retirement benefit landscape in asia

Retirement Benefit Landscapein Asia

April 15, 2008 - Le 15 avril 2008Montréal, Québec

Aaron WongPrincipal Consulting Actuary, Hong Kong

Session PS-4 International Pension Landscape

• People with different culture and in different stages in economic development

• Well developed pension system in some places like Japan, Australia, Singapore

• Benefit practice mostly driven by laws• Ageing population• Having the same subprime nightmare

Who are we …………………


59%

64%

33%

41%

46%

62%

64%

28%

30%

58%

23%

24%

38%

43%

47%

20%

23%

65%

52%

16%

17%

11%

29%

16%

7%

18%

13%

6%

18%

25%

56%

52%

28%

33%

16%

15%

Equities Bonds Other

Asset allocationAssets

US$ bn

Source: Watson Wyatt Global Asset Study 2008

Australia 934 105%

Canada 1,030 73%

France 170 7%

Germany 364 11%

Hong Kong 73 36%

Ireland 124 49%

Japan 2,973 68%

Netherlands 993 131%

Switzerland 600 145%

UK 2,646 96%

US 15,026 109%

Total 24,932 82%

% GDP

Worldwide retirement savings 2008


39%

43% 45%

59%

33%37%

30% 30%

57%53%

48%45%

21%24%24%23%

13%15%

41%

16%15%

30%

22%

30%

20%

38%

42%46%

50%

21%23%

28%

37%40%

24%

31%

52% 51%52%

0%

10%

20%

30%

40%

50%

60%

70%A

sia-

Pac

ific

Aus

tral

ia

Chi

na

Hon

g K

ong

Indi

a

Indo

nesi

a

Japa

n

Mal

aysi

a

Phi

lippi

nes

Sin

gapo

re

Sou

th K

orea

Taiw

an

Thai

land

Year 2005

Year 2030

Year 2050

Source: U.S. Statistics Bureau

Population aged 50 and over


0% 20% 40% 60% 80% 100%

Australia

China

Hong Kong

Japan

Korea

Malaysia

New Zealand

Philippines

Singapore

Taiwan

Thailand

DB DC

Source: Watson Wyatt, Benefits International Article, 2005

DB vs. DC?


Government Invested

Severance Pay

− China　− India　− Indonesia− Malaysia　− Singapore　

− India　− Indonesia　− Korea　− Taiwan　− Thailand　

Mandatory Funded

− Australia　− Hong Kong　− Taiwan　

Voluntary Funded − China　− India− Philippines

− Indonesia

− Korea (2005)

− Malaysia 　− Japan

Employment based pensions in Asia



Country Updates

Japan


Source: P. 244 Pension Fund Association survey October 2006

As of March 31

0

20,000

40,000

60,000

80,000

100,000

120,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

Contracts Participants

TQPP dying out


Source: Survey of DC plans by the Ministry of Health, Labour and Welfare

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2002 2003 2004 2005 2006

No. of contracts No. of employers

2007

DC Plans growing: employers


Source: Survey of DC plans by the Ministry of Health, Labour and Welfare

0

0.5

1.0

1.5

2.0

2.5

2002 2003 2004 2005 2006 2007

No. of employees (millions)

DC Plans are growing: employees


• Full DB to DC conversion remains unusual because DC contribution limits are too low

• Supplements to DC include– Cash balance– Additional cash compensation

• Replacement for TQPP (and EPF):– 1/3 cash balance– 1/3 point system – 1/3 final pay

Pension Trends


• Legislation under review by Ministry of Health, Labor and Welfare:

– Increase DC contribution limits?

– Eliminate restrictions on withdrawals prior to age 60?

– Raise DC plan participation age limit above 60?

– Permit employee/matching contributions?

– Introduce pension guarantee insurance for DB plans (like PBGC)?

• Public Pension System also under review for 2009

– Benefit levels, contributions and retirement age

– Integration of social security programs for private and public sectors

• Financial instruments and exchange law (“J-Sox”)

Likely change

Likely change

Likely change

Legislative Update



Country Updates

China


Employer Sponsored

Pillar II

Informal Support

Pillar III

Supplementary Pension Plans

(including Enterprise Annuity)



Tier I:Social Pooling

Tier II:Individual Account

Vol

unta

ryS

tatu

tory

SocialInsurance

Pillar I

National Social Insurance Fund“Di Bao”

Pillar 0

Personal savings

Retirement system introduced in 1997


• Both employer and employee required to contribute on a monthly basis

• ER contribution– varies from location to location depending on local

demographic profile– average of 20% of salary subject to a cap

• EE contribution– (in all locations) at 8% of salary subject to a cap

Pillar I: Social InsuranceEmployer contribution varies from location to location


• Two benefits under Pillar I - social pool (DB) and individual account (DC)

ER 22% (Shanghai)

EE 8% (Shanghai)

Social pool:1% per year of service x

Capped salary

Contributions Benefits: Monthly Pension

Individual account balance divided by a

factor

+

Note: Benefits from the social pool are not proportionate to the contributions payable: Contributions are financing benefits of the (many millions) of employees who have been laid off from State Owned Enterprises in the last 10 years – this burden varies by location.

Pillar I: Social InsuranceSince 2006, employer contributions only go to the social pool


Current monthly salary (RMB) of a male employee aged 30

5,000 20,000

Replacement ratio from Pillar I 26% 8%

Low replacement ratio from Pillar I:- Interest credit on Individual accounts linked to bank deposits

(around 3% to 4% pa)- Contributions are capped at 300% of City Average Earnings

Shanghai CAE: RMB 2,464 per month Beijing CAE: RMB 3,008 per month

Pillar I: Social Insurancethe higher the salary, the lower the replacement ratio


Employer Sponsored

Pillar II

Informal Support

Pillar III





Tier I:Social Pooling

Tier II:Individual Account

Vo

lun

tary

Sta

tuto

ry

SocialInsurance

Pillar I

National Social Insurance Fund“Di Bao”

Pillar 0

Personal savings

Pillar I: Social InsuranceHigher earners will have to rely on employers and personal savings


• Only 18% of MNCs have so far set up a supplementary savings/retirement plan (2006 Watson Wyatt Total Rewards Survey)

• Options are:– Enterprise Annuity (the Government’s intended vehicle for

supplementary retirement provision: essentially a ‘qualified plan)– Book reserved plan (typically a notional DC plan – in other words cash

balance)– Insurance product (all are ‘non-qualified’ plans)– Other funded savings plan (also ‘non-qualified plan’)

• Currently 2/3rds of MNCs with a supplementary plan have an insurance product– These are ‘deposit administration’ style plans– Simple for the employer but may be inflexible and poor value for

money

Pillar II: Supplementary Pension PlansNot yet common in China


Contributions

BenefitsAppoint

EmployeeEmployee EmployerEmployer

EA Trustee

CustodianAdministrator for record keeping

FundManager

Must appoint admin, custodian, fund manger separately: a ‘bundled’ plan not currently possible

Structure of Enterprise Annuity (“EA”)In due course expected to be China’s main pension system. But when?


• Benefit payable on statutory retirement (male 60; female 55) in lump sum or monthly installments

• Payment before statutory retirement only permitted on death or emigration

• Accumulated balances portable when changing employers– but only if the new employer has an EA plan

• Accumulated balances must be retained for ex-employees if no EA plan at new employer

Major disadvantage of EA is inability to pay out of vested benefits on termination

Enterprise Annuity: Benefits


Maximum tax deductible employer contributions

(% of Salary):

Jiangsu

Anhui

Zhejiang

Shandong

He’nan

Fujian

Hubei

Hunan

Jiangxi

Guangdong

4%

5%8.3%

5%

12.5%5%

4%

5%4%

4%Shenzhen 6%

Important note: The tax policy on employee contributions, benefit payments, and investment returns is not clear

Tax Policy on Employer ContributionsKey advantage of EA is tax deductibility of employer contributions: Maximum deduction varies by

province but typically only deductible up to 4% of pay


Shaanxi

Shanxi

Gansu

Chengdu

8.3%

4%

4%

4%

Yunnan 5%

Xinjiang 4%Hebei 4%

Liaoning 4%

Jilin 4%

Heilongjiang 4%

Beijing 4%

Important note: The tax policy on employee contributions, benefit payments, and investment returns is not clear

Tax Policy on Employer ContributionsVaries by province (cont’d)


• About 1700 EAs established:– Less than 10 are by multinational companies

– Although these names include some prominent employers in China including Siemens, BP, and Avery Dennison and we are seeing some movement in the market

• Most MNCs adopting “wait-and-see” approach due to:– Limited tax incentives for employer contributions– Taxation of investment returns and benefits is still not clear– Low long term investment returns– Limitation on plan design

• Especially requirement for benefits to be paid at statutory retirement• Beyond the time horizon of most Chinese employees today so may be

limited attraction/retention impact

– Complicated registration process

Current progress of Enterprise Annuity


3%

15%

63% 19%

Review / Set up after more clarification on regulations

Review / Set up within the next 12 months

Not consider reviewing the existing plan

Not consider introducing a supplementary plan

Source: Watson Wyatt

Supplementary Retirement What do multinationals think?



Country Updates

Hong Kong


… and 11th largest employer based

retirement assets

World’s 34th largest economy ........


• About one-third of working population covered by retirement plans

• 30% of them were in defined benefit plans

• 99% of retirement plans provide lump sum benefits upon termination of employment

• Comprehensive regulation governing operation and funding of retirement plans

• Started to see some DB/DC conversions before MPF kicked in

Before MPF


• Employees have to be offered at least MPF

• Almost all employees are covered either by MPF or ORSO retirement plans

• Number of employees in defined benefit plans reducing from 200,000 to 150,000 since MPF

• Continue to see DB/DC conversions in place slowly

• Employees covered in MPF in their late career currently would not have sufficient retirement savings

After MPF


Source: MPFA, Watson Wyatt

HK$ billion %

0

100

200

300

400

500

600

700

800

900

1,000

1,100

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

0

0.5

1

1.5

2

MPF Fee Rates %MPF Assets (HK$ billions)

MPF Assets



Country Updates

South Korea


• Aging population and earlier retirement age reduced income-generating period

25 50 80

Cash InNOW Cash Out

25 60 70

BEFORE Cash In Cash Out

age

age

* Employee Retirement Benefit Security Act, Korea’s new pension law

Why ERBSA*?


Old Age Income Security

Pillar 1NATIONALPENSION

Pillar 2SEVERANCE

PAY

Pillar 3PERSONALSAVINGS

Government mandated National Pension

Contributions too low & benefits too high

Rapidly aging society

Mandatory severance pay scheme…but inadequately funded & paid cash

Prevalence of interim payments

Overregulation and lack of incentive

Underutilized by employees

• Also, Korea’s pension system was not stable overall

Why ERBSA?


Severance Pay Scheme (SPS)

• Mandatory benefit of at least one-month average salary per year of service

• Paid as lump-sum with little tax withdrawal

• No requirement for external funding most MNCs fund externally to some level

• Interim payment is allowed

• Not a 2nd pillar pension plan

1 December 2005

Option 1: Keep SPS

• Employers are not forced to terminate SPS

• Lose tax incentives if keep SPS

Option 2: Adopt DB

• Minimum benefit of one-month average salary per year of service (same as SPS)

• 60% funding test rule applies every year

BEFORE AFTER

Option 3: Adopt DC

• Minimum contribution is 1/12 or 8.3% of annual salary

• Employees allowed to contribute voluntarily

Requires Majority

Consent from Labor

* Ignored employers with less than 10 employees

What has ERBSA changed?


• Reduced tax benefits for employers of severance pay– Tax breaks of retirement insurance products will

expire by end 2010

• Tax favored employee contributions

• Replacing DB with DC

• External funding of liabilities

Why pension?


DC

IRA

DB751.4

322.3

63.5

Asset Size by Plan Type as of May 31, 2007

Source: Financial Supervisory Service

billion won

DC

IRA

DB

During 2006, large employers (including public enterprises) started to adopt DB plansHence DB assets increased rapidly

0

100

200

300

400

500

600

700

800

J an- 06 Mar- 06 May- 06 J ul- 06 Sep- 06 Nov- 06 J an- 07 Mar- 07 May- 07

Market trend: plan assets


10%

12%

16%

12%10%

36%

4%

Which pension plan options is your company interested in exploring further?

Keep severance pay

DB pension

DC pension

DB pension for certain groups of employees and DC for others

Severance for certain groups of employees and pension for others

Other

Don’t know

Watson Wyatt Survey (2007)



Country Updates

Australia


• Superannuation Guarantee (SG):– 9% of salary

• Generally DC for new hires– DB plans often closed to new members

• Usually lump sum benefits• Benefits must be preserved until retirement• From 1 July 2005, each employee has been

able to choose a fund for their SG contributions

Australia


• Previously:– Company contributions Taxed at 15%

(lower than most personal tax rates)– Investment Income Taxed at15% (lower

than most personal tax rates)– Benefits Taxed, rates depending on age,

reason for benefit, whether pension or lump sum, and size of benefit

Australia: tax


• Benefits (either lump sum or pension) tax free from age 60

• Reasonable Benefit Limits abolished• Requirement for payment of benefits before age

65 abolished– allows superannuation to remain within

favourable taxed environment

• Changes to means testing rules for social security eligibility

Makes sense for employees to consider voluntary contributions

Tax from 1 July 2007


• Previous age based limits (on employer tax deductibility) abolished

• New limits on both member and company contributions.– employer contributions A$50,000 per year– non-deductible (typically member) contributions

A$150,000 per year– transitional limits in place

• Contributions in excess of the new limits will be taxed at the top marginal personal tax rate– breaching the limits will therefore impact employee,

rather than employer

New Contribution Limits


Thank you


retirement benefit landscape in asia

Documents

public pension system

asiasession ps

employeessession ps

locationsession ps

employerssession ps

oversession ps

outsession ps

pension guarantee insurance