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Retirement Benefit Landscape in Asia

Retirement Benefit Landscape in Asia. April 15, 2008 - Le 15 avril 2008 Montr é al, Qu ébec Aaron Wong Principal Consulting Actuary, Hong Kong. Session PS-4 International Pension Landscape. People with different culture and in different stages in economic development

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Retirement Benefit Landscape in Asia

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  1. Retirement Benefit Landscapein Asia April 15, 2008 - Le 15 avril 2008Montréal, Québec Aaron WongPrincipal Consulting Actuary, Hong Kong Session PS-4 International Pension Landscape

  2. 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 ………………… Session PS-4 International Pension Landscape

  3. Worldwide retirement savings 2008 Assets US$ bn Asset allocation % GDP Source: Watson Wyatt Global Asset Study 2008 Session PS-4 International Pension Landscape

  4. Population aged 50 and over Source: U.S. Statistics Bureau Session PS-4 International Pension Landscape

  5. DB vs. DC? 0% 20% 40% 60% 80% 100% Australia China Hong Kong Japan Korea Malaysia New Zealand Philippines Singapore Taiwan DB DC Source: Watson Wyatt, Benefits International Article, 2005 Thailand Session PS-4 International Pension Landscape

  6. Employment based pensions in Asia Government Invested Mandatory Funded • China • India • Indonesia • Malaysia • Singapore • Australia • Hong Kong • Taiwan Voluntary Funded Severance Pay • China • India • Philippines • Indonesia • Korea (2005) • Malaysia • Japan • India • Indonesia • Korea • Taiwan • Thailand Session PS-4 International Pension Landscape

  7. Retirement Benefit Landscapein Asia Country Updates Japan Session PS-4 International Pension Landscape

  8. TQPP dying out 120,000 12,000 100,000 10,000 80,000 8,000 60,000 6,000 40,000 4,000 20,000 2,000 0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Contracts Participants As of March 31 Source: P. 244 Pension Fund Association survey October 2006 Session PS-4 International Pension Landscape

  9. DC Plans growing: employers 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2002 2003 2004 2005 2006 No. of contracts No. of employers 2007 Source: Survey of DC plans by the Ministry of Health, Labour and Welfare Session PS-4 International Pension Landscape

  10. DC Plans are growing: employees 2.5 2.0 1.5 1.0 0.5 0 No. of employees (millions) 2002 2003 2004 2005 2006 2007 Source: Survey of DC plans by the Ministry of Health, Labour and Welfare Session PS-4 International Pension Landscape

  11. 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 Session PS-4 International Pension Landscape

  12. 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”) Legislative Update Likely change Likely change Likely change Session PS-4 International Pension Landscape

  13. Retirement Benefit Landscapein Asia Country Updates China Session PS-4 International Pension Landscape

  14. Retirement system introduced in 1997 Session PS-4 International Pension Landscape

  15. Pillar I: Social InsuranceEmployer contribution varies from location to location • 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 Session PS-4 International Pension Landscape

  16. Pillar I: Social InsuranceSince 2006, employer contributions only go to the social pool Benefits: Monthly Pension Contributions • Two benefits under Pillar I - social pool (DB) and individual account (DC) Individual account EE 8% (Shanghai) balance divided by a factor + Social pool: 1% per year of service x ER 22% (Shanghai) Capped salary 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. Session PS-4 International Pension Landscape

  17. Pillar I: Social Insurancethe higher the salary, the lower the replacement ratio • 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 Session PS-4 International Pension Landscape

  18. Pillar I: Social InsuranceHigher earners will have to rely on employers and personal savings Session PS-4 International Pension Landscape

  19. Pillar II: Supplementary Pension PlansNot yet common in China • 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 Session PS-4 International Pension Landscape

  20. Structure of Enterprise Annuity (“EA”)In due course expected to be China’s main pension system. But when? Contributions Employee Employer EA Trustee Benefits Appoint Administrator for record keeping Custodian Fund Manager Must appoint admin, custodian, fund manger separately: a ‘bundled’ plan not currently possible Session PS-4 International Pension Landscape

  21. 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 Enterprise Annuity: Benefits Major disadvantage of EA is inability to pay out of vested benefits on termination Session PS-4 International Pension Landscape

  22. Tax Policy on Employer ContributionsKey advantage of EA is tax deductibility of employer contributions: Maximum deduction varies byprovince but typically only deductible up to 4% of pay Maximum tax deductible employer contributions(% of Salary): Shandong 4% 5% He’nan 8.3% Jiangsu Anhui 5% Hubei 12.5% Zhejiang 5% Hunan 4% Fujian 5% Jiangxi 4% Guangdong 4% Shenzhen 6% Important note: The tax policy on employee contributions, benefit payments, and investment returns is not clear Session PS-4 International Pension Landscape

  23. Tax Policy on Employer ContributionsVaries by province (cont’d) 4% Heilongjiang 4% Jilin 4% Liaoning 4% Beijing Xinjiang 4% 4% Hebei 8.3% Shanxi 4% Gansu Shaanxi 4% Chengdu 4% Yunnan 5% Important note: The tax policy on employee contributions, benefit payments, and investment returns is not clear Session PS-4 International Pension Landscape

  24. 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 Session PS-4 International Pension Landscape

  25. Supplementary Retirement What do multinationals think? Review / Set up after more clarification on regulations Not consider introducing a supplementary plan 19% 63% 3% 15% Not consider reviewing the existing plan Review / Set up within the next 12 months Source: Watson Wyatt Session PS-4 International Pension Landscape

  26. Retirement Benefit Landscapein Asia Country Updates Hong Kong Session PS-4 International Pension Landscape

  27. World’s 34th largest economy ........ … and 11th largest employer based retirement assets Session PS-4 International Pension Landscape

  28. 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 Session PS-4 International Pension Landscape

  29. 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 Session PS-4 International Pension Landscape

  30. MPF Assets HK$ billion % 1,100 2 1,000 900 1.5 800 700 600 1 500 400 300 0.5 200 100 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2017 2018 2019 2001 2002 2003 2004 2005 2015 2016 Source: MPFA, Watson Wyatt MPF Assets (HK$ billions) MPF Fee Rates % Session PS-4 International Pension Landscape

  31. Retirement Benefit Landscapein Asia Country Updates South Korea Session PS-4 International Pension Landscape

  32. Aging population and earlier retirement age reduced income-generating period Why ERBSA*? Cash In Cash Out NOW 25 50 80 25 60 70 age BEFORE Cash In Cash Out age * Employee Retirement Benefit Security Act, Korea’s new pension law Session PS-4 International Pension Landscape

  33. Why ERBSA? Old Age Income Security • Also, Korea’s pension system was not stable overall • 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 Pillar 1NATIONALPENSION Pillar 2SEVERANCE PAY Pillar 3PERSONALSAVINGS Session PS-4 International Pension Landscape

  34. What has ERBSA changed? • Option 1: Keep SPS • Employers are not forced to terminate SPS • Lose tax incentives if keep SPS • 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 • 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 Requires Majority Consent from Labor • Option 3: Adopt DC • Minimum contribution is 1/12 or 8.3% of annual salary • Employees allowed to contribute voluntarily BEFORE 1 December 2005 AFTER * Ignored employers with less than 10 employees Session PS-4 International Pension Landscape

  35. 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? Session PS-4 International Pension Landscape

  36. Market trend: plan assets Asset Size by Plan Type as of May 31, 2007 billion won 751.4 DB DB 322.3 DC DC 63.5 IRA IRA During 2006, large employers (including public enterprises) started to adopt DB plans Hence DB assets increased rapidly Source: Financial Supervisory Service Session PS-4 International Pension Landscape

  37. Watson Wyatt Survey (2007) Which pension plan options is your company interested in exploring further? Other Keep severance pay DB pension Don’t know DC pension DB pension for certain groups of employees and DC for others Severance for certain groups of employees and pension for others Session PS-4 International Pension Landscape

  38. Retirement Benefit Landscapein Asia Country Updates Australia Session PS-4 International Pension Landscape

  39. 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 Session PS-4 International Pension Landscape

  40. 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 Session PS-4 International Pension Landscape

  41. 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 Tax from 1 July 2007 Makes sense for employees to consider voluntary contributions Session PS-4 International Pension Landscape

  42. 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 Session PS-4 International Pension Landscape

  43. Thank you Session PS-4 International Pension Landscape

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