PROJECT M
 
Zhao Yue
PROJECT M

A young new system for China’s old

China’s enterprise annuity market is young but has lots of room for growth. Zhao Yue, who in 2004 helped establish a pensions department in the Industrial and Commercial Bank of China (ICBC), talks about the challenges

© Stefen Chow

A young new system for China’s old

China’s enterprise annuity market is young but has lots of room for growth. Zhao Yue, who in 2004 helped establish a pensions department in the Industrial and Commercial Bank of China (ICBC), talks about the challenges


PROJECT M

The enterprise annuity (EA) market is relatively new in China, how much has it grown?

Zhao Yue

There has been a lot of growth over the past 10 years but it is still a relatively small market. Employees who have joined the enterprise annuity programs account for fewer than 10% of those covered with basic pensions – so there is room for a lot more growth. From 1991 to 2004 EA grew from zero to RMB 68 billion (about $2.6 billion). From 2004 to last year, it reached RMB 600 billion, with a net growth of RMB 100 billion last year. Figures released by the Ministry of Human Resources and Social Security of the People’s Republic of China show that by the end of 2013, there were 66,000 companies in China which had established enterprise annuity systems and more than 20 million employees participating in the plan.

PROJECT M

How does pension insurance work in China?

Zhao Yue

The basic pension insurance is the first in a multi-pillar system being developed across China. It already covers a fairly large population. The state encourages employers to establish EA as a supplementary pension for employees, and employees are also encouraged by the state to actively create their own personal savings pension.

PROJECT M

What is ICBC’s market share?

Zhao Yue

Our account management volumes are probably equal to all the other nine institutions in this market. ICBC operates three kinds of businesses, namely trustee, account management and custodian services. By the end of 2013, amongst 10 corporate trustees, 17 account management agencies and 10 custodians in the entire market, our market shares were 14%, 42% and 42% respectively. The institutional managers in this market include commercial banks, commercial insurance companies, and also trust companies and fund companies. As to the proportion of our market size amongst companies of the same banking business, the trustee accounts for 51%, account management 48%, and custodian 42%.

PROJECT M

How did ICBC get involved in this market?

Zhao Yue

We are not merely a commercial organization but a large state-owned bank, so a lot of our work involves reforming and developing the entire social security system as part of social responsibility programs. The business developed towards the end of 2004 when we realized how important this market is and set up a department – which is my department – to find out how to develop it further. We have a very big population in China (1.35 billion), and dealing with the aged is a social problem.

PROJECT M

What are the major issues in this market?

Zhao Yue

EA adds to an already fairly heavy financial burden for firms and employees. A firm pays 20% of total wages in basic pension insurance for employees. And employees must not only pay for the basic pension, but also insure themselves medically, against work injuries, for maternity and so on. The state is only now introducing tax incentives on annuities and other pension savings schemes. Also holding firms back from establishing annuities is the low rate of return on investment. This is mainly due to the unwieldy management of the entire system, which requires cooperation between trustees, account managers, custodians and investment managers. So it is mainly state- owned holding firms that offer EA with very few private or foreign firms doing so.

PROJECT M

What are the challenges in promoting the take-up of enterprise annuities?

Zhao Yue

Market growth will depend on the state encouraging the development of a comprehensive enterprise annuity system. We already have social consensus on the importance of EA, but EA needs more time to get established. It is also important that EA is managed by professional institutions to win the trust of customers. Finally, we need to improve the effects, performance and efficiency of enterprise annuity management.

PROJECT M

What is ICBC doing to encourage private take-up of corporate annuities?

Zhao Yue

Cultivating this market is definitely a priority. Our most important tasks are to give continuous market feedback to the government, to increase public awareness and to help the reform process.

PROJECT M

What financial products are being developed to invest matured annuities?

Zhao Yue

In some enterprises, retired people may get a lump-sum annuity of hundreds of thousands of RMB, or even more than one million. Therefore, they need financial products that can maintain or increase the value of their annuities. People have now begun regularly to withdraw their supplemental pensions in small amounts. So some financial institutions are researching the possibility of service facilities or service products for retired senior citizens, such as aging community and old-age medical care. This is a new trend on the market, reflecting societal changes in thinking and planning old age.

PROJECT M

What about take-up among young people?

Zhao Yue

Those born in the 1990s and just entering the workforce have a low salary and a retirement pension is not their primary concern. However, the system has a built-in incentive. If the employee refuses to pay into the EA scheme, then the employer is also not obliged to. This acts as an incentive as they are losing out on contributions paid for them from their employer.

PROJECT M

Thank you for your time.

Zhao Yue

And I thank you for your interest.

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