Civil Service and Military Pensions

1
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 [phone] E-mail
stuart.leckie_at_stirlingfinance.com Tokyo 20
January 2011
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Contents

• Current Pension Arrangements
• Reform Directions Going Forward
• Conclusions

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I. Current Pension Arrangements
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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
Pillars (World Bank) Pillars (World Bank) Chinese Terminology Contri-butions Benefits Funded Status
State Zero Zero Minimum guarantee (Di Bao) n/a Varies From Government
State I Ia 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
State II Ib 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 EE Lump sum or annuity benefit Funded
Private III III Other Voluntary Benefits, e.g. Group Insurance Plans ER EE Lump sum or annuity benefit Funded
Private State IV IV Family support subsidised healthcare and housing n/a Varies From Government or Family
Source Stirling Finance research. ER employer
EE employee.
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Urban Enterprise System (Contd)
Equities/ Linked products Financial/ Corporate Bonds G-bonds / Deposits
Pillar 1a (state) - - 100
Pillar 1b (state) - - 100
Pillar II (EA) lt 30 lt 50 gt 20
Pillar III (non-EA) lt 20 lt 20 lt 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

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National Social Security Fund (NSSF)

• Established in 2000
• Fund of last resort
• To help cope with Chinas 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 Chinas pension
  sector
• To expand to USD 225 bn by 2015
• Yet to find out the exact role of NSSF in Chinas
  overall pension system going forward

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New Rural Pension System

• 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

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New Rural Pension System (Contd)
Terminology Contributions Benefits Funded Status
Basic Social Pool 100 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
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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 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. Wage bill p.a. RMB, billion 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) 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 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).
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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
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
gt10 and 20 60 70
gt20 and 30 75 80
gt30 and 35 82 85
gt35 88 90
Source Stirling Finance research Birmingham and
Cui (2006).
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Current Pension Arrangements
Civil Servants Public Servants
Final salary Position Wage Post Wage Position Wage Post Wage
Years of Service Replacement Ratios Replacement Ratios
10 50 50
gt10 and 20 70 70
gt20 and 30 80 80
gt30 and 35 85 85
gt35 90 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.
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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 -gt 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 (contd)

• Enterprise -gt 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 -gt enterprise
  -gt 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
(Contd)
Terminology Contributions Benefits Funded Status
Social Pool Pension ER 20 of salaries Monthly pension based on average local monthly wage, indexed individual wage and years of employment PAYG
Mandatory Individual Account (IA) Pension EE 8 of salary (starting from 3) Monthly pension of 1/139 of IA balance at the time of retirement assuming at least 15 years contributions Funded
Voluntary Occupational Annuities TBC TBC TBC
Source Stirling Finance research.

• 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

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3. Military Pensions
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Overview

• Peoples Liberation Army (PLA)
• Unified military organisation of all land, sea,
  strategic missile and air forces in China
• Top leadership Central Military Commission
• Worlds largest military force - 3 million
  members
• Worlds 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
Pay Structure
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
Replacement Ratios
Years of Service Replacement Ratio
10 65
gt10 and 15 70
gt15 and 20 75
gt20 and 30 80
gt30 85
Severely injured or disabled because of work 95
Source Stirling Finance research.
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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
Source Stirling Finance research.
Note Total pension benefits capped at 100 of
final pay!
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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 -gt urban
  enterprise system
• Civil servants system -gt urban
  enterprise system
• Military personnel system -gt 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 (Contd)

• 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 (Contd)

• 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?