Amid the one-two punch of the new Notice on Matters Relating to the Adjustment of the Classification of Trust Business (Exposure Draft) and accelerated development of the pension industry, it is high time to explore the models of retirement trusts in China.
Retirement trusts not only cater to the needs of the trust industry for returning to its roots and transformation, but can also efficiently serve the real economy and people’s livelihoods – fully integrating the advantages of the trust system and competitive strengths of the retirement industry.
At present, there is no clear definition of retirement trusts in laws and regulations. Based on current market practice, there are mainly three types of retirement trusts, namely retirement service trusts, pension trusts and pension industry trusts, depending on application scenarios.
As found from the author’s search results for each type of retirement trust currently operated by trust companies, the market mainstream is the retirement service trust (or retirement consumption trust), which combines client needs for retirement with investment and wealth management.
This article focuses on analysing the primary legal models of these predominant retirement service trusts.
Main legal framework
Currently, the mainstream retirement service trust in the market generally refers to trust wealth management products embedded with retirement consumer interests, which fall into the category of asset management products defined in the Guidelines for Regulating the Asset Management Business of Financial Institutions. Such retirement service trust products are subject to the guidelines and other regulatory requirements for trust products.
Trustors and beneficiaries. Trustors are generally people with retirement needs. They may be either individuals wishing to fulfil filial duties to their parents, or those planning for their own elderly security. They should be qualified investors under the guidelines, and are generally also the beneficiaries.
However, some trust companies also have retirement trusts in favour of third-party beneficiaries. For example, Anyu Pension Trust, jointly introduced by Industrial Bank and a specialist trust firm, is a third-party benefit trust under which trustees are appointed by trustors to allocate trust benefits to designated beneficiaries at fixed values each year – firstly to meet the trustors’ retirement needs during their lifetimes, and finally to pass on their assets after death, serving dual purposes of personal retirement and family wealth inheritance.
Purpose of trust. In addition to maintaining and increasing value of assets, the purpose of a trust also includes obtaining retirement consumer interests. Some retirement service trust products are also intended to facilitate inheritance of family wealth.
Management and utilisation of trust assets. Generally speaking, retirement service trusts should also meet requirements on classification of asset management products set out in the guidelines, classified by fixed income products, equity products, commodity and financial derivatives or hybrid products, according to the nature of the investment. Given the characteristics of retirement service trust products, asset allocations are generally in the low and medium-risk categories, principally including cash, fixed income and quasi-fixed income products.
Trust beneficiary rights. Trust beneficiary rights are among the defining features of retirement service trusts, generally including the earnings distributed in cash and retirement consumer interests.
The latter mainly comprises retirement services provided by senior care institutions designated in the trust contracts entitled by the beneficiaries, including retirement medical care, retirement community, retirement hotel occupancy, fitness club membership, rehabilitation management, recreation and leisure, and after-death care.
Some trust companies provide options in the distribution of trust benefits. For example, Beijing International Trust’s retirement consumption trust offers clients the option to alienate their cash proceeds in exchange for retirement consumer interests. By waiving their cash proceeds, clients gain free access to designated nursing homes and a package of retirement consumer interests including retirement medical care, rehabilitation nursing, and after-death care.
Matters meriting attention
Retirement service trusts combine the needs of retirement services, entrusted wealth management services and entrusted inheritance, providing clients with one-stop services encompassing retirement support, inheritance and investment. Accordingly, given the characteristics of retirement service trusts, the following matters require due attention.
As trust beneficiary rights in retirement service trusts usually include retirement consumer interests, and beneficiaries may also be the consumers of the retirement products, the design of the trust structure should comprehensively consider the Trust Law, the guidelines, the Law on the Protection of Consumer Rights and Interests, and other laws and regulations. These protect the rights of consumers of retirement products, such as the right to know and right of free choice, and ensure supervision and management of third-party retirement service institutions to protect the rights of investors in the trust products.
For retirement service trusts embedded with retirement consumer interests, retirement institutions, as third-party service providers for the trusts, are not parties to the retirement trust contracts. Rather, they are parties providing special retirement services as agreed under relevant service agreements between the trustees on behalf of the retirement trusts and retirement institutions.
Trustees should therefore pay particular attention to whether there is any membership arrangement when selecting retirement service products and service institutions. If there is such arrangement, the trustees should also check for any risk of illegal fundraising through the membership or other arrangements, and for strict supervision of membership fees.
If the deal structure of retirement service trusts is self-benefitting and involves fundraising, it will fall into the category of asset management trusts under the latest guidelines.
In such circumstances, trust companies shall conduct business under the four categories of asset management trusts in accordance with the guidelines, and comply with regulatory bans on new channelling business and non-standard fund pooling, and scale back the financing trusts as stipulated.
From the perspective of regulatory guidance under the reform framework, trust companies are suggested to focus more on development of retirement service trust business more in line with the roots of trusts, and within the category of asset service trusts.
Ren Guobing is a partner and Lin Shulan is an associate at Jingtian & Gongcheng
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