China pensions: key changes to come

AsianInvestor presents a roundup of expected developments that the investment industry should know about in the huge mainland retirement savings market.
China pensions: key changes to come

Beijing recognises that China’s huge but nascent pensions industry faces big issues—most notably underfunding—and has made important changes* in recent years with a view to establishing a more robust retirement system.

During 2018 the government is expected to introduce further measures to expand the supply of pension capital and improve the management of retirement funds. Asset managers and other investment service providers, both local and foreign, will be taking note.

“2018 will be the most important year for pension reforms in China,” said Zhu Haiyang, head of pension business at Tianhong Asset Management, the largest Chinese mutual fund house by AUM with Rmb1.7 trillion ($255 billion) in mutual fund assets.


China’s retirement system comprises three ‘pillars’. The first comprises the National Social Security Fund and provincial public pension funds (PPFs); the second is made up of enterprise annuities (EA) and occupational annuities (OA); and the third covers individual pension schemes. 

The pillars are growing at different speeds, according to a report released by consultancy KPMG in December.

First pillar assets grew from Rmb600 billion to Rmb5.5 trillion ($847 billion) in the decade to end-2015. The second pillar stands at Rmb1 trillion and the third pillar at Rmb2 trillion. 

But KPMG forecast the second pillar will grow at a compound annual growth rate (CAGR) of 28% until 2025, and the third pillar at 21%—compared to 18% for overall pension assets over the same period. 

The second pillar—containing the voluntary EA scheme for both state-owned and private companies, and OA, a compulsory retirement scheme for civil servants.

EA was launched in 2004, while OA started in 2015. But EA has been developing slower than expected, and OA is expected to surpass EA in assets. EA assets grew from Rmb100 billion ($12 billion) in 2005 to Rmb1 trillion in 2015.

OA is expected to swell quickly in assets, given its compulsory nature. Li Lianren, director for annuities at Ping An Annuity, estimated last year that the annual OA contribution would quickly reach Rmb160 billion and that the entire programme would reach Rmb1 trillion within five years.

OA assets have not been invested yet, but that is expected to start next year, said Zhu Haiyang, head of pension business at Tianhong Asset Management.

Zhu told AsianInvestor that important developments are expected for all three pension pillars (see also box).


China is facing a large and growing challenge in respect to its pension liabilities. It has emerged that 13 local governments, representing almost a third of the country’s 1.4 billion people, are unable to cover their pension liabilities out of worker contributions, so will have to lean on fiscal budgets. 

The payout abilities vary across different provinces, but the Public Pension Fund (PPF) is sufficient on a national level for 16 months’ of payouts, said Yin Weimin, China’s minister of human resources and social security (MoHRSS) at the Communist Party’s 19th national congress in September. 

Hence the government is likely to introduce a central pension adjustment system at some point this year, which will balance the liability burden across different regions, Wang Hui, vice president of research at Chinese investment bank CICC, told AsianInvestor.

On top of that, Beijing is tipped to roll out various measures to boost the supply of pension assets:

Transfer of state-owned enterprise assets: To help make up shortfalls in the public retirement system, Beijing initiated a plan last month to shift stakes in state-owned enterprises (SOEs) to the NSSF and some provincial pension schemes. The guidelines said the transfer will formally take place in batches starting in 2018. 

Raising the retirement age: Doing so would ease the pension burden amid the country’s rising life expectancy rate, as payments to retirees would be delayed.

According to a November report by the International Labor Organization, the retirement age is 65 in Japan, the US and various European countries.

China’s legal retirement ages—60 for men, 55 for female civil servants or female members of the armed forces and 50 for other female workers—were set in 1978. At that time Chinese life expectancy was 65, according to the World Bank, but by 2015 it had risen to 76.

Boosting tax incentives: China’s regulators are considering introducing certain tax benefits to boost the development of pillar three. It is possible that the new programme will be insurance-led and that the pilot scheme (which makes pension insurance tax-deductible) will be launched in the very near future, KPMG said.

Michael Wu, head of Greater China at Northern Trust, told AsianInvestor that tax benefits are important for developing the third-pillar system, as Chinese people have been enjoying tax deductions for their first- and second-pillar pension contributions. “Such an arrangement is needed to incentivise people to buy pension insurance products,” he said.

Under the second pillar, too, analysts said tax incentives would be key to drive the development of enterprise annuities. It has been slow because of the late introduction of tax deferral rules (at end-2013) and the low proportion of tax that can be deferred, CICC’s Wang said. 

The maximum pre-tax deduction under the EA scheme in China is 4%, compared with 37% and 11%, respectively, for the 401(k) and Individual Retirement Account pension plans in the US, she noted. However, China has no proposed changes in the pipeline in this area yet.


Expanding the supply of pension assets is one way to tackle the funding issue; another is to improve the investment returns of those assets. 

PPF mandates: To help boost returns of individual provinces’ public pension funds, China allowed PPFs to give investment mandates to NCSSF to manage in 2016. As of November 30, nine provinces and cities had signed such contracts, totalling Rmb430 billion in assets, of which Rmb180 billion had been transferred and is being invested, according to the MoHRSS. This year, more provincial funds are expected to be handed to NCSSF to manage.

NCSSF investment diversification: NCSSF chairman Lou Jiwei said in May 2016 that the state pension manager would move into new financial instruments and investment strategies to better diversify risks and improve returns. 

For instance, NCSSF has been seeking approval to invest in foreign alternative assets, Northern Trust’s Wu said. It has not received it so far, he noted, most likely because the fund does not yet have the in-house expertise to make such investments overseas. So it will need to be largely reliant on external providers and will take time to build trust with them, Wu said. Foreign currency is another risk factor, he added.

Still, NCSSF is likely to use more external managers, given that more assets are being injected, Zhang Howhow, director of global strategy group at KPMG China, told AsianInvestor.

*The most significant pension reforms in recent years include allowing provincial Public Pension Funds to give investment mandates to NCSSF in 2016; the introduction of occupational annuities in 2015 and their being allowed, in 2016, to appoint third-party investment managers; the transfer of SOE assets to the first-pillar pension system in 2017; and the release of draft guidelines on pension-purpose mutual funds in 2017.

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