China's efforts to defuse what experts have called its pension time bomb have created a multibillion-dollar opportunity for domestic and international fund managers.

Tuesday, June 13, 2006

China's efforts to defuse what experts have called its pension time bomb have created a multibillion-dollar opportunity for domestic and international fund managers.

The greatest promise may lie with a nascent, voluntary corporate pension scheme, known as enterprise annuities, which is similar to the 401k plans that dominate corporate retirement planning in the United States.

Some analysts and fund executives predict that within a few years, enterprise annuities could surpass China's US$25 billion (HK$195 billion) National Social Security Fund as a source of new money to manage - and therefore as a source of fees.

Both will be important sources of assets, but we think that if implemented appropriately, the enterprise annuities could become a significant source of assets over time, potentially by a wide margin, said Peter Alexander, head of Shanghai-based consultancy Z-Ben Advisors. You could see momentum start to build within three years, so long as we see movement on policy. That's really the issue that's outstanding.

China's pension crisis has its roots in demographics, particularly the effect of the one-child policy it introduced in 1979 to curb population growth.

According to a United Nations study released last year, the number of people aged 60 or over is expected to rise to 31 percent of the population in 2050, or more than 430 million people, from just 10.9 percent last year. That would be well above the projected world average of 21.7 percent in 2050.

Recognizing that more needed to be done, China decided at the start of the decade to establish the social security fund to help local governments that could not meet pension and other social security payments. To date, the social security fund has been the largest source of business for fund managers.

Z-Ben estimates about 30 percent of the fund's assets are managed by external firms. It expects assets could climb to 450 billion yuan (HK$436.05 billion) by the end of 2008, creating a 135 billion yuan pot of cash for the industry to manage.

Enterprise annuities are a more recent development. China's Ministry of Labor and Social Security set the ground rules in 2004 and issued licenses last year to 15 Chinese fund managers to offer the product.

There have been some forecasts that once enterprise annuities become established, they could generate 100 billion yuan a year in new assets for the industry to manage. But as of last month there were probably only about 100 enterprise annuity programs underway, with money just starting to flow to fund managers, said Stuart Leckie, co-author of Pension Funds in China.

The uptake of these still remains modest. It's partly the complexity of the system. It's also partly the lack of significant tax incentives to drive the employers or employees towards them, said Christopher Ryan, chief executive of ING Investment Management Asia Pacific. But I think increasingly as competition for talent becomes a more important issue for the Chinese enterprises, the value of having an enterprise annuity system in the company is going to rise, just as it did in Western markets.

Fund executives said both the modest levels of tax incentives for employers, which are granted at the provincial level, and lack of clarity involving some tax issues had slowed uptake of the plans.

Even so, firms including state-owned firms in sectors such as steel and coal products are in the process of setting up plans, said He Xueyun, head of annuities at Harvest Fund Management - partly owned by Deutsche Bank.

Part of the reason is goodwill. They want to improve the income of their employees. The second reason may be the tax benefit. Even a 4 or 8 percent tax reduction is still a big number to a big company, she said.

Fullgoal Fund Management in Shanghai, partly owned by Canada's Bank of Montreal, already has about two billion yuan in corporate pension and enterprise annuity assets under management, said assistant president Andrew He. There's a lot uncertainty for the moment, but I think next year will be better than this year, He said