm to sit on the expert panel to review the latest round of EA service providers. Aon Hewitt provide on-going advisory work to State-Owned Assets Supervision and Administration Commission (SASAC) on Long-term Incentive, Compensation and Benefits Management. Experience on Enterprise Annuity Plan Consulting Aon Hewitt advised the Bank of China to become the first State Owned Enterprise to successfully design and implement an EA plan in 2006, and Aon Hewitt also advised the first and second Foreign Invested Enterprises successfully rolling out EA plans in China; Aon Hewitt successfully supported many clients on EA plan setup and operation review including Airbus, AstraZeneca, Avery, Atlas Copco, Boeing, Black-Vetch, BaoSteel, Beijing Airport, Citibank, Credit Suisse, Novozymes, Servier, Volvo, etc. 25