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More Reform Still Required in Pension System

The government issued 37 licences to 29 companies to take care of the country's voluntary corporate pensions on Tuesday in order to straighten out the pension management market.

The Ministry of Labour & Social Security offered licences to fifteen companies, including four joint ventures, to manage voluntary corporate pensions.

The ministry also gave custodian licenses to six banks, trustee licenses to five companies and administrator licenses to 11 companies.

Eight companies got two licences.

Fortis Haitong Investment Management Co, 33 per cent owned by Fortis, the biggest Belgian financial-services company, and China Merchants Fund Management Co, 30 per cent held by ING, received management licences. Bank of Montreal's Fullgoal Fund Management Co venture and Harvest Fund Management Co, part-owned by Deutsche Bank AG, also got approval.

There are two types of corporate pensions in China "basic corporate pension", which companies are required to turn into the government for distribution to retired corporate staff; and a "voluntary corporate pension," which works as a supplement to the basic pension and commercial retirement insurance and is voluntarily provided by enterprises for their staff as a retirement benefit.

When the licences were offered, there were no qualifications for fund managers looking to manage the country's voluntary corporate pensions. And the companies could either choose fund managers or manage the pension themselves.

Experts say this makes the pension management market a mess and is not good for maintaining the security of these pensions.

The government originally planned to issue 40 licences but eventually only offered 37 due to the insufficient number of suitable fund managers, said Chen Liang, an official for the ministry.

Labour ministry statistics show the scale of voluntary pensions reached 50 billion yuan (US$6.2 billion) by the end of last June. Around 7 million people in China were covered by this type of pension plan by the end of 2003.

According to the government's rules, a maximum of 20 per cent of the voluntary corporate pension can be invested in the stock market.

Moreover, these pensions should be invested in some less risky securities such as bonds to secure a stable profit, because a pension is the guarantee of a solid livelihood for retired staff, said Zhang Xuedong, a fund manager at China Asset Management Co.

Although the consistent flow of pensions into the securities market is good news for the market, the quota and the small pension base means it is not a strong enough force to really boost the market, the manager said.

In China only about 5 per cent of companies, mostly big companies with sound finances, establish voluntary pension plans. In developed economies, the number can be as high as 80 to 90 per cent.

The reason for this is that in China pensions are not obligatory, and there is a tax levied on the investment and gains.

To adjust the tax system and issue some favourable policies for pension investment is an essential step in encouraging companies to establish a voluntary pension system and use it for investment, said Zhang.

When more and more pensions enter the stock market, the fresh blood would help boost the sluggish market, he said.

Yesterday, China's shares opened 2.3 points higher after breaking through the 1,100 points on Tuesday.

The Shanghai Composite Index closed at 1107.70, with a small increase of 0.33 per cent.

Turnover in Shanghai and Shenzhen amounted to about 23.3 billion yuan (US$ 2.88 billion).

(China Daily August 4, 2005)

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