China set a "one child per family" policy. Today, modern societies in Japan, China, Hong Kong and Korea, have birth rates less than 1%. This means that there are fewer people entering the workforce to pay for more and more retirees emerging from the workforce.

Reformers in the Asia-Pacific

Now these reforms are hitting the Asia-Pacific Region. A brief summary of what is happening in the larger, more organised countries:

Japan

The Basic Pension system is government-managed. There are concerns about the viability of this system as there are instances where members are not making mandatory contributions (the leader of the opposition and the Prime Minister).

In addition to the state plans, there are many private sector pension plans on a defined benefit basis. As you can imagine, many of those plans are under-funded as a result of the tough economic conditions over the past ten years (much improvement recently). The reforms allowed defined contribution plans for the first time starting in January 2002 and migration from the defined benefits plans for small and medium employers will take place by 2012. However, to date there has not been significant migration - less than two million employees are covered under these new plans.

Korea

There is a government-defined benefit pension plan funded by both employers and employees and managed by the government. The plans started as 67% final average earnings indexed plan. Korea is also facing demographic changes, and over the past 15 years the benefits have been continuously reduced. The public is no longer confident that the plan will meet all retirement needs. The sector level of pension benefits was provided by an employment separation benefit-based on one month's salary for each year of service. Unfortunately today, most of those benefits are paid when employment is terminated rather than carry the benefit forward to retirement. In other cases, employees consume the benefits when they terminate employment rather than carry the benefits forward to retirement. In some cases, employers have gone bankrupt leaving employees with none of their accrued benefits, as the plans were not required to be funded.

Under the new Employment Retirement Security Act (ERISA), effective Dec. 2005, companies will have the option to replace the separation benefit with funded DC, DB or hybrid plans-subject to company and union agreement. This change will be voluntary for companies. These new plans will be placed in the private sector.

China

Pension reforms have been underway for more than ten years. The base pension for all urban workers is pegged at 20% of the average provincial wage. This is managed by the Ministry of Labor and Social Security. Some of the assets of this system (really a PAYG system with some excess funds at present) are being outsourced to the private sector on specific investment mandates.

The second mandatory level is an individual account funded by a total of 11% employer/employee contribution. The government also manages this part.

From May 2004, employers are being encouraged to set up private sector DC individual account plans. However, these new plans are voluntary, and there are no tax incentives for the members and limited tax incentive for have yet to be released.

Hong Kong

There was a voluntary occupational pension system available for the past 15 years. However, only 29% of the work force were members of these plans.

The HK government introduced a Mandatory Provident Fund managed in the private sector effective January 2000, which on September 30, 2005 covers 97% of the employees of companies, and about 78% of the self employed individuals in HK.

Taiwan

There was a system of statutory redundancy payments. The reform effective July 1, 2005 requires employers to contribute 6% of employee's salaries to a government-administered individual account. The employees can make voluntary contributions from pre-tax income. The account is portable. The plans earn minimum returns equal to 2-year certificates of deposit.

The system is mandatory and administered by the government. For companies with more than 200 employees, they can set up a private sector annuity insurance plan if the majority of employees agree.