Workshop on Civil Service and Military Pension Arrangements

Workshop on Civil Service and Military Pension Arrangements Civil Service and Military Pensions in China BY STUART H. LECKIE, O. B. E. , J. P. , F. I. A. , F. S. A. CHAIRMAN, STIRLING FINANCE LIMITED TEL: (852) 2147 9998 FAX: (852) 2147 2822 E-mail: stuart. leckie@stirlingfinance. com Tokyo 20 January 2011 1

Contents n Current Pension Arrangements n Reform Directions Going Forward n Conclusions 2

I. Current Pension Arrangements 3

Current Pension Arrangements in China n Private sector pension systems Ø Urban enterprise system Ø NSSF Ø New rural system n Civil / public service pensions n Military pensions 4

1. Private Pension Sector Systems 5

Urban Enterprise System Pillars (World Bank) Zero Chinese Terminology Zero: Minimum guarantee (Di Bao) Contributions n/a Benefits Varies Funded Status From Government Monthly pension based on average local I State Ia: Mandatory Social Pool Old Age Pension ER: ~20% of salaries monthly wage, indexed individual wage PAYG and years of employment Monthly pension of 1/139 of IA balance II Ib: Mandatory Individual Account (IA) Pension EE: 8% of salary II: Voluntary Enterprise Annuity (set up by eligible Private III ER; EE employers) III: Other Voluntary Benefits, e. g. Group Insurance ER; EE Plans Private & State IV IV: Family support; subsidised healthcare and housing Source: Stirling Finance research. ER – employer; EE – employee. at the time of retirement assuming at Should be funded least 15 years’ contributions Lump sum or annuity benefit Funded From n/a Varies Government or Family 6

Urban Enterprise System (Cont’d) Equities/ Linked products Financial/ Corporate Bonds G-bonds / Deposits Pillar 1 a (state) - - 100% Pillar 1 b (state) - - 100% Pillar II (EA) < 30% < 50% > 20% Pillar III (non-EA) < 20% < 100% Source: Stirling Finance research Note: n State pensions increased each year by an amount between price inflation and earnings escalation n Investment return for IA: 2% p. a. in the past 10 years n EA funds reached USD 45 bn by end-2009 7

National Social Security Fund (NSSF) n n Established in 2000 Ø “Fund of last resort” Ø To help cope with China’s pension challenge in the future Ø Available to help the provinces with any future pension financing difficulties Growing in size, stature and influence Ø Total assets increased from USD 2. 4 bn in 2000 to USD 120 bn by October 2010; Ø Investment return: 9. 8% p. a. via domestic and international investments Ø Biggest institutional investor in China’s pension sector Ø To expand to USD 225 bn by 2015 Ø Yet to find out the exact role of NSSF in China’s overall pension system going forward 8

New Rural Pension System n 55% of residents being rural in China n New rural pension system established in late 2008 Ø On a voluntary basis Ø To cover entire rural population by 2020 Ø Eligibility: rural residents aged 16 and above who are neither students nor currently participating in the urban enterprise system Ø Pension age: 60 for M & F Ø Achievement: 23% coverage by end-2010 9

New Rural Pension System (Cont’d) Terminology Basic Social Pool Contributions Benefits 100% from government budget No less than RMB 55 per month Funded Status Unfunded Individuals - RMB 100 / 200 / 300 / 400 / 500 per year Individual Account Monthly pension benefit of 1/139 of IA balance at pension age assuming at least Government - 15 years’ contribution; Funded No less than RMB 30 each year otherwise, lump sum payable Other sources Source: Stirling Finance research 10

2. Civil / Public Service Pensions 11

Overview n Civil servants Ø Salaries and welfare benefits paid by the government Ø Concept applies to all civilian public sector employees working for government departments or agencies at different levels n Ø Qualification required: university degree + qualification exams Ø Total number as of end-2007: 11 mn Public servants Ø Employees working in state-owned institutions (e. g. , schools, universities, hospitals, fundamental research institutions and TV and radio stations etc) Ø Total number as of end-2007: 29 mn Ø 73% of total workforce that relies on the government budget for salaries and pension benefits No individual contributions required from civil / public servants 12

Size of Civil / Public Service Force in China 1990 Employment 1995 2000 2005 2007 millions Public Service 23. 0 25. 3 26. 9 27. 1 28. 7 Civil Service 9. 1 10. 6 10. 7 11. 3 Total 32. 1 35. 4 37. 5 37. 9 40. 0 Wage bill p. a. RMB, billion Public Service 48. 8 139. 4 259. 1 507. 9 741. 7 Civil Service 19. 2 55. 9 106. 4 223. 5 325. 1 Total 68. 0 195. 3 365. 4 731. 4 1066. 8 Civil / public employment relative to total employment (excluding rural workers) % Public Service 8. 9 7. 8 7. 5 6. 3 Civil Service 3. 5 3. 1 2. 9 2. 6 2. 5 Total 12. 4 10. 9 10. 4 9. 0 8. 8 Wage bill relative to GDP % Public Service 2. 6 2. 3 2. 6 2. 8 2. 9 Civil Service 1. 0 0. 9 1. 1 1. 2 1. 3 Total 3. 6 3. 2 3. 7 4. 0 4. 1 Source: Reforming Civil Service and Public Service Unit Pensions in China (2009). 13

History at a Glance n n n First system established in 1955 Ø For employees of government units, non-profit units and party organisations Ø Retirement age: 60 for M and 55 for F Ø Benefit levels linked to length and type of service, final base wage and inflation rate Document No. 104 in 1978 Ø Looser pension eligibility criteria for employees of government units and SOEs Ø Retirement age reaffirmed: 60 for M and 55 for F Ø An additional five-year adjustment allowed for special reasons Ø A more generous replacement ratio relative to the base wage Ø A minimum guaranteed pension of USD 15 per month Document No. 60 in 2006 Ø Simplification of pay structure Ø Synchronisation of replacement ratios 14

Pension Arrangements Prior to July 2006 Civil Servants Public Servants Basic Wage + Seniority Wage Basic Wage + Position Wage + Post Wage Final salary + Post Wage Replacement Ratio for Basic Wage and Seniority Wage 100% n/a Position Wage and Post Wage Basic Wage and Post Wage ≤ 10 40% 50% >10 and ≤ 20 60% 70% >20 and ≤ 30 75% 80% >30 and ≤ 35 82% 85% >35 88% 90% Replacement Ratios Years of Service Source: Stirling Finance research; Birmingham and Cui (2006). 15

Current Pension Arrangements Final salary Civil Servants Public Servants Position Wage + Post Wage Years of Service Replacement Ratios ≤ 10 50% >10 and ≤ 20 70% >20 and ≤ 30 80% >30 and ≤ 35 85% >35 90% Source: Stirling Finance research. Pension benefits for retired civil / pension servants are subject to adjustment in proportion to the pay change for those currently active servants. 16

Transferability of Pension Benefits n Document No. 13 in 2001 Ø To specifically deal with portability issues of social security entitlement between civil / public service sector and enterprises Ø Civil / public service sector -> enterprises ─ Join the enterprise pension system ─ Make IA contributions in accordance with enterprise system rules ─ Past working years in civil / public service sector will be credited to the enterprise system ─ Lump sum subsidy based on previous years of service in civil / public service sector will be transferred to IA ( = average monthly basic pay in the year before leaving * years of service in civil / public service * 36%) 17

Transferability of Pension Benefits (cont’d) Ø Ø Enterprise -> civil / public service sector ─ Come under coverage of the pension arrangements for civil / public servants ─ Previous years of consecutive service in enterprise sector will be credited to the civil / public service sector ─ IA under the enterprise system will remain under the supervision of local social insurance agency ─ Monthly pension equivalent to 1/139 of IA balance at the time of retirement ─ Reduction of the same amount from civil / public service pension entitlement Civil / public service sector -> enterprise -> civil / public service sector ─ Lose the subsidy (both principal and interest if any) previously received ─ Same level of pension benefits as those new joiners from the enterprise sector 18

Pilot Reform Programme for Public Servants n n Necessity of reforming Ø Improving life expectancy Ø Overall generous benefits Ø Cost increased more than 20 times in the past two decades Ø Cost to total wages bill more than doubled Pilot programme for public servants Ø Launched in 5 provinces / municipalities in 2009 ─ Ø Chongqing, Guangdong, Shanghai, Shanxi and Zhejiang A multi-pillar pension system established for currently active public servants 19

Pilot Reform Programme for Public Servants (Cont’d) Terminology Social Pool Pension Mandatory Individual Account (IA) Pension Voluntary Occupational Annuities Contributions Benefits ER: ~20% of Monthly pension based on average local monthly wage, salaries indexed individual wage and years of employment EE: 8% of salary Monthly pension of 1/139 of IA balance at the time of (starting from 3%) retirement assuming at least 15 years’ contributions Funded Status PAYG Funded TBC Source: Stirling Finance research. Note: n gradual increase in IA contributions to help the acceptability of the pension burden by public servants n “Occupational Annuities” scheme on a similar basis to “Enterprise Annuities” n Implementation has encountered significant resistance from the public service sector 20

3. Military Pensions 21

Overview n People’s Liberation Army (PLA) Ø Unified military organisation of all land, sea, strategic missile and air forces in China Ø Top leadership: Central Military Commission Ø World’s largest military force - 3 million members Ø World’s largest active standing army - 2. 3 million members Ø All military costs involved are met by the government budget Ø Was significantly involved in many commercial enterprises in order to earn revenue, but has largely been stamped out 22

Current Pension Arrangements n No individual contributions needed for pension benefits n Higher remuneration and pension payments than civil servants of equivalent rank n Ø Military cadres (including officers and non-ranking officers) Ø Soldiers (excluding volunteers) Variations in retirement age exist Ø Official retirement age for military cadres: 55 for M and 50 for F Ø Exemptions ─ Officers who have reached the age of 50 or have been in service for no less than 30 years ─ Non-ranking officers who have reached the legal retirement age ─ Those who cannot continue service due to work-related injuries or disabilities ─ Others who are close to retirement age and can neither continue service in the army or transfer to other service sectors 23

Current Pension Arrangements n Soldiers (excluding volunteers) who wish to retire from the army Ø Aged 55 or above Ø Has been in service for over 30 years Ø Suffered extraordinary or severe work-related injury or Ø n Not able to continue service due to health reasons Else, can Ø Transfer to the civil / public sectors or enterprises prior to retirement (subject to approval) or Ø Leave the army with a certain amount of compensation and pursue different opportunities themselves 24

Current Pension Arrangements for Military Cadres Pay Structure Final Salary Officers Non-ranking Officers Position Wage + Rank Wage + Post Wage + Basic Wage + Years-of-service Wage Replacement Ratios Years of Service Replacement Ratio ≤ 10 65% >10 and ≤ 15 70% >15 and ≤ 20 75% >20 and ≤ 30 80% >30 85% Severely injured or disabled because of work 95% Source: Stirling Finance research. 25

Current Pension Arrangements for Soldiers (Excluding Volunteers) n 85% of final pay after retirement for soldiers (excluding volunteers) with no more than 20 years’ service n Extra 1% increase for each additional year of service exceeding 20 years n Soldiers with injuries or disabilities due to work receive 100% of final pay upon retirement n Soldiers who are conscripts do not receive any pension benefit after their relatively short period of service n Both officers and soldiers can enjoy extra pension benefits 26

Extra Pension Benefits for Special Cases Extra Benefits Applicable Group (In terms of replacement ratio) Winner of “Hero” prize, “Role Model” prize, “First-class Contribution” prize, “Extraordinary Contribution” prize and equivalent 15% Winner of “Second-class Contribution” prize and equivalent 10% Winner of “Third-class Contribution” prize and equivalent 5% Members working in extremely critical environment for 10 consecutive years 5% Members working in extremely critical environment for 15 consecutive years 10% Members working in extremely critical environment for 20 consecutive years 15% Source: Stirling Finance research. Note: Total pension benefits capped at 100% of final pay! 27

II. Reform Directions Going Forward 28

New Systems and Reforms n n Priority Ø To introduce the new rural pension system for 720 mn rural residents Ø Initially on a voluntary basis, later on a compulsory basis Ø To narrow gap between rural pension and average urban enterprise pension Ø To converge rural and urban systems in the second of the century More tasks Ø Increasing disparity of benefits between systems Ø A strong call to reform civil / public service pension systems Ø To bring them into line with the urban system in long term Ø To be well received by community at large Ø To provide guarantees and commitments to civil / public servants to ease the transition Ø To consider the pace of future salary increases + the rate of future pension increases 29

Patterns of Reforms n Broad thrust of pension reforms in China (in the order of timing) Ø Introduce rural system on a voluntary basis Ø Public servants system -> urban enterprise system Ø Civil servants system -> urban enterprise system Ø Military personnel system -> urban enterprise system Ø Convert rural system to compulsory basis Ø Improve urban system Ø Improve rural system Ø Resolve pension position of migrant workers Ø Specify purpose(s) of NSSF Ø Integrate rural and urban systems 30

Patterns of Reforms (Cont’d) n Significant improvements needed for both existing urban and rural systems n Urban measures Ø Raise normal retirement age to 60 for both males and females Ø Ensure all individual accounts have real assets Ø Improve return on individual account assets Ø Formalise arrangements for portability of pensions Ø Define protocol for pension increases Ø Improve education and communication to all members and pensioners 31

Patterns of Reforms (Cont’d) n Rural measures Ø Encourage voluntary participation Ø Give subsidies on a proportionate basis, not a flat amount Ø Enhance return on individual accounts Ø Grant pension increases aggressively Ø Increase pension amount at retirement accordingly Ø Make system compulsory Ø Formalise portability arrangements Ø Integrate rural and urban systems 32

Coordination of Different Ministries n Easy implementation of policies and guidelines n Improved utilisation of resources n Better development and long-term integration of various systems n First-class coordination to be achieved: Ø Ministry of Human Resources and Social Security (urban and rural systems) Ø Ministry of Finance (budget and subsidies) Ø Local authorities (public service pensions) Ø Central Military Commission (military pension arrangements) Ø Ministry of Civil Affairs (“di bao”, civil service pensions and military pension payments) 33

Hong Kong Example n n Historical pension arrangements for civil servants Ø 2/3 of final salary at retirement Ø Full cost-of-living increases after retirement Post-97 arrangements for civil servants Ø More into line with the private sector Ø Mandatory Provident Fund (MPF) introduced in 2001 – funded, contributory, DC, lump sum Ø All pension entitlements for pensioners and the existing civil servants protected Ø All new civil servants required to join an enhanced MPF arrangement Ø Risks (borne by new generation of civil servants) - Insufficient retirement moneys - Longevity - Inflation 34

III. Conclusions 35

Conclusions n Existing pension arrangements complicated n Pilot experiments to transfer the public service pension arrangements into the urban enterprise system n A long way to go before the civil servants / public servants / military systems can integrate wholesale into the urban enterprise system n Significant measures to improve and rationalise both the existing urban and rural systems n May take 40 further years before one uniform pension system covers the entire working population 36

“This is not the End or the Beginning of the End, but may be the End of the Beginning!” Thank You! Questions? 37