China’s pension regulator will soon officially allow more investment vehicles as eligible pension products and is planning to establish an account-based structure, as part of the efforts to encourage more people to invest in the third pillar – the private market – of its pension system.

Banks' wealth management products, commercial pension insurance products and funds that "meet the requirements" will become third-pillar pension products, the Ministry of Human Resources and Social Security (MoHRSS) said in a statement last week.

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.

It did not elaborate on what the requirements are, or specify when the new rules will be ready.

The relaxation in eligible products can encourage more individuals to invest for their retirement, as wealth management products and mutual funds often bring higher returns than insurance policies, Wu Haichuan, Shanghai-based head of retirement business for Greater China at Willis Towers Watson, told AsianInvestor.

The success of the efforts hinges on the products people can choose, Sally Wong, chief executive of the Hong Kong Investment Funds Association, told AsianInvestor.

"In the mutual fund space, there should be a sufficiently wide array of products that invest in different asset classes and across different markets. Individuals can then choose fund products that [are suitable for] their age, years to retirement, and risk and reward appetite," she said.

The China Securities Regulatory Commission (CSRC) announced in March last year that funds of funds would be the only authorised investment vehicle for retirement funds. Such products enable small investors to gain exposure to a broader array of assets with fewer risks.

However, regulators have also experimented with other types of pension products. 

Under a one-year pilot programme started in May last year, insurers are allowed to offer tax-deferred annuity schemes to individuals in Shanghai, Fujian province and Suzhou Industrial Park in Jiangsu province. Policyholders will not have to pay tax on their contributions until they start withdrawing funds after retirement, subject to a cap of Rmb1,000 ($157).

Regulators are now enhancing efforts based on the pilot programme. For example, it is likely to extend tax incentives to all the to-be eligible products. Contributions into such pension products are voluntary and so tax incentives are crucial to encourage people to buy them, Wu said.

However, it was reported that merely Rmb71.6 million in premium income from about 40,000 policies of tax-deferred annuities schemes were realised as of end 2018, partly because the tax exemption amount is not high enough. But still, market observers including China AMC’s chief executive officer Li Yimei expect regulators to extend the one-year pilot scheme for third pillar pensions imminently.


Regulators are also considering implementing an account-based structure and an integrated information management platform to help to improve the pension system, MoHRSS said in the statement.

"It makes a lot of sense and should be a lynchpin of [the third] pillar," Wong said. "Different from the first two pillars, this pillar is individual-based, and as such the structure [that facilitates investments into this pillar] should evolve around the individuals."

Individuals can better access and manage their own pension investments through their own accounts, including investing into a product and switching between funds.  This would also enable the authorities and providers to monitor and keep track of the tax incentives being used, she said.

It would be similar to the mandatory provident fund (MPF) system in Hong Kong, except that the savings are voluntary in China. It can help to bolster the development of the third pillar in China’s pension market, Wu said.

China divides its retirement system into three pillars, as defined by World Bank guidelines. The first pillar is dominant, and consists of social security that is funded and run by the government; a less developed second pillar is mainly made up of corporate annuity schemes; and a nascent third pillar comprises personal savings and voluntary individual contributions.

The country has to develop its private pension market, or third pillar, quickly. Its main state pension fund is set to run out of assets by 2035 as the country's workforce shrinks, because of its longstanding one-child policy, according to a study by the Chinese Academy of Social Sciences.

The gap between contributions and outlays could be as high as Rmb11 trillion by 2050, with each retired citizen supported by only one worker, down from the current level of two, the study shows.