Pension Pioneer

Chinese computer maker Lenovo Group is regarded as one of the country’s most dynamic and desirable employers. But even Lenovo has to work hard to hang on to its talent, especially highly sought-after employees with overseas experience. Today, Lenovo has a new tool in its recruiting kit: the first nationwide corporate pension plan of any Chinese company. The plan, launched in July, is a competitive must for a company that has ambitions to become a global information technology powerhouse following its $1.75 billion acquisition of IBM’s personal computer business last year. A corporate pension plan is exactly the kind of perk “that is often raised at the end of a job interview,” says Zhang Jin, executive director of human resources for Lenovo China.

The company is at the forefront of a financial revolution with huge implications. As more firms follow Lenovo’s lead, China’s stock market will receive a healthy stimulus, much as the debut of 401(k) plans fostered the growth of an equity culture in the U.S. in the 1970s and ’80s. “Mutual funds have a very short history in China, and people don’t know how to manage their assets,” says Zhao Xuejun, chief executive of Beijing-based Harvest Fund Management Co., which manages Lenovo’s fund. “This is a very important development for those who focus on money management over the space of a lifetime.”

It’s also an economic necessity: Despite reform efforts, the World Bank estimates that less than half of China’s 265 million urban workers are covered under defined contribution plans set up by employers to supplement creaky state pensions. And companies often borrow from their pension funds to such an extent that many plans are “notional only,” says insurance analyst Bob Leung of Merrill Lynch & Co. in Hong Kong. Demographics will further undermine the system, as the baby boomers of the Mao Zedong era begin to retire in greater numbers than there are new entrants to the work force, who were born under Deng Xiaoping’s one-family, one-child policy.

Since 2003 the government has encouraged reform experiments to address the pension gap. With Beijing’s consent a few provinces passed legislation allowing for the creation of pilot corporate pension plans managed by third-party providers. The success of these efforts prompted the central government to adopt similar nationwide reforms, and the Ministry of Labor and Social Security last year licensed a number of leading financial institutions, including China Life Insurance Co. and China Construction Bank, to set up independent subsidiaries to provide pension services.

Lenovo was quick to seize the opportunity. The company needed a national scheme because it has employees in every Chinese municipality, province and autonomous region except for Tibet. Setting up separate pension plans in each province would have been prohibitively expensive and would have impeded the transfer of workers within the country.

So Lenovo applied for government approval to establish its own pension, and the Labor Ministry gave its approval in January. Lenovo formally launched the plan in July, when it registered its partners: Ping An Endowment Insurance Co. will serve as trustee, Harvest Fund Management will manage the plan assets, and China Merchants Bank will provide recordkeeping and custody services.

The Labor Ministry at first wanted the plan to be open to all employees, but Lenovo lobbied successfully to limit access to employees with at least one year’s service in an effort to reward loyalty and commitment. The Ministry also wanted a minimum of 80 percent of employees to participate, but it relented when only 70 percent of Lenovo’s 8,000-plus employees — still a high percentage by Western standards — agreed to sign up.

Employee contributions don’t receive any tax advantages, unlike similar schemes in many other countries. Lenovo’s contributions are tax-deductible, however, and that fact could encourage other companies to introduce their own plans. Lenovo will match employee contributions according to a formula that varies with the employee’s tenure and the company’s profitability. Zhang says workers joining the plan will typically see a roughly 5 percent increase in their overall compensation.

Scheme members have two options for investing their funds: a principal-guaranteed account that is limited to cash and bonds, or a balanced account that can hold as much as 30 percent of its funds in equities, the ceiling allowed under current regulations (the remainder must be invested in cash and bonds). The plan’s equity holdings are currently restricted to domestic stocks, but Harvest Fund Management has applied to take part in China’s nascent Qualified Domestic Institutional Investor scheme and hopes to receive permission to invest in shares on overseas markets by next spring.

Interest in establishing pension plans appears to be widespread in China. Harvest CEO Zhao says the fund manager has already won mandates from Dongfeng Automobile Co., Fujian Tobacco Import & Export Co. and Shaanxi Coal Industry Group Co., although these companies have yet to launch their schemes. Harvest, which had $5.2 billion under management at the end of 2005, expects to win mandates from at least five other large Chinese corporations by the end of the year. The firm’s assets have grown 20-fold since 2001.

To be sure, there are barriers to the expansion of China’s pension industry. “Schemes like this are not cheap, and only big companies with healthy balance sheets can afford them,” says Zhao. Making pension plans mandatory would spur growth, but analysts aren’t expecting the government to act anytime soon.

大型金融机构资产管理ambitions, however, will have a clear incentive to start their own plans, says Merrill Lynch’s Leung. “A big bank with hundreds of thousands of employees can start up a scheme and give it to its own pensions unit, which will then use the capital to develop its own business and market it out as a product,” he says.

Demand for pensions from Chinese workers looks sure to stay strong. As Tamara Trinh, a senior Asian economist at Deutsche Bank in Frankfurt, puts it, “Those who can will run to join them because they don’t trust the state scheme, which is teetering on bankruptcy.” i