In September 2019, China officially launched a grand plan: to transfer stakes in its state-owned enterprises (SOEs) into its basic pension system. 

It's a bold idea. Shifting the stakes should extend the system’s sustainability, or the time period over which it can deliver benefits to its retirees. Beijing might have been slow off the mark to address its retirement savings gap, but it’s doing its best to make up for lost time.

The government has other plans too. It is drafting rules to let foreign financial institutions become dedicated corporate pension managers. Introducing foreign players would increase competition and put more pressure on domestic asset managers to improve the performance of their investments. 

Beijing is also considering a wider range of asset management products as eligible pension offerings for individuals, giving them more investment options to meet their unique needs. 

While these reforms are welcome, China’s pension system has one crucial problem: its over-reliance on its first pillar – the social security system. This consisted of $1trillion in 2016, whereas those in joint-contributed corporate funds stood at $168 billion and investments in individual pension vehicles were $242 billion, respectively. 

While regulators’ efforts to improve the second and third pillars are having some effect, it will unlikely be sufficient to turbo-charge their expansion from the current prediction. The assets under management (AUM) of the three pillars are predicted to respectively grow to $3.98 trillion, $1.25 trillion and $1.35 trillion by 2025, according to statistics from Manulife and KPMG. 

Even the entry of foreign asset managers with a broader array of products is unlikely to lead to corporate pension plans or individuals saving more money for their retirement, experts argue. “The importance of establishing a multi-pillar system is that over time the pillars are not standalone and independent. You can leverage each of the pillars to maximise the benefits and the retirement savings for individuals,” Calvin Chiu, head of retirement for Asia at Manulife, told AsianInvestor

That is only possible if China can bolster the second and third pillars. It is no easy task. 


The biggest coming change will be the injection of SOE assets into its public retirement system, to help improve its asset size. 

After a two-year trial, authorities rolled out the scheme countrywide on September 20 with the release of new regulations governing the transfer of these assets to national and provincial social security funds.

Enterprises owned by the central government have to transfer 10% of their equity stakes into the Rmb2.24 trillion reserve National Social Security Fund (NSSF) by the end of 2019, said a joint release from five regulatory bodies that included the Ministry of Finance, Ministry of Human Resources and Social Security (MOHRSS).

Enterprises owned by local governments must follow, passing over 10% of their stakes to provincial pension funds by the end of 2020. Each provincial government has to set up a new entity that it solely owns to hold, manage and operate these transferred state-owned assets, or alternatively appoint a qualified firm to manage the assets via segregated accounts. 

The move is expected to greatly increase the total assets in China’s pension system. All-told, 59 centrally-owned SOEs are expected to transfer about Rmb660 billion-worth of assets to the NSSF, according to the Ministry of Finance.

This creates a great deal of confidence that the government is determined to do all it can to address any future pension shortfall 

That will help to fill a funding gap in China’s pension system that is expected to reach Rmb890 billion by 2020, according to the National Academy of Economic Strategy.

“This creates a great deal of confidence that the government is determined to do all it can to address any future pension shortfall,” Michael Wu, country executive for Greater China at Northern Trust, told AsianInvestor.

Progress in the asset transfer has been slow during the two-year trial run since it was first announced in 2017.  However, the recent imposition of an end-2020 deadline, combined with the stipulation that the largest shareholders of SOEs are held accountable for the implementation, should ensure a lot more progress over the next 12 months, he said.

The shift of SOE stakes provides a strong source of funding to the social security funds, Lu Quan, secretary general of the China Association of Social Security (CASS), told AsianInvestor.


China’s regulators are also formalising rules to let foreign financial institutions become dedicated corporate pension managers.

On July 20 the China Banking and Insurance Regulatory Commission (CBIRC) announced that it intended to upgrade the relevant laws and regulations surrounding corporate pension operations to let in foreign pension managers, and would work with related ministries and commissions to do so. 

The regulator stated that allowing foreign institutions to set up or hold stakes in pension management companies that invest enterprise annuity (EA) assets would enhance market vitality, introduce seasoned pension management experience, and improve the management level of pension investment. But the regulator has offered no update since. 

It appears that Standard Life Aberdeen will be the first foreign insurer permitted to set up a dedicated unit to tap China’s corporate pensions market. Its subsidiary, Heng An Standard Life (HASL), obtained the regulatory approval to establish a new pensions insurance company in March. HASL must complete the preparatory work by March 2020, the one year-anniversary of it receiving its initial licence. It would then seek an EA license to offer second-pillar pension products, a spokeswoman told AsianInvestor.

To date, CCB Pension Management is the only foreign-owned company approved as a specialised manager of EA assets, while 20 other domestic financial firms are allowed to manage EA funds as part of their broader operations.

Richard Jackson, US-based president of Global Aging Institute, told AsianInvestor that opening up the EA to foreign entrants will improve professionalism and long-term, risk-adjusted returns for pension participants. 

In addition, China’s pension regulator will soon allow more investment vehicles to be eligible pension products. Banks’ wealth management products, commercial pension insurance products and funds that “meet the requirements” will become third-pillar pension products, MOHRSS said in June.

MOHRSS said it and the Ministry of Finance were making good progress in developing the relevant policy papers, which aimed at improving the multi-layered pension insurance system in China. But it did not elaborate on what the requirements are, or specify when the new rules will be ready.

It’s hoped that the relaxation in eligible products will encourage individuals to invest more for their retirement, as wealth management products and mutual funds often offer higher returns than insurance policies, Wu Haichuan, Shanghai-based head of retirement business for Greater China at Willis Towers Watson, told AsianInvestor.


Allowing foreign managers to enter the domestic market could also pave the way for corporate pension funds to invest some assets overseas.

Currently corporate pension funds can only invest in Chinese assets, but last year the MOHRSS suggested allowing them to invest offshore. The foreign manager reform plans would help deliver that idea, Wina Appleton, retirement strategist for Asia Pacific at JP Morgan Asset Management, told AsianInvestor.

“With what they are saying about bringing in foreign managers, I think that [indicates] the potential of opening up of foreign allocation … it will be positive for the entire asset base,” she said.

Currently EA assets can only be invested inside of China. Allowing pension managers to invest at least a portion of the assets offshore could bring in more diversification, create higher investment efficiency and reduce volatility, Appleton added.

There are also hopes that China will allow its first pillar pension funds, comprised of the NSSF and provincial pension funds, to conduct a broader array of investments.

However, the state-owned enterprise asset injection isn’t likely to immediately help them do so. The funds will initially receive regular dividends but cannot sell the assets within the first three years of holding the stakes, or influence the operations of the SOEs. 

In addition, pension managers will only be able to invest their dividends into bank deposits or treasury bonds, due to provincial governments’ generally poor investment capabilities. 

Beijing has also encouraged local governments to transfer their pension assets to the National Council for Social Security Fund (NCSSF), the body that oversees NSSF, in an effort to improve their returns. However, the NCSSF has to ensure this pot of provincial assets has a 95% chance of a positive return. 

To do so it has had to largely eschew equities. That represents the focus of China’s authorities on safety over returns, but it’s a conservative approach that has contributed to the shortfall in China’s public pension system, said Appleton.

“Obviously, if the assets are diversified overseas or [allowed to invest] into equities it would help to grow the assets and reduce the gap,” she said.

Quan of CASS added that it would make sense for provincial pension funds (or NSSF on their behalf) to slowly make overseas investments, albeit with risk-control measures such as a risk-reserve fund.

This article was adapted from a feature looking at China's pension system, which originally appeared in AsianInvestor's Winter 2019 edition.