China's new pension system has the potential to open the populous country's doors to Western money managers.
"Money management is now going to be opening up to Western influence, to a more Western style of pension business in China," said Stuart Leckie, chairman of actuarial consultant Woodrow Milliman China Ltd. in Hong Kong. Mr. Leckie is also the author of "Pension Funds in China," which details the current system, instituted at the beginning of the year, and lists potential changes that would move pensions into the private sector.
Foreign financial services companies already are making headway in the tough-to-crack China market at a retail level, with an eye toward expanding into institutional sales.
John Hancock Mutual Life Insurance Co., Boston; Sun Life Assurance Co. of Canada, Toronto; and Prudential Corp. PLC, London, got approval in April from the China Insurance Regulatory Commission to set up joint ventures to sell life insurance to individuals.
Progress in westernizing financial services is likely to be aided by China's ongoing effort to become a member of the World Trade Organization, experts said.
Stephen Brown, John Hancock chairman and chief executive officer, was among those China's Prime Minister Zhu Rongji met with when he visited the United States last month.
Executives with John Hancock and Sun Life would not speculate about the potential for managing group pension plans for private companies. Nor would they comment on whether they are getting in line to manage the pension funds of the hundreds of municipalities and provinces across China.
But China watchers such as Mr. Leckie are betting that -- within the next two or three years -- the joint ventures will start selling retirement plans to companies.
"This new handful of insurance companies can sell individual policies to the man in the street," Mr. Leckie said. In two to three years, the same companies likely will sell group pension policies, he said.
The World Bank has estimated that 300 million Chinese could have personal retirement accounts in five years.
"If only 10% of those people invest, that's 30 million potential clients," said Yves Guerard, chairman of Ernst & Young Canada Actuaries & Consultants Inc. in Montreal.
Putting a dollar amount on the market was more difficult, he said, but the Chinese are big savers, socking away about 25% of their annual income.
Ernst & Young is advising the Ministry of Labor and Social Security, which is coordinating the effort.
Guidelines for the administration of pension funds are not clear, Mr. Leckie said. And financial markets are still developing in China. Pension assets are still limited to government bonds and bank deposits.
The need for pension reform is pressing.
The size of the national government's pension reserve is closely guarded. Experts believe its unfunded liability is enormous.
"The reserves in China's system equal three months of payout. The tank is already empty," said Nicholas Lardy, a senior fellow with the Brookings Institution in Washington.
Change from pay-as-you-go
Up until this year, the government plan was generous. The pay-as-you-go system gave workers pensions worth 80% of their final salaries. The government was responsible for almost all employees via its state-owned enterprises. It also paid for housing.
China's aging population can't sustain this level of benefits, Mr. Leckie said. Today, 9% of the population is 60 or older. By 2030, close to 22% of the work force will be that age.
And new laws are on the books. The change in January to a new "three-pillar" pension plan -- originally drafted by the World Bank -- in which the government, employers and employees will share the pension burden is a move to the private sector, Mr. Leckie said.
The first pillar is a mandatory pension, provided from a pool of funds at the provincial level. This will replace 20% of a worker's pre-retirement wage, Brookings' Mr. Lardy said.
The second is a defined contribution system. "The government and workers contribute into an IRA or 401(k), like the Chilean or Singapore model. Initially, workers would have no choice as to where" their contribution is invested, Mr. Lardy said.
Eventually, workers will contribute 8% of salary, with the company kicking in another 3%.
And the third is a voluntary contribution scheme. Employees will be able to contribute up to 5% of their salaries.
Mr. Leckie predicted the last of the three pillars will open the country up to Western investment managers.
Mr. Lardy added "the objective is to transform a grossly underfunded system." The intent "is to bring more people into the plan."
Maintaining current benefits would require workers to contribute 45% of their salaries over the next 10 years, he said. That's double the average worker's 22.5% contribution rate in 1996.
And China is a vast hodgepodge of municipal and provincial governments, making it difficult to gauge the progress of pension reforms, said Mark Dorfman, senior pension economist with the World Bank in Washington. "There are different things going on in different parts of China."