China pension reform offers opportunities

A new reform to China’s public pension fund (PPF) system has the potential to propel asset growth at insurers, say market participants.

Ping An Annuity has predicted that the proposed occupation annuities will bring in an additional Rmb150 billion ($24.12 billion) annually into the pension industry over the next five years.

Under rules announced last week, all of China’s 38 million government workers are to contribute 8% of their monthly salary to the PPF, while their employers will pay in 20%. Until now, public-sector staff have received pensions without having to make contributions.

The contributions will be backdated to October 1 last year, but it is unclear as to when payments will start to be made from salaries.

The PPF is supervised by the Ministry of Human Resources and Social Security (MoHRSS), but the accounts are managed by local governments at the municipal level, which have not had centralised management. At the end of 2013 the PPF scheme had total assets of Rmb3.1 trillion ($498.6 billion).

An executive at Ping An Annuity, the pension insurance arm of China’s second largest insurer, told AsianInvestor that the reform provided greater scope for the development of pension insurance business. He said most insurers’ pension insurance businesses have recorded losses or low profits due to high competition and lower fees charged, so the proposed occupation annuities would provide new opportunities.

The reform brings government employees’ arrangements into line with that of the private sector. Shanghai-based consultancy Z-Ben Advisors described it as a milestone that brings the PPF system closer to the target of centralised management.

Government workers’ PPF contributions will match those made by private-sector staff, bringing the dual-track pension system to an end. Employees’ 8% contributions will be paid into their individual pension accounts, while employers’ 20% contributions will go into a government-run social pension fund.

In addition, Chinese government departments have been asked to set annuities programmes tailored for their employees. The proposed “occupation annuities” will see employees contribute 4% of salaries and employers pay in 8%.

In total, government workers will be required to contribute 12% of salaries, while employers will be paying in 28%.

“The reform unifies the contributions and payment system of government and private-sector workers, so the government can manage the PPF more efficiently,” said Constance Tan, an analyst at Z-Ben.  It will help to narrow the gap between the rich and the poor, she added.

While the government has not stated which body will help to manage the annuities programmes, said Tan, pension insurance companies may be given more opportunities to manage it than other finanial institutions because they have experience in running enterprise annuities (EA) schemes.

Tan noted that there were three major asset owners in China’s public pension system – the PPF, EA schemes and commercial pension plans. The EA scheme is China’s version of the US’s standard 401(K) defined-contribution pensions.

EA schemes, which have been operating in China since 2004, had total AUM of Rmb607 billion as of last June, according to the MoHRSS. Five pension insurance companies managed a total of Rmb330 billion as of last September, including Ping An Annuity (Rmb95 billion), China Life Pension (Rmb83 billion), Taikang Pension (Rmb70 billion), Changjiang Pension (Rmb44 billion) and Taiping Pension (Rmb38 billion).

Besides those firms, 12 asset management firms have set up units offering EA and commercial pension products, with the top five being China AMC, Harvest, Bosera, ICBC Credit Suisse and China Southern. These five managed a combined Rmb194 billion as of last September.