China’s ongoing reform of its three-pillar pension system was unscathed by the Covid-19 pandemic, but an aging population and a deep deficit have continued to slow progress.

Janet Li, wealth business leader for Asia at consulting firm Mercer, told AsianInvestor that “Covid-19 has had limited impact on the overall China pension system and its regulatory reform”. However, the system’s internal development still requires attention.

Separately, Desiree Wang, the China country head of JP Morgan Asset Management, said: “Covid-19 hasn’t fundamentally changed the path of pension reform in China. In the longer term, we remain positive on China’s plans to implement policy improvements and in growing the base of both individual and corporate participants in the pension system.”

China’s retirement system comprises three “pillars”. The first pillar consists of the national social security fund and provincial public pension funds; the second is made up of enterprise and occupational annuities, and the third covers individual pension schemes.

Based on Mercer’s 2019 Melbourne Global Pension Index, China’s pension system was graded “D,” which means the system has some desirable features, but it also has major weaknesses that needed to be addressed, particularly in efficacy and sustainability. Mercer's index ranked 37 retirement systems worldwide with the Netherlands and Denmark awarded “Grade A,” representing “a first-class and robust retirement income system”.

Both Wang and Li highlighted the need to focus on developing the third pillar to help make up for a projected funding shortfall in the first pillar in the long term.

FOCUS ON THE THIRD PILLAR

Desiree Wang,
JP Morgan AM

According to the National Council for Social Security Fund (NCSSF)’s 2019 annual report, published earlier this month, total assets under the fund stood at Rmb2.63 trillion ($389 billion) in 2019, a 17.6% growth compared with 2018. The scheme serves as a reserve fund to supplement social security spending.

The fund recorded a 14.06% equity investment return of Rmb291.7 billion ($43 billion), representing a higher-than-average annual return of 8.14% since its establishment in 2000. A spokesperson from NCSSF highlighted that the fund would continuously focus on three core investment strategies: long-term investment, value investment and socially responsible investment, the nation’s media news website Xinhua.net reported.

Wang said funding for the system's first pillar remains adequate in the short term. However, for the long-term viability of the system, the market would need to see less future reliance on the overstrained first pillar. As a result, she sees most meaningful growth in the third pillar.

“For pillar three, we see the need for investor education on retirement and long-term investments to change mindsets. In contrast to the current focus on short-term stock trading, more education is needed to teach individuals how to prioritise savings for retirement, and how to maintain an income once they retire,” Wang said.

At the same time, the market is expecting the government to grant an increase in tax relief or tax deferrals by the end of this year, which will also boost the third pillar’s growth, she added.

Li noted that the system should follow trends in the working population, such as the rising number of self-employed among the younger generation. In recent years, many young people tend to venture out and start their own business, she said. “How the pension system should provide coverage for this group is also an important topic for consideration,” Li said.

She pointed to an "insurance connect" scheme, a joint Hong Kong and China initiative under the Greater Bay Area regional development blueprint, as a potential solution to supplement the current national system. Insurance connect, which was proposed in July this year, involves setting up service centres in mainland Chinese cities with counters for Hong Kong insurers. 

INTRODUCE MORE PENSION MANAGERS

Janet Li, Mercer

Li also recommends that the system employ asset managers with overseas experience, which will "inject healthy competition and help to sharpen the skills of local managers”.

She has seen rapid growth in Chinese asset managers’ capabilities, who are ready to support the country’s pension reform.

According to the Ministry of Human Resources and Social Security’s First Quarter 2020 report on enterprise annuities, which come under the second pillar, there are 22 licensed pension managers.

“Given the growth of the size [of both pillar one and pillar two], we hope to see more qualified entrants being allowed to manage pension assets,” Wang said.

“Pillar two has benefited in the last few years from healthier market participation,” she added, and the same outsourcing model for the management of enterprise annuities could be applied to occupational annuities.

SOE CONTRIBUTION CONTINUES

"While the first pillar of the state's pension system is sufficient for the short-term, the Chinese Academy of Social Sciences in 2019 estimated that the system could run out of funding as soon as 2030, due to China’s rapidly aging population," Wang said.

To ensure adequate funding, a large amount of money from large state-owned enterprises (SOEs) has been delegated to the national fund. The Ministry of Finance in September transferred 10% of shares from some of the country’s biggest listed state-owned enterprises, including China Life Insurance, Agricultural Bank of China, People's Insurance and Bank of Communications, to the national pool.

The NCSSF has so far seen 55 SOEs share transfers, totalling Rmb660 billion ($97.2 billion), according to a March 2020 KPMG report, as of the end 2019. Most recently, Shanghai started the first round of SOE shares transfers, and the whole exercise is expected to be completed by the end of this year.

According to some experts' estimates, the market will see as much as Rmb2 trillion of SOE shares injected into the national fund by the end of this year.