Race in annuity market begins
By Mo Fan and Xu Jing (China Business Weekly)
Updated: 2004-06-28 10:57

China's annuity market is taking off.

Both domestic and overseas financial institutions are standing at the same starting line.

In the middle of this month, Taiping Life Insurance Co Ltd announced it will establish a professional pension management company to explore China's potentially huge corporate pension market, approved by China Insurance Regulatory Commission (CIRC ), the industry's regulator.

A logo of the China Insurance Regulatory Commission is shown in the picture. Insurance companies in China are eyeing huge opportunities in the annuity market. [photocome]

Sun Jianyong, director at the Ministry of Labour and Social Security, said Chinese enterprises annuity add up 30-40 billion yuan (US$3.6-4.8 billion).

And the market will hit 500 billion yuan (US$60.24 billion) by 2010.

He also pointed out that, unlike other social security funds, a corporate annuity is a self-established and self-managed fund. But playing a role of a system builder, the government should guarantee its operation.

Sun said corporate annuities can bring opportunities to the whole insurance industry, including property insurance, life insurance and insurance capital management.

Since the second half of 2000, market-operated annuities have emerged. Major insurers including China Life, Ping An Life, Pacific Life, Taiping Life and New China Life have put forth several corporate annuity products.

Take China Life and Pacific Life for examples. Both made profits of around 1 billion yuan (US$120 million) per year in the Guangzhou annuity market.

Taiping Life, the pioneer in the pension realm, set up an annuity division last April, ready to work with the reform of the government and research institutions on China's corporate annuity.

Last September, the company invited Raymond Tam, former chief actuary in Mandatory Provident Fund Schemes Authority (MPFA), as the chief insurance actuary for Taiping Life.

While domestic insurance companies stepped into the annuity market, some foreign and joint-venture companies have shown great interest.

One of them is Pacific Antai Life Insurance Co (PALIC) whose parent company is ING. The international giant maintains a good relationship with the Guangdong Bureau of Labour and Social Security, whose reform scheme of the Guangdong Social Security System was completed through the partnership.

Philippe Collas, chairman of French Societe Generale Asset Management Co Ltd (SGAM) announced the company hopes to enter China's social security market indirectly through its joint venture in China, Fortune SGAM Fund Management Co Ltd with China's largest steel maker Baosteel.

Currently, Fortune SGAM has made the product designation, and will bid for the social security fund scheme..

Collas said SGAM would further intensify support to Fortune SGAM which will be able to shoulder the management of the social security funds and corporate annuities.

In terms of products design, SGAM will assist Fortune SGAM develop more products to satisfy different types of investors both at home and abroad, including a guarantee fund and monetary market fund, to form a complete product chain.

Domestic pension companies will surely face the challenge from foreign titanic players.

Alongside SGAM, US-based AIA and French-based AXA have advanced management skills in operating emerging pension markets.

In addition, the pension companies have to compete with other domestic financial institutions such as fund companies, commercial banks and trust companies, which are also seeking a presences in the pension market to share a slice of the lucrative pie.

The annuity business, which costs these companies a great deal, is divided into three sectors, namely, account management, custodian management and investment management.

A high-ranking official of South Fund Management Co Ltd said: "Commercial banks will enhance business innovation in fund companies."

While only banks and insurance companies are capable of sitting on the chair of account manager, fund companies who are eager to be investment managers have to wait until they are recommended by account managers to clients, some experts said.

But if commercial banks team up with fund companies, an integrated account management services, both sides of the business, the custodian and investment management, are realized.

"From the beginning, some financial institutions seldom go it alone," Wu Jiqing, a manager at Taiping Pension Co, told China Business Weekly. "They will operate through strategic alliances."

For example, AIG and China Merchant Bank, China Asset Management Co Ltd and Bank of China have signed the annuity strategic co-operation agreement separately. Bank of China's Shanghai branch and Shenyin & Wanguo Securities Co Ltd have jointly launched a string of annuity products recently.

"Corporate annuity management is an attractive market, but many trust companies are looking on, including some that may be qualified for annuity and fund management companies," said an annuity sector official with a trust company.

At present, China's insurance regulator has approved eight commercial banks as corporate annuity custodians and account managers.

They are the Industrial and Commercial Bank of China, the Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, Shanghai Pudong Development Bank, Guangdong Development Bank, and China Merchants Bank, who all energetically promote their account management systems in order to occupy land in the vast field of annuity custody and account management.

While the annuity market has opened up, some obstacles still remain, some expert noted.

China still lacks basic tax incentive to urge domestic companies to set up an annuity system, which is critical to develop a comprehensive pension market, Wu said.

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