Morningstar Magazine - February/March 2014 - (Page 33)

Domino's Pizza Enterprises DMP and Oroton ORL," he said. Christine St. Anne is the online editor of Morningstar. com in Australia. Asia China Pension Reform Impacts on China's Insurers By Iris Tan The Chinese government recently introduced deferred tax measures on corporate pensions. Starting this year, pension fund contributions by both corporations and employees will be partially exempted from an employee's income tax. Investment returns from corporate pension funds will be deferred till withdrawal at retirement. The move is an effort by the Chinese government to develop a multi-tiered pension system that will help make up for a huge capital shortfall in the government-run social insurance fund. The move could be a good opportunity for the country's insurers such as Ping An and China Pacific, who manage much of the country's pension funds and who can now cross-sell products. (Assets under management or custody by life insurers for China's corporate pension scheme accumulated to over CNY 424 billion in 2013. That amount is small compared to the CNY 4.9 trillion in insurance assets.) As of September, Ping An Insurance had a leading market share of 41% of the corporate pension market, with CNY 79 billion assets under management. Ping An was trailed by China Life with a 34.2% share and CNY 66 billion assets under management. China Pacific Insurance's subsidy, Changjiang Pension Insurance, ranks as the third largest player with a 17.6% share and CNY 34 billion assets under management. According to the government's roadmap in establishing a multitier social security system and the approaching pilot program of deferred tax private pension insurance in tier one cities, the introduction of tax incentives including tax deferral and tax exemption will significantly boost the pension insurance business in the near term. The World Bank projects China will become the world's third-largest corporate pension market, with total fund assets reaching to US $1.8 trillion by 2030. With a low penetration rate at around 12% of urban employees, China's corporate pension insurance fund only represents less than 1% of the country's GDP, much lower than 47% in the U.S. We expect the pension insurance (both corporate and private pension insurances) will become one of the primary drivers for life insurers in the near term. Iris Tan is a senior analyst at Morningstar based in Shenzhen, China. Japan Japan's Confusing Decision on Elderly Investors By Chiho Shimada Indeed, the distinction between suitable and unsuitable products is somewhat confusing. For example, the following products are considered suitable for elderly investors: leveraged or inverse investment ETFs and ETNs and debt underwritten by financial institutions (including perpetual subordinated debt, callable bonds and preferred securities). On the other hand, ordinary asset allocation funds and index funds (except those linked to the TOPIX and Nikkei225 indexes) are considered to be the products which need careful attention. The guidelines also state that salespeople may sell REITs to elderly customers, but may not sell index mutual funds composed of REITs without permission by senior managers. The rules fail to address an underlying problem: The mismatch between elderly investors' financial literacy and the trend of increasingly complex mutual funds. About 40% of individual investors in Japan are over 65, and these investors prefer monthly income such as dividend payments. That search for income has pushed asset managers to launch incomegenerating funds. At the same time, financial products have become complicated. For example, currency options are added on to underlying equity or bond investments. Most elderly investors do not have enough financial literacy to understand the risks inherent in such products. This is not only a problem for elderly investors but for young or middle-aged investors as well. Chiho Shimada is Chief Editor at Morningstar Ibbotson in Japan. In mid-December, the Japan Securities Dealers Association proposed new rules that outlined what kinds of investments are appropriate for elderly investors, particularly those 75 and older. However, these guidelines, which must be in place by March, take a surprising view of which products salespeople should be cautious about when suggesting them to elderly clients. global.morningstar.com/Morningstarmagazine 33 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014