China's government is keen to encourage pension reform to persuade more citizens to save more for their retirement, and to help local pension funds make better returns. As part of that, it is allowing foreign managers to enter the domestic market.

Its efforts 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 Ministry of Human Resources and Social Security suggested that they be allowed to invest offshore. 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.

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 foreign allocation… it will be positive for the entire asset base,” she said.

There are also hopes that China will allow its first pillar pension funds, comprising the National Social Security Fund (NSSF) and provincial pension funds, to conduct a broader array of investments.

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

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

To do so it has largely had to 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, Appleton says.

“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.

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

THINK OUTSIDE THE BOX

Perhaps the most important step that China can take to ensure that its elderly have sufficient retirement savings is to encourage people to put more money into pension plans. 

Howhow Zhang, partner for global strategy group at KPMG China, told AsianInvestor that it makes sense for pension funds to access a broader array of investments. But he believes that it would be more helpful for China’s regulators to introduce new products, such as a default corporate pension plan with opt-out options. 

Not everybody agrees. Calvin Chiu, head of retirement for Asia at Manulife, told AsianInvestor that it would be costly for companies to do so. He noted that businesses already contribute about 20% of workers’ payrolls into the first pillar of social security.

Employers’ contributions to the EA scheme has been capped at 8% of an employee’s total salary, while the total contribution from employers and employees is capped at 12%.

This contrasts with many other countries, in which the first pillar social security system is heavily funded by governments, without relying on corporate payments.

“From an overall company budget operating perspective, how much more money and budget do you have left to put on the table for another set of pension plans like the EA?” he said. 

Zhang agrees that it could be tough for some firms to meet this funding cost, but argues that it should not be an excuse.

“We need to think outside the box… if you make the corporate pension plans mandatory but give people the option to not participate, that may have a more profound impact on people’s mentality about planning for their retirement lives. People should be more open-minded to try new things,” he said.

Other experts agree, noting that mandatory corporate defined contribution plans have proven to be an effective way to bolster pension assets in a number of countries.

We need to look to improve financial literacy and basic pension knowledge in China through ongoing investor education programmes

The UK, for example, tried several times to encourage employers and employees to set up pensions, but its first major breakthrough came with automatic enrolment, said Jamie Jenkins, head of global savings policy at Standard Life Aberdeen. Employees don’t have to stay in the system, but most opt to, which has created a bit of a social norm to save, he added.

Meanwhile, looming regulatory changes to the third pillar appear unlikely to solve the root of the problem. Adding more financial products would expand the offering, but that won’t necessarily persuade more Chinese investors to use them because they don’t see the need, says Jackson Lee, country head for China at Fidelity. 

“We need to look to improve financial literacy and basic pension knowledge in China through ongoing investor education programmes,” he said. 

“I think in general, individuals in China need better education. It’s a mindset thing, not a skillset thing,” agreed Zhang.

This story was adapted from a feature on China's pension industry, which originally appeared in AsianInvestor's Winter 2019 edition.