There are lessons for Hong Kong in China's approach to reforming its retirement benefits system, according to Stuart Leckie, senior adviser, Greater China, for Hewitt Associates and chairman of the Hong Kong Retirement Schemes Association. Mr Leckie's company has just completed a major consulting project for the Asian Development Bank and the Chinese government on the social security reform pilot programme for Liaoning province, in China's northeast. Under China's three-pillar approach to its retirees, the Liaoning system offers an employer-funded basic pension of up to 30 per cent of average local earnings, an individual account pension based on members' contributions and investment return, and the opportunity for supplementary plans known as enterprise annuity plans. 'The individual account is like Hong Kong's MPF to the extent that the payout will depend on one's own salary, but it is also unlike MPF. Firstly, because you have to take the benefit as a pension and, secondly, there is no choice of investment.' Mr Leckie believes the lump sum nature of the MPF is a serious weakness. Regular pension payouts are preferable because retirees are unable to spend all their benefits rapidly, as they can with lump sums. He says Hong Kong has never held a wide debate on the proper shape of its retirement safety net, but rather seized on the MPF as a way of taking responsibility from the government and putting it in the private sector. The mainland spelled out its three-pillar approach to retirement in State Council Document 26, and prepared for the Liaoning pilot programme in document 42. The target total benefit for mainland retirees is 58 per cent of final salary. There is the basic old-age pension which will deliver 30 per cent, then an additional 28 per cent from an individual account built up by 8 per cent of salary contributions by the member plus investment returns. 'A 58 per cent pension of final pay should be fine for most people in most circumstances,' Mr Leckie says. The Liaoning project involves only city dwellers in the province, who make up about 53 per cent of the 42 million population. Average salary levels differ widely, from 400 yuan (about HK$374) a month in the poorest city to almost 1,100 yuan a month in the richest city, Dalian. Mr Leckie says it is vital to reflect local salary differences in designing and providing retirement benefits for each local workforce. The 30 per cent salary level payout achieves this goal. 'There is no alternative because you have to take account of local earnings and the local cost of living. There is a big gap between salaries in the poorest and richest cities in Liaoning, but if you go to Shanghai or Beijing, salaries are more than 1,500 yuan or 1,600 yuan a month compared with 400 yuan in parts of Liaoning. Compare these differences with salaries in Britain. Wages are higher in London than in the North of England by, say 20 per cent to 30 per cent, but not by a multiple of four times as they are in China.' Liaoning employers are funding the 30 per cent retirement plans but they contribute at different rates depending on the local conditions, including demographics and financial position. Contribution rates vary from city to city between 19 and 26 per cent of salary. All employers are expected to contribute, whether they are state-owned enterprises (SOEs), collectively owned enterprises, private companies, foreign firms or self-employed entities. The employer contributions must cover both the 30 per cent basic pension and obligations under previous pension schemes. Hewitt worked on four main issues for its Liaoning project, Mr Leckie says. 'We did actuarial calculations on the system's long-term liabilities. Secondly, we commented on the administration - collection of money, payment of benefits, and so on. The third area was to look at the investment of individual account funds. Lastly, we helped with the system's management information system. They need an efficient system of reporting between the SOEs, the municipalities, the cities and the province.' Unlike Hong Kong, where it took many years to launch the relatively simple MPF, China has moved fast in overhauling its pension system. Document 26 was issued in 1997 with a target implementation date of January 1999. Liaoning, as a major industrial centre until the 1980s, had been affected by the industrial reform process, and the government believed it needed special treatment, partly because of a higher than average dependency on the social security system. 'At some point, if China regards the Liaoning experiment as successful, this will become the model to be rolled out to the other provinces,' Mr Leckie says. 'If this system works properly in Liaoning, it should be easier in other provinces.'
