ING has recommended that more Chinese companies introduce occupational pension plans for their employees after the government awarded new corporate annuity licenses in early August as part of its drive to develop its pension infrastructure.
The reforms come as the Chinese Government faces a rapid increase in pension liabilities, with the ratio of the working population set to drop from 9:1 to 2.6:1 over the next 40 years. Corporate annuity schemes can help increase the number of people who are currently covered beyond the current 169 million workers, which represents less than 25% of the working population. That compares with 85% in Hong Kong and 70% in Singapore. In addition, higher returns achieved by outsourcing fund management to private institutions will help encourage inflows.
Alexander Rinnooy Kan, member of the Executive Board of ING Group and Chairman of ING Insurance Asia/Pacific said: “The Chinese government recognises the challenges of pension provision and are pushing forward with significant reforms to China’s pension system.”
The comments were made at the International Pension and Insurance Forum, which was sponsored by ING and organised by the China Insurance Regulatory Commission. ING’s joint venture, China Merchants Fund Management, was one of four non-domestic fund managers to obtain a license in August to manage corporate annuity assets in China. The Forum took place in Dalian in Liaoning Province in North-Eastern China. The Province is home to around 10% of China’s state-owned enterprises and the pilot scheme for corporate annuity pensions, launched in 2001. Dalian itself is the headquarters of ING Capital Life Insurance Company, one of ING’s two insurance joint ventures in China.
“Pension reforms in China require a long-term vision and commitment from all the stakeholders involved given its vast population, atypical demographics and regional differences,” Mr. Rinnooy Kan said. “The future success of the pension system depends largely on the proper implementation of occupational and private pensions, and as such China is definitely moving in the right direction.”
Assets for voluntary pension schemes currently stand at around 5 per cent of China’s GDP, compared with 94.1% in the Netherlands and 66% in the U.S. However, voluntary pension assets are expected to increase by RMB100 billion ($12.4 million) per year, according to government estimates. Corporate annuities serve as a good instrument to build occupational, or second pillar, pension funds because they generally achieve a higher rate of return than the majority of the majority of pension products which typically only invest in low-yielding bank deposits.