Business opportunities in civil servant pension reform
Benn He Vice President of L&H, Swiss Re Beijing
When on 14 January 2015, the State Council officially announced its Decision on the Reform of the Retirement Insurance System for Staff at Government Organs and Public Institutions, the civil servant pension reform became a reality and the imminent demise was proclaimed of the “dual-track” retirement insurance system.
The current pension system has been in operation for 20 years. This reform has embodied fairness and unity in the system by taking aim at the “pain points” that have been festering for a long time.
While society closely watches the pension reform in government organs and public institutions, people are making calculations about their own future retirement adequacy. At first glance, the target of the reform is the quasi-civil servants in administrative public institutions. There seems to be no trace of commercial insurance involved. Very little of the old age benefits of permanent civil servants is affected by the reform, and they are unlikely to feel compelled to go buy a commercial retirement insurance product. But, considering the continuing effect of the social insurance reform and the impact of the pension reform on public awareness about commercial insurance, we believe that the benefits to be reaped by commercial retirement insurance will gradually come to the surface.
Stronger supplementary function of commercial retirement insurance
Both in theory and in international practice, three pillars form the pension protection system: the basic pension provided by society; the supplementary pension provided by employers; and the individual savings retirement insurance. Without a doubt, commercial retirement insurance plays a supplementary role. But for so long, the supplementary function of China's commercial retirement insurance existed only in name.
With its stated aim of “wide coverage, basic insurance guarantee”, the social insurance pension has been making great strides. Commercial retirement insurance, though, has been stunted in its development. The supplementary retirement insurance provided by employers lacks the support of tax incentives. And awareness about individual commercial retirement insurance is lacking.
As long as a social insurance pension system keeps claiming to cover everything under the sun and overemphasizing its social insurance responsibility, there will be little room for growth of commercial retirement insurance.
As the reform of the civil servant pension system has now started, public finance will no longer bail out the retirement funds for civil servants – the concept of a pension of 80% to 90% of wages has passed into history. There has been greater transparency and standardisation in the operation of pension, and the delineation of the scope of social insurance pension has become clearer. Commercial insurance with a strong social attribute – particularly old age and medical insurance, is directly related to the social safety net. As social insurance keeps itself within bounds, we will no doubt see it leave more room for the development of commercial insurance business.
It is fair to say that this civil servant pension reform is overcoming many obstacles in the pension system reform. As the social insurance pension clearly marks its boundaries, the supplementary role of commercial retirement insurance can become an actual reality.
The public demands retirement insurance
Regardless whether it is a civil servant pension, or a pension for employees, the social insurance pension has long become what the majority of people rely upon in their old age, thereby creating the common misconception that “retirement adequacy depends on the government”. Also, the understanding of social insurance pension is muddled at an individual level. Under such circumstances, there is clearly insufficient awareness of market insurance, and most people would rarely take the initiative to purchase themselves retirement insurance products.
With the civil servant pension reform, people can see for themselves that even civil servants who have security for life (“an iron rice bowl”) need to fork out 8% of their earnings for retirement insurance, and have to save bit by bit for their future individual account. Thus, the own-risk awareness and insurance awareness of people at large will receive a major boost. From the point of view of an individual, retirement adequacy is a government obligation and a major social issue, but that does not equate to leaving all responsibilities to the government: individuals must bear responsibility for their own standard of living in old age.
In addition, the reform now undertaken provides a rare lesson for the public in “retirement insurance”, and the man in the street is beginning to consider how to make his own “retirement insurance plans”. During the course of the reform, terms such as “pension replacement rate”, “individual account”, “pension income”, “occupational annuities” etc. keep on popping up, and prompt acute questions among common people about their future pension. Moreover, with the establishment of occupational annuities for civil servants, it was made known that the basic pension replacement rate was insufficient.
At present, the replacement rate of basic pension (including social pooling accounts and individual accounts) is less than 50%. And the trend in future changes does not give rise to optimism either. With occupational annuities serving as examples, a rational consumer will consider how to design his or her own pension level. In other words, there will be an increased demand for commercial retirement insurance products.
Commercial retirement insurance is gaining traction
The civil servant pension reform has started but is still a work in progress. Presumably, insurance companies are optimistic about the demand for insurance products that is gradually released into the market. A number of insurance companies are already eyeing “occupational annuities” worth up to Rmb100 billion. Retirement insurance companies, in particular, with their experience in managing “enterprise annuities”, have an obvious edge.
Furthermore, the State Council's Ten Guidelines to Deliver a Modern Insurance and Pensions Industry by 2020 provides the background that encourages pension management services to be outsourced, thus opening up quite a lot of new business areas for insurance companies.
In addition, in accordance with the current reform plan, an enterprise is required to set up occupational annuities with its own financial resources. As such, there are direct business opportunities for commercial retirement insurance at some financially weaker public institutions will see a falling pension replacement rate.
We see too how insurance companies all along have made a case for the elderly care industry and building communities for the elderly, and have “differentiated” themselves from the social insurance pension – reinforcing their own “supplementary function” by embodying the service quality and business strength of commercial retirement insurance.
Under the banner of old age protection, insurance companies offer the market various insurance products for the elderly. Products such as accident coverage for the elderly, cancer treatment insurance for the elderly and medical insurance for the elderly have been launched. In the future, there will be products protecting against specific risks from old age, medical care, critical illnesses, nursing care and accidents, seeking for even more room for the growth of commercial retirement insurance business.
We all know that we have to face up to the reality that China's population is ageing and that improving the old age protection system is an extremely urgent matter. As the government accelerates the reform of the social insurance pension system, we foresee more policies in support of the elderly care industry.
For the retirement insurance market in particular, preferential old-age tax policies would be the indispensable “catalysts”. We look forward to policies such as deferred tax or tax relief seeing the light of day and prying open the enormous demand in the old-age market. Hence, a series of measures in the process of reforming the social insurance system may have an enormous impact on stimulating the demand for insurance.
Since the social insurance reforms constantly put the role of commercial insurance in the limelight – lightening the financial burden on the government while improving the efficiency of the pension protection system – we believe the prospects of commercial retirement insurance are bright.
Published April 2015