A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/china-expat-pensions
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
For even more information feel free to visit the following external sites:
https://www.pensionfundsonline.co.uk/content/country-profiles/china/105
https://www.oecd.org/en/publications/pensions-at-a-glance-asia-pacific-2024_d4146d12-en/full-report/china_59a40147.html
https://www.cfr.org/blog/what-chinese-pension-system-and-why-are-its-problems-hard-fix
B] The Issues
The implementation of a private pension program nationwide will serve as an important driver for the increased maturity of Chinese capital markets, but there is still room for it to attract more users with a willingness to open accounts and invest, said experts. According to a notice jointly released by five central government departments, including the Ministry of Human Resources and Social Security, the Ministry of Finance and the State Taxation Administration, the private pension program began to be fully implemented across the country.
Under the plan, all Chinese employees covered by the country’s basic pension insurance system — also called the first pillar — can voluntarily open private pension accounts at designated commercial banks. Data from the Ministry of Human Resources and Social Security suggest that more than 1 billion(!) Chinese could be eligible for the program. Individuals can deposit a maximum of 12,000 yuan ($1,645) every year into their private pension accounts. The deposit can be completed on a monthly or yearly basis.
“The nationwide implementation can be interpreted as the erection of a third pillar in China’s pension system in the real sense. It is an important step forward in the construction of a multilayered pension system in the country,” said Dong Keyong, a professor at the Renmin University of China.
In November 2022, the private pension program experiment started in 36 major cities such as Beijing, Shanghai, Guangzhou, Guangdong province, and Xi’an, Shaanxi province. According to data from the Ministry of Human Resources and Social Security, 72.79 million Chinese had opened their private pension accounts by end-November.
C] Education is key
A major achievement of the private pension pilot program over the past two years has been to educate people on the account’s function as financial preparedness for people during their old age, said Jin Weigang, deputy director of the China Association of Social Security. More importantly, the program will significantly aid in the further maturity of the Chinese capital market, according to industry mavens.
Based on international experiences, pensions, as a long-term capital, serve as the cornerstone of a stable and sound stock market, said Wan Li, a financial industry analyst at BOCOM International. As more people open accounts and deposit money, private pensions are likely to become an important incremental capital inflow into the A-share market. Such capital usually focuses on long-term investments, which is conducive to the sustainable development of the Chinese stock market, she added.
D] Capital Effect
CITIC Securities has calculated that the value of China’s private pension market will rise to 12 trillion yuan by 2035, by which time 40% of the capital will be directed to investments in equities, up from 20% at present. This substantial increase will significantly boost capital market vitality, said experts from CITIC Securities.
Zheng Zheng, a portfolio manager at asset management firm Bosera Funds, said the full implementation of the program is a “milestone” in the Chinese capital market as it will stimulate more financial product innovation. The investable scope under private pension accounts has been expanded upon full implementation of the private pension mechanism, and it is “a major highlight”, said Yan Zhipeng, a professor at Shanghai Jiao Tong University.
Savings deposits, wealth management products, commercial pension insurance and mutual fund products used to be open for investment for private pension accounts. Following the latest full implementation, treasury bonds and designated pension deposits have now also been included.
E] About Risk
According to Yan, these two newly added financial products incur little credit risk. Their asset prices are more stable, which can address the financial security concerns of retirees. Yan further said that the bond ladder strategy is widely adopted for pension investments. It is a diversification technique that involves investing in bonds with staggered maturity dates. This strategy can reduce risks by spreading investments across different bonds and provides a predictable source of retirement income.
“For example, an individual can divide 100,000 yuan of deposit into five equal parts. The first 20,000 yuan can be invested in bonds or savings products that mature in one year, and the second 20,000 yuan can be invested in those with a two-year maturity, and so on. This will secure a safe and stable cash flow every year in the following five years. Treasury bonds are suitable for such an investment strategy,” he added.
Index funds have also been included as an investable product under private pension accounts, according to the notice released. Instead of investing in a single stock, index funds focus on a part or all constituents of one index, which can help individual investors alleviate risks and make investment decisions, said Dong of Renmin University of China.
F] Regulations
The China Securities Regulatory Commission, the country’s top securities watchdog, has included 85 equity index funds into the product catalog for private pension investment, among which 78 track various broad-based indexes, while the rest track those generating higher and stable dividends.
Including index funds into the private pension product catalog will usher in more long-term capital, optimize investor structure and stabilize stock market performance, said Gao Ying, investment director at Ping An Fund Management Co Ltd. Index products will thus be facilitated to seek rapid growth, which may be translated into a slow but longer-lasting bull run in the A-share market.
Liu Xiangdong, chief analyst of Eastern Spring Equity Investment Management Co Ltd, said index products are being increasingly preferred by Chinese investors thanks to their lower fees, risk diversification features and higher liquidity. On the other hand, index products can largely lower trading frequency as they usually adopt long-term investment strategies. This will effectively reduce market volatility, especially in the short run. The expansion of index products means more capital inflow, lower trading costs and higher market efficiency, he added.
G] Activation of accounts
But there are also some issues that need to be addressed before the private pension program can really make a big difference in the market. According to a report about 9 million people had actually deposited money in their private pension accounts by March 2023, which was only 22 percent of all the people who had opened such accounts.
The report, which aimed to illustrate financial institutions’ efforts to serve China’s elderly care sector, showed that a large number of private pension accounts are in an “idle “state. People’s willingness to deposit funds needed to be further activated, according to the report.
The longer maturity cycle of private pensions is also a double-edged sword, as it is a long-term investment but with lower liquidity. As the money cannot be withdrawn before retirement, people will be more reluctant to deposit funds into the accounts due to liquidity concerns, said Yu Fenghui, an independent financial expert. Therefore, Yu suggested more withdrawal methods under the private pension account, allowing individuals to use part of the capital for special cases, such as home purchases.
H] Product Selection
In addition, private pension accounts are managed in a closed manner, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co Ltd. According to the interim measures for private pension capital management among commercial banks and wealth management firms, an individual can only choose one qualified commercial bank to open one account.
This means the choice of pension products is limited to those provided by the bank. If the bank has an affiliated insurance company, it may even guide its private pension clients to purchase its own insurance policies, further narrowing down the choices, Dong said. According to the national social security public service system, 26 wealth management products for private pension plans had been introduced as of Jan 3. The number of deposit products had reached 466 and that of fund products stood at 287.
However, choosing the right product among this large pool is not an easy task, even for someone like Yan from SAIF who has tracked the financial markets for about 20 years. “When I opened my own private pension account two years ago, the easiest solution was to do a simple math of risks and yield. But the decision was still made in haste, as the product I chose has reported a 3 percent loss up to now,” he laughed.
“Making the right investment decision can be difficult for even professionals like me, let alone an ordinary individual investor lacking in financial knowledge. In other words, the freedom to choose among a large variety of different products is not necessarily the best,” Yan said.
I] Consultations
Financial institutions are encouraged to provide investment consultation services to individuals opening private pension accounts. Private pension products should be introduced to clients based on their risk appetite and age. Financial institutions should give full play to their professionalism to help clients manage their capital, according to the notice. Allowing financial institutions to conduct consultations will help to bridge the gap between product providers and individual investors. This will help to improve the long-term returns of investors, which is in line with the inclusiveness of private pension services.
J] Finally
Building a channel connecting the second pillar — enterprise annuity and occupational annuity — with the third pillar is also of much importance, according to Helen Huang, managing director of Fidelity International China. “When a candidate starts working for another company or retires, he or she may encounter much complexity if the different accounts are isolated,” she said.
Zeng Gang, director of Shanghai Institution for Finance and Development, a think tank, suggested that a unified private pension account management platform should be set up to manage accounts and products across different financial institutions. Efforts should be made to explore the establishment of a minimum income guarantee mechanism or a similar policy to enhance the public’s trust in private pension investment. Private pension products should be more diversified and personalized, he added.
While tax exemptions, as high as 5,400 yuan upon the 12,000 yuan annual deposit, should serve as an impetus in opening a private pension account, the incentive is not strong enough, according to Sun Yudong, a professor at the Renmin University of China. “Only people having an annual income of 960,000 yuan can enjoy the maximum 5,400 tax exemption on a yearly basis. In other words, people with lower incomes are not entitled to such a tax exemption. More attractive deduction measures should be introduced to enhance people’s willingness to open private pension accounts and deposit money into them,” he said.