Enterprise Annuity in China

1. Enterprise Annuity in China Oct 28, 2009

2. Content Overview of China�s Pension System Overview of Enterprise Annuity Application of Actuarial Mathematics in Actuarial Modelling Q&A

3. China�s Previous Pension System: The Iron Rice Bowl from 1950s to 1970s Prior to China�s �Open Door� policy, Chinese workers tended to stay with one company (almost all are state-owned) for the duration of their whole careers State-owned enterprises (SOEs) were responsible for all their employees� salaries and benefits - cradle to grave provision After retirement, employees received a generous pension which could be as high as 100% final salary Other benefits provided: medical care, education, life-long security, housing and transport subsidies

4. China�s Previous Pension System State Council Document No.104 (1978) Pension Benefits in relation to years of service Funding: Since most of the pensioners were from SOEs, the funding was based on a pay-as-you-go (PAYG) system and/or loans from the state-owned banks. Result: Many of the SOEs ran into financial difficulties and could not afford to pay pension Loans from SOE banks accumulated into Non-Performing Loans (NPL), and these banks gradually stopped making loans to finance pension payments

5. Because of the PAYG problems, the government had been trying to reform the pension system since the 1990�s State Council Document No. 26 (1997) Under Document No. 26, new Social Security system was established across country The purpose of Document No. 26 was to shift the pension burden from the state to employer and employee. Document No. 26 was based on the recommendations by the World Bank that China undertakes a Three Pillar Pension System Pillar I: Mandatory/Social Pension Pillar II: Occupational Pension (Supplemental Pension) Pillar III: Personal Savings

6. Three pillars of the �Retirement savings concept�: Pillar I: Mandatory / Social The government provides a basic level of benefits, including pay-as-you-go funded benefits through social pooling and Individual Retirement Accounts (IRAs). Pillar II: Occupational Companies offer supplemental pension plans above state benefits to complement Pillar I Pillar III: Personal Employees draw on their individual savings to purchase an enhanced level of benefits. China�s Current Pension System Three Pillars Pension System 

7. China�s Current Pension System Social Pension: Employer and Employee Contribution

8. China�s Current Pension System Social Pension: Employee Benefits

9. Overview of Enterprise Annuity

10. Overview of Enterprise AnnuityStructure

11. Select, monitor and replace administrator, trustee, investment manager Set EA fund�s investment strategy Produce EA fund�s management and financial accounting report Monitor EA fund�s management based on contract Collect employer and employee contribution based on contract and pay benefit to beneficiary Accept inquiry from employers and beneficiary, provide EA fund management report to employers, beneficiary and authority regularly Keep relevant records for at least 15 years Other responsibilities stipulated by legislation and contract

12. Establish EA fund�s enterprise account and individual account Record employer and employee�s contribution and investment return of EA fund Check contribution data with trustee and change of EA fund�s asset with custodian Calculate EA benefit Provide EA fund inquiry service on employer account and employee account Provide EA fund�s account administration report to trustee and supervising authority Keep relevant records for at least 15 years Other responsibilities stipulated by legislation and contract

13. Preserve EA fund�s asset safely Open fund�s capital account and security account in the name of EA fund Set up separate accounts for different EA funds and ensure the independence of fund�s asset Based on trustee�s instruction, distribute EA fund�s asset to investment manager Based on investment manager�s instruction, deal with settlement and delivery in time Responsible for EA fund�s accounting check and estimate, check fund property�s net value calculated by investment manager Check relevant data with administrator and investment manager and monitor investment manager�s investment operation according to regulations Provide EA fund�s custodian report and financial accounting report to trustee regularly Provide EA fund�s custodian report to supervising authority regularly Keep EA fund�s custodian operation record, account book, report and other relevant materials at for 15years Other responsibilities stipulated by legislation and contract

14. Invest EA fund asset Check EA fund�s accounting and estimate outcome together with trustee in time Establish EA fund�s risk reserve Provide investment management report to trustee and supervising authority regularly Keep EA fund�s asset account warrant, account book, annual financial account report and investment record at least for 15 years based on legislation Other responsibilities stipulated by legislation and contract

15. Coverage: It should generally cover all employees after their probation Contributions: Both employer and employee are required to contribute Maximum employer contribution: 1/12 of last year�s payroll Maximum employer and employee contribution: 1/6 of last year�s payroll Contributions are portable when changing jobs Benefits: Payable at legal retirement age (60 for male and 55 for female) Or at death, emigrate overseas Paid as a lump sum or installments Overview of Enterprise AnnuityDesign

16. Conservative assets allocation limits are set: Money Market: >=20% of net assets Fixed Income: <=50%, and government bond: >=20% Equity: <=30%, and Stocks: <=20% Domestic investment only for now Investment managers must set aside 20% of management fees in a reserve fund until reaching 10% of net assets under management Overview of Enterprise AnnuityInvestment and tax

17. Application of Act. Math in Act. ModellingCash flows

18. Application of Act. Math in Act. Modelling Comparison between EA and life insurance (endowment)