2014 China Retirement Investment Whitepaper Summary · Aon Hewitt | Benefits & investment . 6 ....

Prepared by Benefits & Investment

2014 China Retirement Investment Whitepaper Summary May 2015

Agenda

Section 1 – Overview of China’s Retirement Landscape

Section 2 – Historical Investment Performance Review – Enterprise Annuity

Section 3 – Historical Investment Performance Review – Other Retirement Vehicles

Section 4 – Selecting the Right Investment Manager

Appendix – About Aon Hewitt Retirement and Investment Consulting

Overview of China’s Retirement Landscape

Aon Hewitt | Benefits & investment 4

China’s 3-pillar Retirement Framework

3-Pillars of China Retirement System

Pillar 1 Pillar 2 Pillar 3 Government

Mandated

Basic

Pension

Insurance

Employer

Sponsored

Supplemental

Retirement

Plans

Individual

Savings &

Investment

Government Incentives

Pension Insurance

Enterprise Annuity （EA）

Book Reserve

Special Bank Account

EA-like Trust


Supplemental Retirement Vehicles

Pension Insurance

Enterprise Annuity

Book Reserve Special Bank Account

EA-like Trust

More than 80% of

plans set up in the

last 3 years have

adopted Enterprise

Annuity or EA-like

trust models

80%


Legislative Updates

In 2014, the China Insurance Regulatory loosened curbs on insurers’ investment by allowing them to invest in venture capital

funds, preferred shares, collective trusts and overseas assets. Around the same time, the MOHRSS (Ministry of Human

Resources and Social Security) released circular 23 titled “Expanding the Investment Scope of Enterprise Annuity Funds” and

circular 24 titled “Relevant issues concerning the pension products of Enterprise annuities.” These measures expanded the

scope of investment of the Enterprise Annuity plans.

Retirement Investments

Trusts

Infra-structure

Debt

Bank Wealth

Products

……

PPN


China Capital Markets 2014 Review

In 2014, both the equities and bonds market in China posted significant gains. The Shanghai Composite Index rose by 52.87% and

the CSI Aggregate Bond Index rose by10.82%. Policy reforms such as the launch of the preferred shares pilot scheme, the launch

of the Shanghai Hong Kong Stock Connect and the approval for Enterprise Annuity to invest in stock index futures will provide

retirement funds with more investment channels.

142

144

146

148

150

152

154

156

158

160

1800

2000

2200

2400

2600

2800

3000

3200

3400

2013-12-31 2014-03-31 2014-06-30 2014-09-30 2014-12-31

上证指数中正全债指数 Shanghai Composite Index

CSI Aggregate Bond Index

November 30 – Proposal for deposit insurance scheme released

January 17 - Resumption of IPO listings after 1.5 year suspension

March 21 -Preferred shares pilot scheme launched

May 9 - State Council released statement of policy principles focused on promoting reform of capital markets

November 10 - SH HK Stock Connect Debut

November 22 – PBOC cut benchmark interest rates


Performance of Retirement Funds vs. Other Investment Vehicles

Fund mangers of retirement funds tend to err on the conservative side:

• Social security fund outperformed privately managed retirement funds in the past 5 years

• Despite market setbacks between 2010-2013, Enterprise Annuity and EA-like trusts produced respectable (positive) returns. When

markets picked up in 2014, their relative performance worsened.

• There is a clear divide between investment performance of universal insurance (conservative) and unit-linked insurance funds

(aggressive). 2010 2011 2012 2013 2014 5 year annualized

Trust Products 7.7%

Trust Products 8.62%


Trust Products 8.4%

Shanghai Composite Index 53.34%


Bond Funds 6.9%

CSI Aggregate Bond Index 5.88%

Social Security Fund 7.01%


Bond-oriented Funds 18.83%

Bond Funds 6.10%


3-Yr Term Deposit 5%

Bond Funds 6.22%

Unit-linked Insurance 4.33%

Bond Funds 18.78%



Universal Insurance 3.81%

Enterprise Annuity 5.7%

3-Yr Term Deposit 4.25%


EA-like Trusts 5.19%






3-yr Term Deposit 4.38%


Enterprise Annuity -0.8%

Shanghai Composite Index 4.60%




Enterprise Annuity3.4% Bond Funds -2.89%






Bond-oriented Funds -7.06%





Unit-linked Insurance -0.43%

Unit-linked Insurance -8.25%


Bond Funds 0.61% Trust Products

8.51% Bond-oriented Funds

3.46%

Shanghai Composite Index -13.41%



CSI Aggregate Bond Index -1.28%



- - Bond-oriented Funds -0.06%




Historical Investment Performance Review – Enterprise Annuity


Enterprise Annuity Investment Market

• In the past 6 years, the number of EA portfolios has risen by 162% while AUM has increased by 365%.

• In the past 3 years, the number of equities portfolios (investment scope including Max 30% investment in

equities) has risen by 18% ; the number of fixed-income portfolios (investment scope does not allow any

investment in equities) has risen by 105%.

Number of All Portfolios

1,049 2,740

2009 2014

Assets Under Management（100 mln, CNY）of All Portfolios

1,591 7,403

2009 2014

CAGR 21%

CAGR 36%


Enterprise Annuity Investment Managers

There are 20 qualified Enterprise Annuity investment managers in China. They can be classified into

three groups as follows:

Insurers and Asset Management Firms

Fund Management Firms

Securities Brokerage Firms

7 licensees (35% of total)

AUM: 375 billion (61% of total)

Average AUM: 54 billion








Enterprise Annuity Investment Strategy and Performance

• After the bear market in 2011, investment managers focused on ensuring positive absolute returns even

when overall market conditions are bad.

• As a result, Enterprise Annuity outperformed the stock and bond market in a bearish 2013.

2014 2013 2012

9.88%

6.94%

2.00%

3.62%

3.92%

2.60%

5.77%

5.17%

2.60%

Equity Portfolios

Fixed Income Portfolios

CPI

In the same year, the Shanghai Composite Index and the CSI Aggregate Bond Index dropped by 7.07% and 1.28% respectively.


Enterprise Annuity Investment Strategy and Performance

• In the past 3 years, all managers succeeded in producing positive returns on their Enterprise Annuity

portfolios. 2014 was a particularly good year.

• Returns congregated around the median. There is a 5% gap between the best and worst performer, and a

1.5%-2% gap between the 25%tile and 75%tile performer.

8.43%

3.19%

6.08%

5.54%

4.74%

6.47%

1.01%

4.08%

3.28%

2.68%

9.77%

4.98%

7.93%

7.62%

6.62%

2012 2013 2014

9.40%

3.91%

6.60% 6.05% 5.71%

7.19%

1.25%

4.20% 3.92% 3.05%

13.31%

8.11%

11.65%

10.30%

8.85%

2012 2013 2014

Returns on Fixed Income Portfolios

Returns on Equity Portfolios


Enterprise Annuity - Scatter Plot of Investment Returns

Fixed Income Portfolios Equity Portfolios

In past 3 years, most managers achieved 5%-6% annualized return on their fixed income portfolios and 6%-8%

annualized return on their equity portfolios. However, volatility of equity portfolios (2%-5%) is noticeably higher

than that of fixed-income portfolios (1%-3%).

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

0% 1% 2% 3% 4% 5% 6%

3-year Annualized

Return

Volatility 4%

5%

6%

7%

8%

9%

10%

11%

0% 1% 2% 3% 4% 5% 6%

3-year Annualized

Return

Volatility


Enterprise Annuity Collective Trusts

Collective trusts are standardized Enterprise Annuity plans created and managed by Trustees. These plans cater to small and

medium size employers without the scale to operate a standalone Enterprise Annuity plan. As at the end of 2014, there were 54

Enterprise Annuity collective trusts in the market. Over the past 3 years, the number of investment portfolios has risen by 29% to

143 and the size of assets under management has risen by 46% to 60.92 billion.

Fixed Income Portfolios（single）

2009 2014

46 57

2009 2014

72 87

Equity Portfolios（single）

Fixed Income Assets Under Management（100 mln, CNY）

2009 2014

227.38 346.35

2009 2014

190.7 296.97

Equity Assets Under Management（100 mln, CNY）


Enterprise Annuity Collective Trusts Investment Strategy and Performance

With a few exceptions, the majority of collective trusts achieved positive returns over the past 3 years. The gap

between the best and the worst manager is noticeable, though the gap between the 25%ile and 75%tile

performer is usually small and less than 1.5%.

2012 2013 2014 2012 2013 2014

Return on Fixed Income Portfolios

Return on Equity Portfolios

8.46%

0.78%

6.10% 5.39% 4.55% 4.32%

-0.79%

3.62% 2.96% 2.51%

11.06%

4.27%

9.04% 8.26% 7.62%

6.63%

1.95%

6.46%

5.44%

3.62%

6.12%

1.09%

3.70% 3.39%

1.88%

13.56%

5.40%

10.79%

9.37%

8.44%


Enterprise Annuity Collective Trusts – Scatterplot of Investment Returns

Fixed Income Portfolios Equity Portfolios

Most collective trusts achieved annualized return between 5%-7.5% over the past 3 years, though volatility of

fixed income portfolios (2%-4%) is noticeably less than that of equity portfolios (2%-5%).

2%

3%

4%

5%

6%

7%

8%

0% 1% 2% 3% 4% 5% 6%

3-Year Annualized

Return

Volatility 4%

5%

5%

6%

6%

7%

7%

8%

8%

0% 1% 2% 3% 4% 5% 6% 7%

3-Year Annualized

Return

Volatility


Enterprise Annuity – Pension Products

• Pension products are investment portfolios issued and managed by investment managers to facilitate the

pooling of assets in small to medium sized Enterprise Annuity plans, thereby raising economies of scale and

increasing investment efficiency.

• Pension products speed up the process of building investment portfolios of new Enterprise Annuity plans and

reduce opportunity cost associated with time lost.

Equities

Fixed Income

Others Money Market

Hybrid Funds

Pension Products


Enterprise Annuity – Development of Pension Products Market

• Majority of pension products on the market today are fixed-income funds.

• Enterprise Annuity portfolios typically employ trusts and infrastructure debt as underlying assets .

• Pension products provide respectable returns, and development of this market is currently limited by the

variety of investment products available.

22.58%

70.97%

6.45%

Asset Allocation - By Number of Products

权益类

固定收益类

流动性资产

8.17%

79.87%

11.95%

Asset Allocation - By Assets Under Management

权益类

固定收益类

流动性资产

Products and assets are concentrated in fixed

income

Equities

Fixed Income Liquid Assets

Equities

Fixed Income

Liquid Assets


0%

20%

40%

60%

80%

100%

120%

Enterprise Annuity – Pension Products Investment Performance

Pension products are a new phenomenon; there are 17 pension products that have been on the market for more than 1 year. Most produced respectable returns in 2014.

2014 Returns on Pension Products (includes only funds that have been on the market for more than 1 year)

Equity Fixed Income Money Market


Summary

1. Of the 20 qualified Enterprise Annuity investment managers, the bigger players consist mainly of insurers,

followed by fund management firms;

2. There has been a shift in investment strategy for Enterprise Annuity plans in recent years. Less emphasis

is placed on maximizing short-term returns and more emphasis is placed on achieving a balance between

absolute returns and relative returns over a longer-term horizon;

3. The market for pension products has developed rapidly. Although the existing pension products generated

respectable returns in 2014, investment options remain limited and assets are concentrated in fixed

income. Potential for growth in this space is huge.

4. The development of pension products allows employees to have more options for their Enterprise Annuity,

which will make the operation model of Enterprise Annuity in China more like those of the 401(k) plan in

the US.

Historical Investment Performance Review – Other Retirement Vehicles


Overview of EA-like Trust and Pension Insurance

Of the 3 mainstream pension insurance options currently available on the market, universal insurance has

been around the longest but has been losing market share consistently over the past 10 years. EA-like trusts

differ from insurance in many respects and as such is classified as a separate class of retirement vehicles.

Universal Insurance

Participating Insurance

Unit-linked Insurance

Defend contribution

Flexible plan design and streamlined operation model

Guaranteed return + investment returns

Defined contribution

Flexible plan design and streamline operation model

Guaranteed return + dividend



Variable Investment returns

EA Like Trust



Variable Investment Returns

Retirement, death Retirement, death, total permanent disability

Retirement, death, total permanent disability, termination

Retirement, death, total permanent disability, termination, emigration, in-service withdrawal

Note: Terms and conditions of insurance policies will vary slightly among insurers.

Plan

Design

Return

Withdraw


EA-like Trust

With a few exceptions, investment performance of EA-like trusts mirrors that of enterprise annuity plans. This

could be due to the fact that the same team that handles Enterprise Annuity at most providers are also

responsible for managing EA-like trusts as well.

6.78%

-11.74%

5.88% 4.99% 4.18%

8.79%

-3.36%

5.60% 3.14% 2.87%

28.95%

5.41%

9.89% 7.09% 5.50%

2012 2013 2014


Insurance – Universal Policies

Universal policies provide guaranteed returns (currently capped at 2.5% by the CIRC). On top of that, insurers

will usually provide a top-up return, the amount of which varies from one provider to another. Nevertheless, the

gap between the highest and lowest annual returns has been less than 1% over the past 5 years.

Annual return on universal pension insurance policies

3.00%

3.20%

3.40%

3.60%

3.80%

4.00%

4.20%

4.40%

2010 2011 2012 2013 2014

中国人寿

平安养老

中意

友邦

泰康

China Life Ping An Annuity Generali AIA Tai Kang


-5%

0%

5%

10%

15%

20%

25%

30%

Product 1 Product 2 Product 3 Product 4 Product 5 Product 6 Product 7 Product 8 Product 9

2012 2013 2014

Insurance – Unit-linked policies

Returns on unit-linked insurance policies are subject to short-term swings in the market and comparatively few

insurers provide such policies. These policies are more suited for long-term investment and employers with a

higher tolerance for risk.

Conservative Portfolios

Moderate Risk Portfolios

Aggressive Portfolios


Conclusion

1. Compared with the market for Enterprise Annuity, the market for traditional pension insurance is relatively

small. However, since both pension insurance and EA-like trust offer something that Enterprise Annuity does

not, they have maintained a steady share of the market;

2. There is a wide range of pension insurance products on the market that can effectively cover the risk appetites

of different employers and employees;

3. EA-like trusts offer employers the flexibility to provide in-service withdrawal, and is also the vehicle of choice

for employers looking to establish savings or staff retention plans;

4. EA-like trusts exhibit similar investment performance to enterprise annuity; universal pension insurance

provide guaranteed returns but overall performance has been mediocre; unit-linked insurance provides

opportunities to capture market gains at the risk of higher volatility from year to year.

Selecting the Right Investment Manager


Comparing Investment Management Models

There are three ways to manage retirement investments at the moment: standalone, collective and direct.

Depending on the chosen retirement vehicle, employers will have a choice between one or two or all three of

these options.

For companies with annual plan contributions exceeding 50 million; suitable for employers with specific requirements for investment strategy and risk tolerance; applicable to Enterprise Annuity and EA-like trusts.

No specific requirement for annual plan contributions; suitable for employers that do not have specific requirements for investment strategy and risk tolerance; ability to offer multiple investment options to employees; applicable to Enterprise Annuity, pension insurance and EA-like trusts.

No specific requirement for annual plan contributions; suitable for employers that do not have specific requirements for investment strategy and risk tolerance. Applicable to Enterprise Annuity only.

Stand-alone

Collective

Pension Products


Evaluating Investment Managers

• Employers should choose and weigh selection criteria to match its own requirements

• Past investment performance is a culmination of many factors at play and should not be the only criterion for

evaluating an investment manager. More focus should be placed on future investment capabilities and

strategy.

Company Strength

Services & Quotation

Communication

Investment Capabilities

About Aon Hewitt Retirement and Investment

Consulting (AHIC)


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Sources: November 2013 issue of Pensions & Investments and Plan Sponsor 2013 survey

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as of 6/30/2014

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$1.7 trillion in U.S. assets $ 4.5 trillion in Global assets

Over 480 investment consulting clients: Corporate & Public Pension Plans Defined Contribution Retirement Plans Endowments and Foundations Taft-Hartley Plans

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Full-version Report Purchase

The full report is in WORD format with detailed fund

manager performance data, If you are interested in the

full version of whitepaper, please contact us:

Shanghai：Kenneth Cai 021-23066410，

18602107805 , [email protected]

Beijing ：Martin Shen 010-85279767，

13401001978, [email protected]

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13822230010, [email protected]

mailto:[email protected]



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2014 China Retirement Investment Whitepaper Summary · Aon Hewitt | Benefits & investment . 6 ....

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