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IAA Regional Seminar. Asia Subcommittee.
Asia’s Actuarial Profession: Path and Progress
Gurgaon, India, November 9th, 2016.
Chitra Jayasimha
China
Korea
Japan
Hong Kong
India
Thailand
Singapore
Malaysia
Asia and emerging markets
expected to be the main
drivers of
global growth1,
dominated by China and then
by India, Korea, Indonesia,
Japan
Evolving Business Landscape in Asia for MNCs
Substantial contribution of
Asia
to Global MNC
revenues2
currently 20% and increasing
to 29% in 2019
Asia MNCs business focus to
globalise
is increasing over time3
Japan (226), China (149),
India (54) ,
Rest of Asia (238)
Global companies are
transferring
ever more decision-making
power to Asia2
Sources:
McKinsey Global Institute
Economist Corporate Network
Global Forbes Top 2000 Companies in 2015
Source:
IMF World Economic Outlook, October 2015
Country
GDP Growth Percent Trend
2013 2014 2015 2016 2013 to
2014
2014 to
2015
2015 to
2016
China 7.8% 7.4% 6.8% 6.3% q q q
India 6.9% 7.3% 7.3% 7.5% p q p
Japan 1.6% -0.1% 0.6% 1.0% q p p
Hong Kong 3.1% 2.5% 2.5% 2.7% q p p
Indonesia 5.6% 5.0% 4.7% 5.1% q q p
Malaysia 4.7% 6.0% 4.7% 4.5% p q q
Philippines 7.1% 6.1% 6.0% 6.3% q q p
Singapore 4.4% 2.9% 2.2% 2.9% q q p
Korea 2.9% 3.3% 2.7% 3.2% p q p
Taiwan 2.2% 3.8% 2.2% 2.6% p q p
Thailand 2.8% 0.9% 2.5% 3.2% q p p
Vietnam 5.4% 6.0% 6.5% 6.4% p p q
Source:
IMF World Economic Outlook, October 2015
Source
UN Population Division
Note 1 - Dependency Ratio is (a) the number of people aged 65+
divided by (b) the number of people in the age group 15-64
Source: UN Population Division
Index1 Ranking Country
8 Japan
34 Thailand
41 Vietnam
50 Philippines
52 China
60 Korea
71 India
74 Indonesia
80 Cambodia
92 Pakistan
Notes:
(1) Measures (a) Income Security (b) Health Status (c)
Employment/ Education (i.e. Personal Capability) and (d)
Enabling Environment (e.g. Safety & Mobility)
(2) No information available for HK, Singapore and Malaysia
Source: 2015 Global Age Index Report published by HelpAge International
Overall Perspective on Asia’s Significant Retirement Challenges
Regional Socio-economic Dynamics Regional Retirement Environment and Trends
Economic Growth
Strong sustained economic
growth
but signs of slowdown
(which may be temporary)
Demographic changes
Longevity is increasing and
is generally greater than in
the West
Demographic changes
Rapidly ageing populations
and generally low levels of
immigration
Demographic changes
Low birth rates and
changing lifestyles rapidly
eroding the strength and
size of the family unit
Pillar I
Sustainability of State
pensions under strain in
many countries
Pillar II
Wide variety in the type
and prevalence of
employer-sponsored
retirement plans in each
country. Markets tend to
heavily depend on local
taxation incentives Pillar I
Retirement ages (and
level of State pensions)
generally low by NA/
Western Europe
standards
Pillar II
Rapid increase in pay
levels and health care
costs a key concern for
employers
Pillar I
Systems are being
gradually reformed to
increase retirement age
and contribution levels or
shift to Pillar II programs
Pillar II
Pressure for more
effective management of
employee benefit costs
and encouraging
diversity via a “Flex”
approach
After decades of rapid
economic growth,
countries are starting to
develop economic
problems and need to
adapt to new demographic
realities
Employers need to improve employee “retirement readiness”
by encouraging saving in retirement plans and improving
financial wellness
But how best to achieve this in each country?
Risk appetite
Populations tend to be risk
averse
Pillar III
Individual savings rates in
Asia are relatively high
(compared with Europe
and North America).
Pillar III
Housing is a major
investment and
employees also need to
save for children's’
education and weddings,
family health care
expenses plus retirement
income and health care
costs
Pillar III
Historically, family support
for retirees has been
important but is now
declining steadily
The Three Pillars of Retirement System
Pillar I
State Benefits
(social security)
In general, State-
provided retirement
benefits have been
historically low, except
in Japan and Singapore
Pillar II
Employer-sponsored
Retirement and Savings
Plans
Benefits are typically
provided in lump sum
(rather than annuity) form
Pillar III
Individual Private
Savings and
Investment
Historically, senior
family members have
been supported in
retirement by their
children, but times
have now changed
Typically no tax-
incentives but tax rates
tend to be quite low
Tax rates and pension/savings tax incentives
vary significantly by country
Key Regional Trend
Employers across Asia
are increasingly realizing
the importance of wealth
accumulation and financial
wellness programs plus
financial education for
their employees
(otherwise many
employees will not be able
to afford to retire)
China – Setting the Scene
Country Socio-economic Dynamics Retirement Environment and Trends
Past Economic
Miracle
8 fold increase in GDP
per capita in last 15
years (from USD1K in
2000 to USD8K in
2015)
Rapid urbanization
Urban population
exploding from 300mn
(26%) in 1990 to
750mn (54%) in 2014 (
to projected 1bn in
2050 (76%)
Recent Slowdown
Local and global
economic
repercussions as
official GDP growth
falls below 7%
Population
Stagnation
Population size in 2050
expected to remain flat
at current level of 1.4bn
Major Economic
Developments
Economy transitioning
from export-led to
domestic demand
driven growth and
more open to market
forces
Demographic
changes
Rapid ageing
population exacerbated
by one-child policy
which has been very
recently relaxed
Exploding ‘middle class’
only 4% of urban households were middle class in
2000, 68% today, and expected to be 76% by
2022
Pillar II
Plans on offer target
wealth accumulation
raising adequacy
concerns (prevalent
to provide benefits in
lump sum
rather than annuity
form)
Pillar I
Fragmented system
with differences at
provincial level which
are currently in the
process of being
unified
Pillar II
Company sponsored
plans are still fairly
new - prevalence is
only 25% among
MNCs
Pillar I
Compulsory for
foreign employees in
certain provinces to
participate since 2011
(subject to any
bilateral SS
agreement)
Pillar III
Household savings
rate at about 30% of
income much higher
than in most other
countries
Pillar II
Employee savings
encouraged via Flex
and investment
choices
Pillar I
Plans will gradually to
increase State
retirement age from
60 (men) / 55 to 60
(women) to age 65
over 2017 to 2022
(pending approval)
The world’s second largest economy needs to
adapt in a timely manner to cope with serious
challenges which lie ahead relating to a rapidly
ageing population
The State and major employers are starting to
take action
Special
Bank
Account
Enterpri
se
Annuity
（EA）
Book
Reserve
The Three Pillars of China’s Retirement System
- Qualified funded DC plan
- Regulations on DC design
and investment strategy
- Unfunded plan
- Heavy administrative wor
k
- Has DB characteristics
EA-like
Trust
- Ability to adopt a more fle
xible design and investme
nt strategy
- Funded DC plan
Group
Insuranc
e
- Unfunded plan
- Funded DC plan
- Through insurer’s pension
(participating) products
Pillar I
Statutory
State Security
Pension System
Fragmented
system which
varies by
Province
Earnings-
related Benefit
Two Tier
System :
Tier 1- Social
Account
Tier 2 –
Personal
Account
Pillar II
Voluntary
Employer-
Sponsored
Wealth
Accumulation
Plans
(Retirement
Plan, Savings
Plan or
Housing
Assistance
Plan)
Pillar III
Voluntary
Individual
Private
Savings and
Investment
Insufficient and
large deficit as
mainly PAYG
Underdeveloped
Pillar only 25%
prevalent for
MNCs
Strong
motivation for
households to
save - so Pillar
very strong
DC
Pension
Plan
(Trust
Model)
EA Tax
Incentive
s since 2
013 incr
ease p
opularity
Savings
Plan
more
flexible
withdraw
al
China Statutory Benefits
Social
Security
Pension
Maternity
Medical
Unemployment
Job-Related
Injury
Individual
Accounts
& Social
Pool
Social
Pool
Provident
Housing
Individual
Accounts
Employer & employee
contributions
Employer
contribution only
Central Government issues guidance and
execution is driven locally by municipal
governments
Benefits at retirement are currently a mix of:
Social Pool Pension (DB in nature);
Individual Accounts (DC in nature) ;
A pilot project has been launched by the
State but implementation is currently optional:
All employer contributions go to the
Social Pool;
Employer contributions are determined
at the province/city level;
Social Pool benefits are linked to the
employee’s indexed pay and service
years;
Benefits from the Individual Accounts
are converted to a monthly lifetime
annuity.
46%
38%
32%29%
27%24%
21%
14%11%
7%5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
1,500 2,000 3,000 4,000 5,000 8,000 10,00015,00020,00030,00040,000
Pre-retirement Gross Monthly
Income (RMB)
Replacement Ratio (%) Post Retirement
Living Standards
Replacement ratio is defined as (1) equivalent gross income after retirement / (2) gross income immediately before
retirement
Note: US$1.00= RMB 6.32 currently
Decent 50%+
Reasonable
40%~50%
Low
30%~40%
Very Low
5%~30%
01
02
03 04
06
05
1. Eligibility & Plan
Design
• Participate in State Pension
insurance
• Full-time employees
• Majority participation and approval
(e.g. 70%)
• Endorsement needed
6. Benefit Withdrawal
2. Employer
Contribution
• Tax exemption amount:
capped at 8.33% of the total
cash income from the
previous year
• Tax exemption contribution
ceiling: none
3. Employee Contribution
• Income Tax exemption amount:
Up to at 4% of pay (with pay
capped at 3 X City Average
Wage)
4. Investment Gain
• Investment strategy subject
to regulation
• Accumulative with
contributions and taxable at
benefit withdrawal
• Portfolio selection available
to employees
• No minimum return
guarantee
5. Tax Incentives
• Corporate: Corporate tax
exception on employer
contributions up to a limit
• Individual: Income tax
exception on employee
contributions up to a limit
• At State retirement age,
death, permanent disability
or emigration
• Lump sum or annuity form
0%
5%
10%
15%
20%
25%
30%
35%
1990 1995 2000 2005 2010
Household Saving Rate Old Age Dependency Ratio
0 5 10 15 20 25 30 35
China
France
Germany
Italy
Japan
Netherlands
U.S.
Switzerland
Sweden
Canada
Household Saving Rate %
Individual Savings Market
Dramatic aging demographics are steadily
pushing the savings rate higher
Household savings rate % - an international
comparison
Private Insurance Market
Private insurance is a strong component of Pillar III and includes three main types of pension insurance
products: (1) Universal Life Insurance; (2) Participating Pension Insurance and (3) Unit-Linked Pension
Insurance.
Source: Demographic Patterns and Household Saving in China, the National Bureau of Economic Research
U.S. ,2011; OECD Economic Outlook 83 database
Employees are sensitive about the
investment performance
Employers will pay more attention to plan
governance and investment managers’
ability to achieve a higher investment
return
Professional Investment consulting
service will be in higher demand by clients
who have or consider launching funded
Pillar II plans
Insurance Products - China Insurance Regulat
ory Body has loosened curbs on insurers’ inve
stment by allowing investments in venture capit
al funds, referred shares, collective trusts and o
verseas assets
Enterprise Annuity - MOHRSS (Ministry of Hu
man Resources and Social Security) recently e
xpanded the scope of investment of Enterpris
e Annuity funds
Comment Opinion and Recommended Actions
Unified State
pension system
Employer contribution - 20% x pay; employee
contribution - 8% x pay
Public sector: Occupational Annuity is mandator
y (ER 8%/ EE 4%)
Private sector: Enterprise Annuity is voluntary
For MNCs, opportunities in the area of:
Pillar II – Plan establishment;
DB to DC transfer, if DB plan exists;
Funding any unfunded plans;
Plan optimization (e.g. through Flex;)
Increase in State
pension age
Detailed plans for raising the state pension retir
ement age will be unveiled in 2017
Retirement age will be raised to 65 gradually sta
rting from 2017 to 2022 (pending approval)
Educate employees on implications of
change in State pension age
Emphasize the importance of participating
in the employer-sponsored retirement
plan(s)
Investment of
Retirement
Funds
Hong Kong – Setting the Scene
Country Socio-economic Dynamics Retirement Environment and Trends
Demographic
changes
Population age 65+
to rise from 13% in
2011 to 30% in 2041
Employment
environment Liquid
job market means
turnover rates are
high
Political
Environment
Transition from a
special territory to full
control from China
(scheduled for 2047)
is creating political
friction Economic Tension
Rising income
inequality and real
estate prices lead to
tensions between
haves and have-nots
MNC Presence
Important regional
hub for MNCs
Demographic
changes
Now, 1 retiree is
supported by c6
working age adults.
By 2041, it is
expected that 1
retiree will be
supported by only 2
working age adults
Tax environment
Low tax environment
Effective integration into China is key to
HK’s medium-term economic future but
needs political compromises
State and organizations are taking action to
start to address Hong Kong’s rapid ageing
challenges
Pillar I
State Pension and
social welfare
benefits provide a
safety net to meet
basic needs only
Pillar II
Provision of MPF
benefits mandatory
for employers
without ORSO plans
Pillar II
ORSO plans (from
before 2000) are
slowly being phased
out in favor of MPF
Pillar 1
Ageing population
means funded
universal state
pension will be
difficult to maintain
Pillar II
MPF, entering 15th
year of existence,
has achieved nearly
full penetration
Pillar II
MPF’s future focus
will be on system
refinements such as
default funds, and
investment efficiency
Pillar 1
Government
sponsored study on
feasibility of uniform
pension plan
suggests MPF to
subsidize
Pillar I
Occupational
Retirement
Schemes
Ordnance
(ORSO)
DB,DC or Hyb
rid ben
efits design
The Three Pillars of Hong Kong’s Retirement System
Pillar II
Employer-sponsored
retirement plans = MPF
& (and legacy ORSO)
Pillar III
Individual Private
Savings and
Investment
Common to invest in
stocks and real
estate.
No capital gains tax
in HK, but stamp
duty on real estate
sales.
- Legacy ORSO plans establ
ished before 2000
- After 2000, existing ORSO
plans in 2000 which provid
e minimum benefits and
meet regulatory requir
ements can be exempted
from MPF
Mandatory
Provident Fu
nd
(MPF)
DC
- Mandatory DC system
- Introduced in 2000
- Min Employer and Employ
ee contributions of 5% o
f pay up to HK$30,000 (US
D3.8k) a month
- Trust based
- Operated by private sector
State Pensions
Non-Contributory
A. Social Security
Allowance Scheme
provides :
- For people aged 65 to
69 a means tested
pension;
- For people aged 70
and above a flat
universal pension;
B. Comprehensive
Social Security
Assistance Scheme
- Means tested benefit
for elderly who cannot
support themselves
financially
Only Supports Basic
Needs
Developed from 2000
Predominant form
of retirement
savings, historically
Employee
contribution
Employer
contribution
Employer’s chosen MPF Plan Employer’s Choice
Product 1 Product 2 Product 3
Employee’s Choice Fund A Fund D Fund E Fund B Fund C
Employer chooses the MPF Plan Type & Provider(s)
Employer and employee contribute 5% of monthly pay up to cap of HK$ 30,000 (US$3.8K) a month
Employer and employee can both make additional voluntary contributions
Employees make fund selections from a range of options
Employers often include additional MPF service providers to offer extra fund options to employees.
Fund management fees have been steadily decreasing due to competition and increased pressure from the
HK MPFA
Most common type of plan
Open to employees of particip
ating employers, self-employe
d persons and persons with ac
crued benefits transferred from
other MPFplans
Pools together assets from
various unrelated employers a
nd their employees, plus
self-employed members
MPF Plans
(#38)
Master Trust Plans
(#35) Employer Sponsored Plans (#1)
Industrywide Plans
(#2)
Only one such plan exists
Membership in this type of plan is
limited to the employees of a sing
le employer and its associated
companies
Only cost-effective if the number
of employees is large
Plans established for employe
es of the catering and constru
ction industries
Casual employees do not nee
d to change plans when they c
hange jobs within these two i
ndustries, as long as their pr
evious and new employers are
registered with the same Indus
trywide Plan
Data Source: Mandatory Provident Fund Authority
Phased
withdrawal of
MPF benefits
Currently MPF benefits have to be paid out
in a single lump sum immediately upon
retirement or at a later date;
It is expected that starting from 2016, retiree
s will be able to make up to 4 withdrawals ea
ch year with no additional fees or tax charge;
Need to educate employees on implicatio
ns of the change once the effective date
of the change has been confirmed;
Retired employees will be able to delay
withdrawal if market conditions are not
favorable;
Universal
Retirement
Protection
Study commissioned by the Commission of
Poverty recommends establishing a uni
versal, non-means tested and flat benefit reti
rement plan;
Biggest controversy remains whether the gov
ernment or individuals (and employers) woul
d finance;
The government objective is to offer
universal retirement funded by
employees and employers. However,
the public is not in favor of additional
taxation so a consensus on funding is
hard to reach;
The rapidly-ageing population also
means that sustaining such a program
would be difficult in the long-run;
Standardized
Default MPF
Funds
As there is no standardized default fund
between plans, performance and risk of
default funds under different plans varies
widely;
Planned introduction of a standardized lifecy
cle default with fee cap for members who do
not or do not want to make an investment ch
oice;
About 25% of employees do not select in
vestment choices. The amendment is d
esigned to improve retirement outcom
es for this group and provide a low co
st fund option to all;
Monitor progress and prepare to support
employee enquires once details of propo
sal are released;
Comment Opinion and Recommended Action
Japan – Setting the Scene Country Socio-economic Dynamics
Retirement Environment and Trends
Employment
environment Illiquid
labor market and
traditional values mean
that “job for life” is still
prevalent
Demographic changes
Decreasing population
from 127mn today to
80mn in 2060.
Already a “super-aged”
society with 26% above
65 growing rapidly to
40% by 2060
Employment
environment
Severances are rare as
employers need to
meet stringent
requirements
Demographic
changes
Very restrictive
immigration controls
(despite rapidly ageing
local population)
Employment
environment
Employee labor
conditions protected by
company work rules
and difficult to change
Employment
environment Women
at work not prevalent
Tax system
encourages
housewives to work
part-time
Public Finances
National debt at US$9tn
(or 230% of GDP) with
little improvement due
to persistent low
economic growth in
recent years
Pillar I
State pensions under
severe financial
strain
Pillar II
Major reform since
2000s.
Trend to switch from
DB to DC, but
DB still dominant
Pillar II
Companies spending
more resources on
investment education
for employees
Pillar II
Changes in
legislation causing
shift in type of
company sponsored
vehicles
Pillar II
Employer-sponsored
plans offered for a
few decades and
prevalent for regular
employees
Pillar II
Shift from
“establishing”
DC plans to
“maximizing
advantages” of DC
plans
Pillar I
Increase in
retirement age from
60 to 65
Increase in
contribution rates
Phasing out of early
retirement options
Reform of how State
pension funds are
invested
Overall outlook for world’s third largest
economy remains sombre with large national
debt rapidly ageing workforce and rigid
employment environment
State and employers are starting to take
action
Pillar I
Social Security Plan
“Pay-as-you-go”
ER and EE pay social
security taxes of 8.914% of
capped pay
Retirement age is gradually
increasing from 60 to 65
There are 2 pension
elements:
A. National Pension (NP) -
Flat amount (contribution
period related)
B. Employees’ Pension
Insurance (EPI) - DB
benefit based on career pay
2001 DC Law
DC Plan
Retirement
Allowance Pl
an
(RAP)
2002 DB Law
Corporate Pe
nsion Plan (C
PP) or Fund
(CPF)
The Three Pillars of Japan’s Retirement System
Pillar II
Optional
Employer-sponsored
Supplementary
Retirement plans
Pillar III
Individual Private
Savings and
Investment
Traditionally high
savings ratio has been
in decline
In Dec 2013,
household financial
assets were US$11tn
plus of which more
than 50% in cash
Individual Savings
Accounts (ISAs),
a new tax-advantaged
savings facility
introduced in 2014 to
encourage investment
of savings
Book reserved
Lump-sum termination bene
fit
Prevalent in small employer
s (<100ee)
Funded trust-based plans wi
th full tax deduction
Pension or lump-sum termin
ation
benefit
EPI Law
Employees’
Pension Fund
(EPF)
Funded DB Plan with full tax
deduction
Usually multi-employer
Contract out of EPI
No new EPFs now allowed
Hybrid DB/DC
Pension or lump-sum termin
ation benefit Low ER contbn
cap (cUS$500 month)
Common to supplement a D
C plan
with a DB plan (or vice versa
) Major source of “old-
age” revenue but under
strain from rapidly
ageing population
Well-developed but
not mature enough to
be able to cope with
the rapidly ageing
population
Tax incentives
introduced to
encourage
investment of
substantial cash
savings
National Pension (Flat Amount)
Employees’ Pension Insurance (EPI)
Corporate Pension
Fund (CPF)
Corporate Pension
Plan (CPP) Corporate
DC Plan
EPI Law
DC Law New DB Law
Public
Pension
(Statutory)
Supplemental
Retirement
Plans
(Optional)
Employees’
Pension Fund
(EPF)
Funded Plan
(no contracting-out)
Retirement Allowance Plan
(RAP)
Unfunded Plan
(book reserved)
Funded Plan
(EPI contracted-out)
Tax Qualified Pension Plan (TQPP)
(banned from 2012)
93% of multinational companies provide supplemental retirement plan for their employees in Japan;
Companies moving towards DC plan are increasing steadily, although DB plans are generally still the
primary retirement plans in the MNC market;
RAP, DB (CPP/CPF) and DC are the three major supplemental plans in market. Prevalence varies by
company size;
Source: Aon Hewitt’s Japan Benefits Study 2015
Market Prevalence of DB/DC Market Prevalence by Company Size
Japan Pillar II - Pension Market Overview
Comment Opinion & Recommended Action
Retirement Age
State pension age is gradually being increas
ed from 60 to 65 and is likely to be further i
ncreased further in the future
Typical company practice was to require emp
loyees to retire at age 60. However, from 2
013 legislation change requires companies
to maintain employment up to age 65 (after
a 12-year transitional period; now age 61).
Companies setting the normal
retirement age (NRA) at age 60 will
need to offer renewed employment
contracts for those who want to
continue working beyond age 60
Typical practice is to “rehire” emplo
yees who retire at age 60 as term c
ontract employees
Monitor and keep up to date with
changes in retirement age
requirements and market practices
Employees’
Pension
Funds (EPFs)
Effective from April 2014, legislation
promotes dissolving EPFs
EPFs will be subject to strict annual funding
checks starting from 2019
The government can order an EPF to be
dissolved if it does not pass the annual
funding check. (Only 10% would have
passed the check as of March 2013)
Most EPFs are likely to either be di
ssolved or reduce benefits significa
ntly
Companies participating in a multi-e
mployer EPF will be impacted by th
e EPF’s decision.
Confirm whether the MNC client
participates in an EPF, and if so,
consider leaving the arrangement
DC Plans
DB Plans
From August 2012, employers that have a
DC plan were required to provide investment
education to employees
Employee contributions were allowed from
1/1/2012
Legal DC contribution cap increased
(effective October 2014), from JPY 51,000
to JPY 55,000 per month (from JPY 25,500
to JPY 27,500 if employee is also covered by
a funded DB plan)
The market trend has shifted from
“how to introduce DC” to “how to
maximize the advantages of DC”
Monitor legislation changes and
review DC contribution cap as
necessary
Due to the low contribution cap, DC
only option does not deliver a
competitive benefit
Take advantage of investment
education opportunity for more
effective employee communication
Funding levels for DB plans low by
international standards
Monitor the funding situation regula
rly as the population ages. Some c
ompanies will come under severe p
ressure as regards cash flows and
payment of benefits
Comment Opinion & Recommended Action
Korea – Setting the Scene
Country Socio-economic Dynamics Retirement Environment and Trends
Employment
environment
Employment is
heavily unionized and
employment flexibility
is not prevalent
Rapid urbanization
Urban population
exploding from
31.7mn in 1990 to
40.8 mn in 2014 ( to
projected 44.7 mn in
2050
Employment
environment
Employer labor
conditions protected
by company and
industry unions
Demographic changes
Remarkably rapid aging population from an old
age dependency ratio of 18% in 2015 to 66% in
2050
Pillar I
Sustainability of
State pension
provision under
strain (PAYG) since
current cost will
increase 5 fold by
2050
Pillar II
Adoption of
Company
sponsored plans
has increased
rapidly in popularity
over the last 10
years
Pillar II
Changes in
legislation cause
companies to
transition -replacing
the unfunded DB
severance plan with
funded DB or DC
plan
Pillar II
Future regulatory
changes expected
to improve plan
governance
Pillar II
Legislation requires
companies to
increase retirement
age to age 60
starting 2016/17.
Age 55 - 57 is
current market
practice
Pillar II
Changes in
legislation relaxing
exposure of DC
investment to risky
assets
Pillar I
Increase in
retirement age from
between age 55
and 60 now to age
65 by 2033)
Structural problems pose significant
headwinds to sustainable economic
expansion
State and organisations are taking action
Fostering a creative
economy
Weakness to promote
innovation threatens
competitiveness and
ability to transition to
high-added value
manufacturing
The Three Pillars of Korea’s Retirement System
Pillar II
Mandatory
Mandatory
Severance and
Employer-sponsored
Retirement plans
Tax: in transition
between different
vehicles
Pillar III
Individual Private
Savings and
Investment
Tax: Contributions
tax exempt, returns
tax exempt,
income taxed
Pillar I
National Pension
Scheme
“Pay-as-you-go”
Contributions ER &
EE 4.5% of Pay
each
Monthly earnings
related pension at
retirement
Minimal 10 years of
coverage
Statutory retirement
age between age
55 and 60
(increasing to age
65 by 2033)
Defined
Contribution
Plan
Mandatory
Severance P
ay System (
SPS)
Defined Ben
efit
Plan
- Labor Standards A
ct of 1997
- No tax incentive fr
om 2016
- DB type
Employee
Retirement Benefit
Security Act
(ERBSA) enacted in
2005 and has been
regularly revised
DB or DC plans are
mandatory from
2016 to 2022 (date
depends on
company size)
Contributions tax
exempt, returns tax
exempt, benefits
taxed
Korea Pillar I - National Pension Scheme Not Sustainable
Source: Korea National Pension Research Institute 2013
Since the adoption of ERBSA (Employee Retirement Benefits Security Act) in 2005, the Korean retirement market has
evolved. The replacement of unfunded Severance Pay plans with funded DB and/or DC plans must take place between
2016 and 2022 depending on company size.
Severance
Pay
Severance
Pay DC Plan
(Defined Contribution)
DB Plan
(Defined Benefit)
• Deduction from external funding has
been terminated from January 1, 2011
• Tax deductibility of severance pay is
gradually decreasing to 0% from 2016
• Payable as lump sum only
• Corporate tax incentives for employer
contributions
• Annuity option added while income tax
provisions are changing to favor the
annuity option over the lump sum
option
• Stricter funding requirements for
employers (70% for DB and 100% for
DC as of 2015)
Introduction
of ERBSA
Dec 2005
Transition Period
1
2
3
2016 ~ 2022
DB and/or DC will be
mandatory from
2016 for firms with
300+ EEs
2017 for firms with
100+ EEs
2018 for firms with 30+
EEs
2019 for firms with 10+
EEs
2022 for remaining
firms
Above mandatory
change schedule is
still being discussed in
Congress, and may
be delayed.
DC Transition
Multinational companies are continuing to
generally adopt DC plans
The pace of transition is slowing and likely to
remain at current levels
Pension provider market stable
- mature and well established operating
model
- strong regulations, tax rules and
governance
- competitive market/ good investment
options
Study implications of future changes in
regulations
Continue to monitor competitor and
market trends
Severance Pay
System Provision
Payment on termination (for whatever cause)
or in the event of hardship (as specified by
law)
Replacement of the current DB Labor Law
Severance Pay plan with a DB and/or DC
retirement program is mandated during the
period 2016-2022 depending on company
size
Review severance pay plan (if not
already done so)
Look at implications of upcoming
regulations and prepare as needed
Continue to monitor competitor and
market trends
DC Investment
Maximum DC risk asset investment (e.g.
equities) % limit recently raised to 70% from
40% (effective July 2015)
Best practice is for employers to provide
clear understandable investment informat
ion and education for their employees
Comment Opinion and Recommended Action
Comment Opinion and Recommended Action
Tax-Favored
Annuity Payout
(DB/DC)
Effective 2015, additional tax incentives if
employee receives benefits in annuity form
(rather than lump sum).
Currently pension plan assets are managed
by a financial institution based on a contract
with the company
From July 2016, Plan assets can be manage
d more efficiently through a trust structure.
In a trust structure, a trustee external to the c
ompany has overall responsibility for the pen
sion plan, including asset management.
Companies must ensure
compliance with enhanced
governance requirements
Mandatory investment committee and
Investment Policy Statement (effective from
start of 2016: 500+ employees, 2017: 300+
employees, 2018: 100+ employees)
DB Funding
DB plan must pay 100% of benefits promised
(irrespective of funded status)
Minimum funding ratio is 70% in 2015, but
will be increased to 80% from 2016
Excess assets over 150% funded ratio must
be refunded
Review the investments and funded
status of the plan and monitor regul
arly to ensure compliance with mini
mum funding requirements
DB Governance
DB/DC Trust
Establishment
Establishing a trust to manage pens
ion assets requires setting up and
operating a governance and risk m
anagement framework
Tax Benefit
DC/IRP
Effective 2015, the yearly amount of
employee contribution eligible for income tax
deduction to DC/IRP and private retirement
savings has been increased
Companies should review benefit d
esign to take advantage of the tax
incentives
Companies should review benefit d
esign to consider whether/ how to o
ffer an annuity payment form option
Individual
Retirement Plan Compulsory rollover on termination before
retirement to an Individual Retirement Plan
(IRP)
Benefit must be rolled over to an
IRP (limited exceptions)
Review implications
Singapore – Setting the Scene
Country Socio-economic Dynamics Retirement Environment and Trends
History
Former British
colony with only
50 years history
as a sovereign
city-state
Economy
Exceptional
growth has
transformed
Singapore to an
advanced, high-
income economy
Demographic
changes
Number of
workers to support
seniors (age 65+)
has reduced from
11 in 1980 to 5.7
in 2015 to only 2.1
by 2050
MNC Presence
Regional hub for
MNCs Nationalities
Non-Singaporean
population of 30%
out of total
population of
5.5mn
Tax environment
Low tax
environment
Lifestyle
Per capita GDP of
US$ 58K (global
top 10) and with
90% home
ownership (global
top 5)
Strong and visionary political
environment
has transformed the city state
State and employers are starting to take
action to address the challenges of ageing
Pillar I
CPF provides DC
benefits for all
Singaporean EEs
working in Singapore Pillar II
Adequacy concerns
especially for seniors,
high earners and
foreigners;
Increasing need for
financial wellness
support
Pillar I
CPF provides limited
investment choices
Pillar III
‘Asset rich/ cash
poor’ challenge as
seniors struggle to
release equity locked
in their homes
Pillar II
Company-sponsored
retirement plans are
not prevalent
Pillar III
Family support is
significant but under
pressure due to
shrinking size of
families
Pillar I
CPF’s future focus
will be on system
refinements as the
population ages
Pillar I
Supplementa
ry Retiremen
t
Scheme
(SRS)
DC
The Three Pillars of Singapore’s Retirement System
Pillar II
Employer-
sponsored
Retirement
Plans
(voluntary)
Pillar III
Individual Private
Savings and
Investment
Very common to
invest in real
estate
Stamp duty on
real estate sales
(but no capital
gains tax)
- Individual accounts
- Limited tax incentive for S
G resident Ees; more for for
eign EEs
- Low take-up rate
- Limited company control
Central
Provident
Fund
(CPF)
DC
- Compulsory EE and EE co
ntbns up to a cap of cUS$4
K monthly
- Fully funded individual ac
counts
- Centralized Investments
- Multiple objectives as fun
ds can be used to finance h
ealth care, home owners
hip and education
- Mainly lump sum benefits
- Only Singaporeans CPF-el
igible
Central
Provident
Fund
(statutory)
CPF dominates
Supplementary
plans not
common
Family support
historically
significant
Section 5
DC
- Only 23 programs exist
- Inflexible (only for ER cont
bns)
- Difficult to set up
- Costly to operate
International Retirement Plans
Governance
Concerns Only
Singaporean EEs
eligible
Complex to
understand
Retirement at age
55 is too early
Contribution
rates reduce
at older ages
Investments are
not transparent
Low investment
returns provide
little inflation-
protection
Multiple uses
of funds
erodes retirement
savings
Relatively low
contribution rates
Contribution
pay
ceiling
Observations:
Main aim of CPF is to encourage Wealth Accumulation but to provide only a basic income in
retirement
Governance
Concerns
Administration
Concerns
Over the years, the CPF retirement age has been raised from age 55 to age 62:
1955: The Central Provident Fund withdrawal age became the national retirement age
when it was set at age 55 by the British colonial authorities.
1993: Legislation passed to fix age 60 as the statutory retirement age.
1995: Tripartite Committee on the Extension of The Retirement Age set up to study how
the statutory retirement age could be raised progressively to age 67.
1999: Retirement age raised to 62.
2012: The Retirement and Re-employment Act came into effect, under which employers
must offer healthy workers who have performed satisfactorily:
(a) re-employment from ages 62 to 65, or
(b) a one-time payment.
Comment Opinion and Recommended Action
CPF Changes
In the 2015 budget the government announced
certain CPF changes effective from 2016:
Increase of the monthly earnings cap from
SG$ 5,000 (US$3.5K) to SG$ 6,000
(US$4.2K);
Increase in the ER contribution rate for EEs
aged 50+;
MNCs to ensure they comply with
changes and budget for additional costs;
The trend is to provide foreign EEs who
are not eligible to join the CPF with local
contracts.
MNCs to review the need to introduce
retirement support to maintain equity
between different groups of EEs and
enhance attraction and retention;
Retirement Age
The Retirement and Re-employment Act ca
me into effect in 2012, under which ERs mus
t offer healthy workers who have perfor
med satisfactorily re-employment from age
62 to 65, or give them a one-time payment.
MNCs to ensure they comply with
changes and plan ahead for EEs staying
longer;
Malaysia – Setting the Scene Country Socio-economic Dynamics Retirement Environment and Trends
Tax environment
Recent introduction
of 6% sales tax has
seen general rise in
prices, leading to
increased strain on
incomes.
Increasing
transport costs
Petrol subsidies
have been removed
and there have been
increases in highway
tolls and public
transport fares
leading to increases
in living costs.
Demographic
changes
In the future, the
dependency ratio is
expected to rise from
8% currently to 25%
in 2050
Political
Environment
Recent feelings of
distrust towards
Government
Demographic
changes
High % of working-
age population has
resulted in a
decreasing
dependency ratio,
projecting rapid
future growth
Pillar I
EPF is the main
Pillar 1 benefit
Pillar I
EPF top-up remains
the easiest and most
convenient way to
provide
supplementary
retirement benefits, as
there is no ceiling on
pay and companies
can contribute up to
7% of pay as a top-up
Pillar I
Eligibility to withdraw
funds fully from EPF
still remains low at
age 55. Government
under political
pressure not to
increase it to age 60
Pillar II/ III
Introduction in 2012 of
Private Retirement
Scheme provides
viable alternative to
ERs to provide
supplementary benefits
and also to individuals
Pillar I
Mandatory minimum
retirement age now
set at age 60 (typical
practice was to set it
at age 55)
Sudden surge in price increases combined
with stagnant income has resulted in a
general pessimistic outlook
Introduction of PRS to eventually replace EPF
as main vehicle for supplementary retirement
benefits
Pillar II
Adequacy concerns
due to low coverage
outside private sector,
multiple use of funds
for non-retirement
purposes and low age
to access benefit.
Pillar I
Employees Pension
Fund (EPF)
+
Means-tested Citizen
Assistance Plan
(BRIM)
Employees
Provident
Fund (EPF)
The Three Pillars of Malaysia’s Retirement System
Pillar II
Employer-sponsored
Supplementary
Retirement plans
Pillar III
Individual Private
Savings and
Investment
Traditionally high
savings from family
support
but has been in
decline
Introduction of
Private Retirement
Scheme (PRS) to
strengthen Pillar III
Mandatory for all local
private sector EEs
Statutory minimum ER
and EE contribution
levels (with no earnings
cap) Investment of
funds by EPF Board.
Company
Defined Be
nefit Arran
gement
Not common. Compani
es have been phasing-
out plans, switching to
EPF Top-Up
Only provides basic
support
Adequacy
concerns for
mandatory EPF as
less than 25% of
participants at age
54 fulfil the basic
savings target of
MYR173,000
Traditional family
support under
threat
Government
aims to
strengthen Pillar
III with PRS
Private
Retirement
Scheme
(PRS)
New retirement/ saving
s vehicle
introduced in 2012
Tax incentives
EPF
Top Up
Most popular vehicle to
provide supplementary
benefits by providing
ER top up contributions
– typically 3%-4% pay
Employer
contributions
Employee
contributions
Centrally pooled fund
Investment strategy set by EPF
panel
Account 1
(70% of
contributions)
Statutory
contributions of 12%-
13% (ER) and 11%
(EE). ERs can
contribute up to an
additional 7% of pay
contributions.
Guaranteed
minimum annual
return of 2.5%. EEs
are able to withdraw
up to 20% of excess
savings above the
“Basic Savings
Requirement” to
invest in products
offered by approved
Fund Management
Institutions.
Full withdrawal
from Accounts 1 & 2
Partial
withdrawal from
Account 2 only
(having met
certain
requirements)
Attain age 50
Account 2
(30% of
contributions)
Attainin
g age 55
Leaving
Malaysia
perma-
nently
Death Incapacity
Education
Medical
Housing
Hajj
Education
Total EPF
savings
greater than
MYR 1.05mn
Outgoing
Payments
Governance
Concerns
Administration
Concerns
EPF – Pillar I PRS – Pillar II
Contributions
Mandatory ER and EE levels for all local private sector EEs with flexibility for ER to provide voluntary top-up
Voluntary (can be set up by a Company or by individuals)
Governance
Under government supervision
Private sector regulated financial providers
Investment choice
Under EPF Investment Board (EEs can withdrawn certain amounts to invest in approved financial products)
Choice of provider and fund choices can be decided by ER (if ER-sponsored); There are age-based default core funds for EEs who do not make any choice;
Guaranteed returns
Guaranteed minimum 2.5% per year
N/A
Vesting Immediate vesting for ER/ EE contbns
ER can determine schedule for ER contbns
Tax – ER Contbns
Up to 19% of pay (inclusive of mandatory EPF contbns) are tax-deductible
Tax – EE Contbns
Up to MYR 6,000 annually tax-deductible
Up to MYR 3,000 annually tax-deductible
Withdrawal
Total funds at age 55, death or leaving country permanently; 30% of total can be withdrawn earlier (for various specific purposes);
Total funds at age 55, death or leaving country permanently with no tax penalty; 30% of total can be withdrawn earlier (for any purpose, subject to 8% tax penalty);
Comment Opinion and Recommended Action
Private
Retirement
Scheme (PRS)
Retirement Age
Introduction of Minimum Retirement Age of a
ge 60 for private
sector EEs, effective July 1, 2013.
Previously no minimum retirement age for pri
vate sector – typical normal retirement age
was 55 years.
Typically companies with DB plans still allow
EEs to voluntarily retire from age 55 and
receive a full retirement benefit.
Potential increase in cost for ERs (pay,
EPF contributions, etc)
Age for full withdrawal of funds from EP
F unchanged at age 55. Plans by go
vernment to increase to age 60 to align
with minimum retirement age. However,
political pressure to delay this (as EEs
have to wait additional 5 years to e
njoy benefits) and as yet no definite pla
n to change.
Effective year-end 2012
Voluntary long-term investment plan
ER selects provider (currently eight are
approved)
ER and EE can each make voluntary
contributions
EEs provided with investment choices
Tax Incentives
Tax deduction incentives on ER and
EE contbns (up to prescribed limits)
Full tax-free withdrawal of funds at
retirement age (currently 55), death
or departure from Malaysia.
MNCs should consider this vehicle
since (unlike EPF top-up
contributions), vesting conditions can
be imposed on ER contributions for
retention purposes;
Attractive to individuals as an
alternate investment vehicle for
retirement as studies indicate that
EPF benefits are not adequate and
majority use up their EPF savings
within 10 years;
Choice of funds makes PRS
attractive to individuals seeking higher
returns than EPF – but need to ensure
have adequate education;
Thailand
Thailand – Setting the Scene
Country Socio-economic Dynamics Retirement Environment and Trends
Political uncertainty
holds back the
economy
Economic growth is
being undermined
making the country
one of the worst
performing in the
region
Economic
environment
Since 2014, domestic
demand has picked
up, but exports
continue to remain
weak
Loss of
competitiveness
Policy uncertainty has
led to a drop in foreign
investment as MNCs
choose neighboring
countries with better
business
environments Demographic
changes
Growth in immigration
is minimal, while
emigration has
become more
prevalent in recent
years
Demographic
changes
Rapid aging
population from an old
age dependency ratio
of 14% in 2015 to 50%
in 2050
Pillar I
State pension and
social welfare benefits
provide a safety net to
cover basic needs
only
Pillar II
Adoption of employer-
sponsored plans have
increased over the
past years
Pillar II
Changes in regulation
allows for higher
voluntary EE
contributions
Pillar II
Plans to make
employer-sponsored
arrangements
mandatory postponed
indefinitely by military
Pillar II / Pillar III
Changes in regulation
allows for more
portability between
employer-sponsored
and individual funds
Pillar III
Take-up rates for
long-term funds have
increased due to tax
incentives
Pillar I
Introduction of
National Savings
Fund allows informal
sector EEs to save for
retirement
Continued political uncertainty creates
a barrier to economic recovery
State and ERs are taking action
Return to democracy
Democratically
elected government
removed by military
junta in 2014. With
the junta continuing to
consolidate power, the
current timeline to
return to democracy
in 2017 looks
increasingly unlikely
Pillar I
Government
Sponsored
PAYG
– Government Pension
Fund (civil servants)
– National Savings
Fund (informal sector
workers)
– Social Security
ERs and EEs pay 3%
of capped salary each
Means tested benefits
Severance
pay
DB plans
The Three Pillars of Thailand’s Retirement System
Pillar II
Mandatory
- Severance pay
plans
Voluntary
Employer-sponsored
Supplementary
Retirement plans
- Provident Fund
- Legacy DB Plans
Pillar III
Individual Private
Savings and
Investment
– Long-Term
Equity Fund (LTF)*
– Retirement
Mutual Fund
(RMF)*
* LTF& RMF
qualify for the tax
breaks, if held for
at least 5 years
and unit-holders
reach age 55
Mandatory
Unfunded book reserve
d Lump-sum benefit pa
yable on retirement or
termination
Legacy company-
sponsored DB plans
(unfunded book
reserve)
Mostly closed to new
entrants
Limited tax benefits on
payout
Only 12 such programs
in operation
Provident f
und
Funded DC plan
Full tax deductions on
contributions
Tax benefits on payout
Major source of
“old-age” revenue
under strain from
rapidly aging
population
Not mature to
cope with rapidly
aging population
and not widely
adopted
Tax incentives
introduced to
encourage
investment of
substantial cash
savings
Observation:
Plans to introduce the National Pension Fund,
an ER sponsored mandatory savings plan
have been deferred by the military regime
Old-age benefit
>15 years
contribution
(Annuity: 20%
average 5 years
salary)
Old-age benefit
<1 years
contribution
(Lump sum:
Accumulated EE
contributions)
Government
contributions
1% x pay
State-sponsored fund
Monthly contributions are
based on pay capped at
15,000 THB (US$420)
Type of payment
depends on number of
years of contributions.
Government will
subsidize the difference
Employer
contributions
3% x pay
Employer
contributions
3% x pay
Old-age benefit
>1 years
contribution
(Lump sum:
Accumulated ER
+ EE
contributions +
interest)
Employer payments Unfunded.
pay-as-you-go
program
Retirement and
termination as
mandated by law.
ER can choose to pay
upon EE leaving
service.
Termination
(Lump sum)
Retirement
(Lump sum)
Observation:
Thailand accounting standard requires all companies to perform actuarial valuations on
severance pay plans
Individual
retirement plan
Regulatory amendments in August 2015 allows for
transfers to individual retirement funds (such as
Retirement Mutual Fund) upon termination of
employment
DC investments
Comment Opinion and Recommended Action
DC plans
Review trust documents to allow for increasing
EE contributions.
Educate and encourage EEs to increase
contributions to enhance retirement savings
Look at implications of changes in regulations
and prepare as needed
Continue to monitor competitor and market trends
Regulatory amendments in August 2015 allow ERs to
set a default investment choice if EEs do not make
selections
For companies providing EE choice, review and
set default investment choices to ensure EE’s
financial wellbeing
Provide clear understandable investment
information and education, and empower EEs to
make investment choices
Look at implications of changes in regulations and
prepare as needed
DC Transition
MNCs are continuing to establish provident funds at a
healthy pace
MNCs should consider establishing a provident
fund
Continue to monitor competitor and market trends
Regulatory amendments in August 2015 introduce
flexibility in level of EE contributions
IAS19 / TAS19 Full adoption of IAS19 from 1 January 2015
DC plans Increasing awareness and adoption of provident funds
For companies with no provident fund, to
consider looking at introducing one as its
becoming market prevalent. It’s no more a
differentiator but a hygiene benefit
All companies are now required to perform
actuarial valuation on severance pay plans, as
well as other DB / long-term EE benefit plans
Sources: IMF E&Y India 2015 Survey
India’s GDP grew almost 6-fold
in the last 20 years at an average
annual compound growth rate of
9.5%
India is generally an
attractive
market for
investment
India has a
promising
outlook
India
historic GDP
in USD
1995 to 2015
India represents 2.7% of global
GDP and 17.5% of global
population
(India GDP per capita was
USD$1,600 in 2014)
Source: IMF
270mn out of 1.23bn Indians
(22%) lived below the poverty
line in 2012
(US$37.50 income monthly)
World and India
historic GDP
in USD
1995 to 2015
India
historic GDP
per capita in US$
1995 to 2015
India – Setting the Scene
Country Socio-economic Dynamics Retirement Environment and Trends
MNC Presence
Ostensibly, highly
attractive MNC
environment, due to low
labour costs, lucrative
domestic market and
highly educated/skilled
workforce Low Pension Assets
in India comprise of only
around 6% of the GDP
compared to a global
average of 58% of GDP
Demographic dividend
soon to become a
burden
Demographic issues not
as acute as other Asian
countries. While 65% of
the population is below
age 35, the share of
retiree population (age 60
and above) is expected to
climb from 8% in 2010 to
19% (323 million) in 2050
Weak public finances
Public debt at 65% of
GDP highest in emerging
markets severely limiting
government stimulus
Pillars I & II
Complex and
fragmented pension
system plagued by
low benefit levels/
coverage
Pillar II
Options to withdraw
accumulated funds
before retirement, low
retirement age and
benefits paid in lump
sum rather than
annuity form
discourage saving for
retirement
Pillar II
Several reforms in the
last 10 years aimed to
introduce a modern
pension system via the
National Pension
System Framework
Pillar II & III
Plans like Public
Provident Fund, NPS
(for individuals) and
individual insured
Pension Plans are
being promoted by
the government to
increase retirement
savings.
Pillar III
High savings culture
under threat by shrinking
family units.
Priority to modernise and simplify tax
and regulatory framework State is taking measures to broaden and deepen
retirement provision
Pillar II & III
Very low real investment
returns distort household
behaviour to favour gold
and real estate with only
35% of adults having a
bank account
Challenging business
environment
Complex tax and
regulatory environment
and high administrative
burdens leads to a
challenging business
environment impeding
growth and job creation
Economic Reforms
The improvement in
India’s economic
fundamentals has
accelerated in the year
2015 with the combined
impact of strong
government reforms
Pillar I
The statutory programs
fall short of providing
adequate retirement
income
National Pension
System (DC)
Gratuity (mandatory
)
(DB)
DC Superannuation
The Three Pillars of India’s Retirement System
- Unfunded or funded
- May be insured (or trust)
- Individual EE accounts
- Benefit in lump sum and a
nnuity
Employee Provident
Fund Organization (
EPFO) Statutory
Employee Provident
Fund (EPF) + Emplo
yee Pension Schem
e (EPS)
- ER and EEs pay 12% of
basic salary each
- Centrally managed by
government (with option to
set out own trust)
- EPF pays lump sum
- EPS pays a pension
DB Superannuation
& Post Retirement
Medical (RMBS)
- Product with modern char
acteristics for both corporat
es and individuals
- Legacy plans closed to ne
w entrants
Pillar I
Statutory
benefits for
EEs
National Old
Age Pension
Plan
provides a
safety net for
seniors (age
65+) below the
poverty line
(covers only
16mn people)
Pillar II
Employer
Sponsored
Benefits
Pillar III
Voluntary
Individual
Private
Savings and
Investment
High inflation
erodes
substantial
cash savings
Very limited
support with low
coverage
Inadequate
retirement
benefits with low
coverage
Government
incentives to
encourage
investment
Statutory/ Mandatory
Programs
Employees Provident
Fund Organization (EPFO)
Voluntary
Programs
Superannuation
Insurance
Company
provides
Fund
Management
Privately
Managed
Trust
Traditional ULIPs
Governed
by Regional
Provident
Fund
Commissioner
Observations:
Current trend is for MNCs to replace Superannuation
plans with Corporate NPS vehicles which are more
cost effective and provide greater investment flexibility
and portability.
Nominated
Fund
Managers
NPS for Corporate
Observations:
Larger ERs can contract-out of PF (currently around
2,000) and setup privately managed trusts. Companies
do not engage a professional fund manager. This
option can assist EEs access their funds more easily
as dealing with a government body tends to create
complexities.
Option to
outsource
administration
Exempt
Privately
Managed
Trust
Gratuity
Insurance
Company
provides
Fund
Management
Traditional ULIPs
Privately
Managed
Trust
EPFO
Private Pension
Life Insurance Annuity
Public Provident Fund
National Pension System
Observations:
Retirement funds expected to increase 7-fold from 2012 to 2025 at an annual
growth rate of 16%
EPFO is, and will continue to be, the principle source of retirement for the
organised sector
NPS expected to have the fastest growth starting from a small base
46%
30%
20%
3% 1%
46%
15%
34%
3% 2% In 2012, the total value of retirement
funds is INR 12tn (US$ 181bn)
By 2025, total value of retirement funds is
expected to reach INR83tn (US$ 1.3tn)
Source: E&Y
Note: Gratuity benefits not included
EPS Revision
New investment
guidelines
New governance
guidelines
Trustees that discharge their fiduciary duty should do
so in a more systematic and transparent way to reduc
e costs and manage risks;
Trustees should seek external advice to support
them to review their processes and strategy;
From April 2015, changes impact self-managed non-
EPFO regulated PFs, self-managed Gratuity Funds
and Superannuation funds regarding revised minimum
and maximum limits for different asset classes;
Trustees should seek external investment advice
to support them to review the investment strategy,
ensure compliance, update the statement of
investment principles (or create one if none
exists);
Increase in monthly threshold form INR6.5K (USD$10
0) to INR15K (USD$225);
Review and amend the basic component
structure accordingly;
Comment Opinion and Recommended Action
Trustee Roles &
Responsibilities
clarified
Trustees roles and responsibilities may not be well do
cumented, there is limited awareness and/or confus
ion if it is an HR or Finance responsibility;
It is challenging to keep updated of regulatory change
s or fully understand regulatory complexities;
Trustee bodies do not always meet regularly;
Trustees should seek external advice to review
and update documentation to reduce risk of non-
compliance;
Introduce regular training to ensure roles and
responsibilities are clear and also remain updated
with changes and understand cost and
compliance implications;
Introduce a framework with regular meeting
where decisions are recorded (if not already in
place);
Investment Review
and monitoring Review of investment strategy and monitor investment
performance neglected;
Trustees should seek external investment advice
to support them to review the investment strategy,
ensure compliance, update the statement of
investment principles (or create one if none
exists);
Compliance Risk Ensure benefits are paid in line with law and company
policy;
Trustees should seek external advice to review
and update documentation to reduce risk of non-
compliance;
New Local
Accounting Standard
Since early 2015, the government has introduced a ne
w local accounting standard to converge with inte
rnational requirements;
Implementation of the new standard will help com
panies to improve corporate governance and tr
ansparency in financial reporting;
Review
supplementary
retirement
provision
Popularity of Corporate NPS is currently 33%
and rising;
Increase in awareness and acceptability of N
PS;
Majority of the companies (about 72%) that h
ave implemented NPS feel that NPS is a fav
orable plan;
Corporate NPS offers advantages such as lo
w administration costs, low investment fees,
portability, investment flexibility
MNCs should ensure that they review
their existing supplementary retirement
provision vehicles, contribution levels,
investment choices to ensure they
remain competitive to be able to attract
and retain the right staff;
MNCs to consider introducing/ expanding
DC plans and eliminating
Superannuation plans;
Enhance EE
education and
awareness
EE education is not always a priority leading
to low EE awareness of the benefits they re
ceive and also regulatory changes relating to
retirement saving
ERs should consider reviewing and
enhancing education, training and
communication around the need to save
for retirement, and need to invest long
term in inflation-adjusted savings;
Regular EE surveys and initiatives like
total rewards statements can help to
increase awareness about the retirement
benefits and increase the perceived
value of benefits.
Opinion and Recommended Action
Comment
