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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

Workshop on Civil Service and Military Pension Arrangements

Contents

Current Pension Arrangements

Reform Directions Going Forward

Conclusions

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I. Current Pension Arrangements

3

Current Pension Arrangements in China

Private sector pension systems

Urban enterprise system

NSSF

New rural system

Civil / public service pensions

Military pensions

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1. Private Pension Sector Systems

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Urban Enterprise System

6Source: Stirling Finance research. ER – employer; EE – employee.

Pillars

(World Bank)Chinese Terminology

Contri-

butionsBenefits Funded Status

State

ZeroZero:

Minimum guarantee (Di Bao)n/a Varies

From

Government

IIa:

Mandatory Social Pool Old Age Pension

ER: ~20% of

salaries

Monthly pension based on average local

monthly wage, indexed individual wage

and years of employment

PAYG

IIIb:

Mandatory Individual Account (IA) Pension

EE: 8% of

salary

Monthly pension of 1/139 of IA balance

at the time of retirement assuming at

least 15 years’ contributions

Should be funded

Private III

II:

Voluntary Enterprise Annuity (set up by eligible

employers)

ER; EELump sum

or annuity benefitFunded

III:

Other Voluntary Benefits, e.g. Group Insurance

Plans

ER; EELump sum

or annuity benefitFunded

Private

& StateIV

IV:

Family support; subsidised healthcare and housingn/a Varies

From

Government or

Family

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Urban Enterprise System (Cont’d)

Equities/

Linked products

Financial/ Corporate Bonds

G-bonds / Deposits

Pillar 1a (state) - - 100%

Pillar 1b (state) - - 100%

Pillar II (EA) < 30% < 50% > 20%

Pillar III

(non-EA)

< 20% < 20% < 100%

Source: Stirling Finance research

Note:

State pensions increased each year by an amount between price inflation and earnings

escalation

Investment return for IA: 2% p.a. in the past 10 years

EA funds reached USD 45 bn by end-2009

National Social Security Fund (NSSF)

Established in 2000

“Fund of last resort”

To help cope with China’s pension challenge in the future

Available to help the provinces with any future pension financing difficulties

Growing in size, stature and influence

Total assets increased from USD 2.4 bn in 2000 to USD 120 bn by October 2010;

Investment return: 9.8% p.a. via domestic and international investments

Biggest institutional investor in China’s pension sector

To expand to USD 225 bn by 2015

Yet to find out the exact role of NSSF in China’s overall pension system going forward

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New Rural Pension System

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55% of residents being rural in China

New rural pension system established in late 2008

On a voluntary basis

To cover entire rural population by 2020

Eligibility: rural residents aged 16 and above who are

neither students nor currently participating in the

urban enterprise system

Pension age: 60 for M & F

Achievement: 23% coverage by end-2010

New Rural Pension System (Cont’d)

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Terminology Contributions BenefitsFunded

Status

Basic Social

Pool100% from government budget No less than RMB 55 per month Unfunded

Individual

Account

Individuals

- RMB 100 / 200 / 300 / 400 / 500

per year

Government

- No less than RMB 30 each year

Other sources

Monthly pension benefit of 1/139 of IA

balance at pension age assuming at least

15 years’ contribution;

otherwise, lump sum payable

Funded

Source: Stirling Finance research

2. Civil / Public Service Pensions

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Overview

Civil servants Salaries and welfare benefits paid by the government

Concept applies to all civilian public sector employees working for government departments or

agencies at different levels

Qualification required: university degree + qualification exams

Total number as of end-2007: 11mn

Public servants Employees working in state-owned institutions (e.g., schools, universities, hospitals, fundamental

research institutions and TV and radio stations etc)

Total number as of end-2007: 29mn

73% of total workforce that relies on the government budget for salaries and pension benefits

No individual contributions required from civil / public servants

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Size of Civil / Public Service Force in China

1990 1995 2000 2005 2007

Employment millions

Public Service 23.0 25.3 26.9 27.1 28.7

Civil Service 9.1 10.1 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 6.5 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

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Source: Reforming Civil Service and Public Service Unit Pensions in China (2009).

History at a Glance

First system established in 1955 For employees of government units, non-profit units and party organisations

Retirement age: 60 for M and 55 for F

Benefit levels linked to length and type of service, final base wage and inflation rate

Document No. 104 in 1978 Looser pension eligibility criteria for employees of government units and SOEs

Retirement age reaffirmed: 60 for M and 55 for F

An additional five-year adjustment allowed for special reasons

A more generous replacement ratio relative to the base wage

A minimum guaranteed pension of USD 15 per month

Document No. 60 in 2006 Simplification of pay structure

Synchronisation of replacement ratios

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Pension Arrangements Prior to July 2006

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Civil Servants Public Servants

Final salary

Basic Wage

+ Seniority Wage

+ Position Wage

+ Post Wage

Basic Wage

+ Post Wage

Replacement Ratio for Basic Wage and Seniority Wage 100% n/a

Replacement Ratios Position Wage and Post Wage

Basic Wage and Post Wage

Years of Service

≤ 10 40% 50%

>10 and ≤ 20 60% 70%

>20 and ≤ 30 75% 80%

>30 and ≤ 35 82% 85%

>35 88% 90%

Source: Stirling Finance research; Birmingham and Cui (2006).

Current Pension Arrangements

Civil Servants Public Servants

Final salary Position Wage

+ Post Wage

Position Wage

+ Post Wage

Years of Service Replacement Ratios

≤ 10 50% 50%

>10 and ≤ 20 70% 70%

>20 and ≤ 30 80% 80%

>30 and ≤ 35 85% 85%

>35 90% 90%

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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.

Transferability of Pension Benefits

Document No. 13 in 2001

To specifically deal with portability issues of social security entitlement between civil /

public service sector and enterprises

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%)

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Transferability of Pension Benefits

(cont’d)

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

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Pilot Reform Programme for Public Servants

Necessity of reforming

Improving life expectancy

Overall generous benefits

Cost increased more than 20 times in the past two decades

Cost to total wages bill more than doubled

Pilot programme for public servants

Launched in 5 provinces / municipalities in 2009

─ Chongqing, Guangdong, Shanghai, Shanxi and Zhejiang

A multi-pillar pension system established for currently active public servants

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Pilot Reform Programme for Public Servants (Cont’d)

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Terminology Contributions Benefits Funded Status

Social Pool PensionER: ~20% of

salaries

Monthly pension based on average local monthly wage,

indexed individual wage and years of employmentPAYG

Mandatory Individual Account (IA) PensionEE: 8% of salary

(starting from 3%)

Monthly pension of 1/139 of IA balance at the time of

retirement assuming at least 15 years’ contributionsFunded

Voluntary Occupational Annuities TBC

Note:

gradual increase in IA contributions to help the acceptability of the pension burden by public

servants

“Occupational Annuities” scheme on a similar basis to “Enterprise Annuities”

Implementation has encountered significant resistance from the public service sector

Source: Stirling Finance research.

3. Military Pensions

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Overview

People’s Liberation Army (PLA)

Unified military organisation of all land, sea, strategic missile and air forces in

China

Top leadership: Central Military Commission

World’s largest military force - 3 million members

World’s largest active standing army - 2.3 million members

All military costs involved are met by the government budget

Was significantly involved in many commercial enterprises in order to earn

revenue, but has largely been stamped out

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Current Pension Arrangements

No individual contributions needed for pension benefits

Higher remuneration and pension payments than civil servants of equivalent rank

Military cadres (including officers and non-ranking officers)

Soldiers (excluding volunteers)

Variations in retirement age exist

Official retirement age for military cadres: 55 for M and 50 for F

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

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Current Pension Arrangements

Soldiers (excluding volunteers) who wish to retire from the army

Aged 55 or above

Has been in service for over 30 years

Suffered extraordinary or severe work-related injury

or

Not able to continue service due to health reasons

Else, can

Transfer to the civil / public sectors or enterprises prior to retirement (subject to approval)

or

Leave the army with a certain amount of compensation and pursue different opportunities

themselves

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Current Pension Arrangements for Military Cadres

Officers Non-ranking Officers

Final Salary Position Wage

+ Rank Wage

+ Basic Wage

+ Years-of-service Wage

Position Wage

+ Post Wage

+ Basic Wage

+ Years-of-service Wage

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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%

Pay Structure

Replacement Ratios

Source: Stirling Finance research.

Current Pension Arrangements for Soldiers (Excluding Volunteers)

85% of final pay after retirement for soldiers (excluding volunteers) with no more than 20

years’ service

Extra 1% increase for each additional year of service exceeding 20 years

Soldiers with injuries or disabilities due to work receive 100% of final pay upon retirement

Soldiers who are conscripts do not receive any pension benefit after their relatively short

period of service

Both officers and soldiers can enjoy extra pension benefits

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Extra Pension Benefits for Special Cases

Applicable Group

Extra Benefits

(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%

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Source: Stirling Finance research.

Note: Total pension benefits capped at 100% of final pay!

II. Reform Directions Going Forward

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New Systems and Reforms

Priority

To introduce the new rural pension system for 720mn rural residents

Initially on a voluntary basis, later on a compulsory basis

To narrow gap between rural pension and average urban enterprise pension

To converge rural and urban systems in the second of the century

More tasks

Increasing disparity of benefits between systems

A strong call to reform civil / public service pension systems

To bring them into line with the urban system in long term

To be well received by community at large

To provide guarantees and commitments to civil / public servants to ease the transition

To consider the pace of future salary increases + the rate of future pension increases

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Patterns of Reforms

Broad thrust of pension reforms in China (in the order of timing)

Introduce rural system on a voluntary basis

Public servants system -> urban enterprise system

Civil servants system -> urban enterprise system

Military personnel system -> urban enterprise system

Convert rural system to compulsory basis

Improve urban system

Improve rural system

Resolve pension position of migrant workers

Specify purpose(s) of NSSF

Integrate rural and urban systems

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Patterns of Reforms (Cont’d)

Significant improvements needed for both existing urban and rural systems

Urban measures

Raise normal retirement age to 60 for both males and females

Ensure all individual accounts have real assets

Improve return on individual account assets

Formalise arrangements for portability of pensions

Define protocol for pension increases

Improve education and communication to all members and pensioners

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Patterns of Reforms (Cont’d)

Rural measures

Encourage voluntary participation

Give subsidies on a proportionate basis, not a flat amount

Enhance return on individual accounts

Grant pension increases aggressively

Increase pension amount at retirement accordingly

Make system compulsory

Formalise portability arrangements

Integrate rural and urban systems

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Coordination of Different Ministries

Easy implementation of policies and guidelines

Improved utilisation of resources

Better development and long-term integration of various systems

First-class coordination to be achieved:

Ministry of Human Resources and Social Security (urban and rural systems)

Ministry of Finance (budget and subsidies)

Local authorities (public service pensions)

Central Military Commission (military pension arrangements)

Ministry of Civil Affairs (“di bao”, civil service pensions and military pension payments)

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Hong Kong Example

Historical pension arrangements for civil servants

2/3 of final salary at retirement

Full cost-of-living increases after retirement

Post-97 arrangements for civil servants

More into line with the private sector

Mandatory Provident Fund (MPF) introduced in 2001 – funded, contributory, DC, lump sum

All pension entitlements for pensioners and the existing civil servants protected

All new civil servants required to join an enhanced MPF arrangement

Risks (borne by new generation of civil servants)

- Insufficient retirement moneys

- Longevity

- Inflation

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III. Conclusions

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Conclusions

Existing pension arrangements complicated

Pilot experiments to transfer the public service pension arrangements into the urban enterprise

system

A long way to go before the civil servants / public servants / military systems can integrate

wholesale into the urban enterprise system

Significant measures to improve and rationalise both the existing urban and rural systems

May take 40 further years before one uniform pension system covers the entire working

population

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“This is not the End or the Beginning of the End, but may be the End of the Beginning!”

Thank You!

Questions?