Urban inhabitants in ever-greater numbers are signing up for commercial retirement insurance plans.	The retirement insurance plan offered by the Citic-Prudential Life Insurance Company gives young people the chance to plan ahead.	Many foreign investors have homed in on China's immense old-age care market.

THE relentless, daily increase of pensioners has led to a deficit in the State Basic Old-age Insurance projected retirement pension provisions. Consequently, more and more young people face the pressure of elderly support. Domestic and overseas investors, meanwhile, are casting their eyes over the potential opportunities offered by China's huge retirement insurance market.

Changes in the Retirement Pension Personal Account

Changes started to occur in Zhai Yushu’s personal pension account at the beginning of 2006. “My personal pension account formerly comprised the 8 percent of my salary that I pay in monthly, plus the 3 percent of 20 percent of my salary that my work unit contributed. Since 2006, however, my personal pension account consists solely of my personal contributions. The portion paid by my work unit has been diverted to Social Pooling, the fund out of which pensions are paid to current retirees, such as my parents.

“Retirement pension fund contributions from the current labor force, therefore, support current, but not future retirees.”

The system of basic retirement pensions, comprising the personal pension account and social pooling -- unified collection, management and assigning of pensions by specialized institutions -- began in the mid-1990s. Social pooling, therefore, is the source of pensions for those that retired, or who were about to retire, at that time. “Those that had retired or who were about to retire when reforms came into force are still entitled to the level of pensions guaranteed under the former system of pensions and labor and employment. No matter what reforms occur, these promises must be fulfilled. This is the crux of the problem,” states Liu Guiping, an associate professor with the Institute of Demographic Research of Peking University, in a recent article.

By the end of 2006, the deficit in the national pensions account had hit a worrying RMB 900 billion (US $120 billion) -- a figure that increases RMB 100 billion annually, according to social security department statistics. The Ministry of Labor and Social Security states in a report recently submitted to the State Council that, in the coming 30 years, the deficit in the national pensions account could reach RMB 6 trillion (US $800 billion). This means that, unless another financial resource becomes available through which to close this gap, the government must expend RMB 200 billion (US $27 billion) annually for the next 30 years on replenishing the national pensions account.

Reforms to the personal retirement pension account are intended to “consolidate” it, so gradually reducing pressure on state finance. The Ministry of Labor and Social Security states that the highest pensions will be paid to long-term contributors that have retired within the state regulation-specified time frame, and that those that have made fewer contributions and retire relatively early will receive proportionately lower pensions.

“Unless the personal pension account is consolidated, the deficit 30 years hence will hit RMB 6.2 trillion, which will exert enormous pressure on the government. Consolidating the personal account will result in a RMB 11 trillion (US $1.5 trillion) accumulation,” explains Chen Liang, a Ministry of Labor and Social Security official.

The number of working people participating in basic retirement insurance schemes currently approaches 200 million. This includes enterprise and institution staff, individual businesspeople, and the self-employed. About 10 million new laborers annually take part in basic retirement insurance plans.

More than 70 percent of respondents to one survey expected their pensions to be sufficient to live on after retiring.

Changing Concepts

Ma Xiaojuan is a retirement insurance sales agent at the Xincheng Life Insurance Company. Throughout her five-year career in the insurance industry, one of the most challenging aspects of her job has been that of selling retirement insurance to the young.

“Generally speaking, people aged 40 and upwards are more amenable to retirement insurance plans, but taken as a whole, the market is limited,” Ma reflects. Workers in their 40s are more conscious of the need for financial retirement security, but as Ma Xiaojuan points out, “The earlier you buy retirement insurance, the greater the benefits. Insurance premiums increase by several percentage points annually, and the closer a person comes to retirement age, the fewer insurance companies are willing to insure him or her.”

Ma Xiaojuan once tried to convince her former schoolmates to join a retirement insurance scheme, but, “They thought I was just trying to sell them insurance, rather than helping them plan their futures.” This attitude was particularly prevalent among government department employees who, as Ma Xiaojuan found, “think that the pensions paid out by the state pension program are sufficient, and that there’s no need to join a private pension plan. As matters stand, the State Basic Old-age Insurance is sufficient only to maintain basic living standards; it cannot provide the quality of life desired after retirement.” Another reason why commercial retirement insurance schemes are slow to catch on is that people of the older generation often start their own pension funds by means of regular bank deposits.

Zhang Xiaotian was one of the few of Ma Xiaojuan’s former schoolmates to appreciate the wisdom of her advice and sign up for a retirement insurance plan. This decision was based on his knowledge that the Basic Old-age Insurance provides only a basic guarantee of financial security after retirement. Zhang explains, “RMB 300 is deducted from my salary each month and paid into my pension fund. After adding on the contributions by my work unit, I can expect a monthly pension of RMB 1,000 when I retire. Taking into account price rises, this will be enough for me to live like a pauper.” Having realized this gloomy truth, Zhang decided to join one of the pension plans recommended by Ma Xiaojuan. It costs him a few thousand RMB a year, but the knowledge that he will be financially secure in his old age makes it worthwhile.

The average employee in China deposits a modest RMB 625 monthly to their bank account towards retirement which, taking into account the average pension level of RMB 966 per month, makes up 60 percent of the total pension, according to the April 2007 AXA Retirement Scope report by the French AXA Group -- the world’s largest insurance company. Of all the current retirement preparation practices, the social old-age insurance program is still the most common. “But financial preparations for old-age are changing rapidly. Younger employees take such measures as buying life insurance (53 percent), starting mutual funds and bank savings accounts and stock investments (35 percent), and real estate investment (23 percent). The AXA Group survey reaches the same conclusion.

“More seniors now invest their bank savings in stocks and mutual funds, in view of the handsome profits to be made from stock market dealing. They realize that increases in bank interest rates are far lower than those in price rises,” explains Li Zhenghong, a mutual fund company manager. Li’s father is one of the rising tide of seniors that invest bank savings in mutual funds.

A Huge Cake

The Standard Chartered Bank conducted a survey among 1,700 medium-income earners above the age of 24, whose annual salary ranges between RMB 60,000 and RMB 500,000, and subsequently released its Report on China’s Middle Class Retirement Pension Plans. The survey results indicate that only 28.08 percent of respondents know anything at all about personal savings retirement insurance. This indicates huge potential for China’s retirement insurance market.

At the end of 2006, there were just 31 pension schemes offered by commercial life insurance companies, according to the report. Although commercial old-age insurance businesses have seen annual growth of 27 percent since 2002, their premium income in 2006 amounted to only RMB 77.8 billion (US $104 billion).

The opening of the Ping An Annuity Beijing Branch in July 2007 brought the total number of Ping An Annuity Insurance Company of China, Ltd. (Ping An Annuity), branches to 35, since its founding in Shanghai in December 2004 . Ping An Annuity was Beijing's first retirement insurance company. As a comprehensive insurance group, Ping An is currently focusing on retirement insurance because of the huge commercial opportunities within this market. The enterprise annuity market is currently a much-desired target.

The enterprise annuity system, common overseas, has only just appeared in China. The government encourages enterprises to set up such systems in order to supplement its Basic Old-age Insurance. By the end of 2006, China’s enterprise annuity market had increased to RMB 90 billion, during which year more than 6.55 million employees purchased enterprise annuities, generating income within this market sector of RMB 9.1 billion. Promulgation of new policy will create an enterprise annuity market amounting to RMB 60-70 billion, according to Zhao Weixing, general manager of Ping An Annuity.

“Many well-known scholars and advisory institutes have their eyes on China’s annuity market. They predict that by 2010, China’s total annuity will have reached RMB 1.8 trillion, and that by 2030 it will hit RMB 3 trillion,” states Zhao Weixing, confidently. As in June 2007, his company had 1,122 annuity clients, and an annuity fund exceeding RMB 3.5 billion.

Foreign insurance companies have also picked up on the scent of China’s huge annuity market. A number of international insurance giants, including AEGON of Holland, Manulife of Canada, and Allianz of Germany, are marching into the Chinese annuity market by means of equity share investment in local insurance companies.

Care institutions for the elderly have also attracted the attention of foreign investors. The site of the Augustinum Nursing Home was established in Shanghai’s International Medical Park in June 2006. Construction of this luxurious retirement home, at a total investment of RMB 940 million, will be complete in 2010. Meanwhile, several German and Japanese enterprises and institutions have gone to Qingdao on China’s east coast to discuss cooperation in building old-age care institutions.

“It was beyond our expectations that so many foreign counterparts would home in on the huge business opportunities offered by China’s “gray” industry, which has, until now, battled for survival,” says Li Xuehua, director of the Qingdao Municipal Committee on Aging, which has received a number of foreign inspection groups.

Approximately 5 percent of the senior population hopes to spend their late years in retirement homes, which translates into the need for 7 million beds, according to an investigation by the China National Committee on Aging. The total current number of beds available in existing retirement homes is less than 2 million.

Background: China’s Retirement Security System

Basic Old-age Insurance, also known as State Basic Old-age Insurance, is a compulsory system implemented according to unified state policy that, in principle, guarantees the basic life necessities of retirees. Employees pay 8 percent of their salary as monthly premiums into a personal pension account, and the workplace pays 20 percent to a social pooling fund. Retirees qualify for a monthly pension after paying premiums for 15 years. Basic Old-age Insurance constitutes the main financial post-retirement security for the majority of urban employees.

The government, meanwhile, encourages enterprise annuity and personal savings endowment insurance. Enterprise annuities complement the Basic Old-age Insurance on the basis of voluntary contributions. Only a small number of large enterprises currently incorporate annuity systems, generally as aspects of the company incentive mechanism. But the number of such enterprises increases annually. By 2010, China’s enterprise annuity will total RMB 1 trillion, according to World Bank estimates. Personal savings endowment insurance, operated by local social insurance organizations, constitutes another supplement to Basic Old-age Insurance. These organizations set up personal accounts for each participant in banks whose savings interest rate is no lower than that payable on urban and rural accounts.

As the Basic Old-age Insurance provides only basic security, personal bank savings play a significant role in retirement security. By the end of 2006, bank savings accounts stood at RMB 16.42 trillion, among which are 300 million personal savings accounts.