China regulators are planning to let foreign financial institutions become dedicated corporate pension managers, a move that could pave the way for the funds being allowed to invest some of their assets overseas. The reform plans are part of a bigger goal to encourage faster retirement savings in the fast-aging country.  

The China Banking and Insurance Regulatory Commission (CBIRC) said in a notice on July 20 that permitting foreign institutions to set up or hold stakes in pension management companies that invest enterprise annuities (EA) assets would increase the number of market participants, enhance market vitality, introduce seasoned pension management experience, and improve the management level of pension investment.

The regulator next intends to improve the relevant laws and regulations surrounding corporate pension operations, and would work with related ministries and commissions to give entries to foreign pension managers. In the notice, it also outlined measures to open up other areas in the financial sector, such as banks' wealth management business.

Wina Appleton

Industry participants praised the CBIRC’s move to liberalise the pension sector.

“I think this is the right direction,” Wina Appleton, retirement strategist for Asia Pacific at JP Morgan Asset Management, told AsianInvestor.

She noted that allowing foreign companies into the corporate pension market would increase competition, innovation and professionalism.

Appleton said she believes the reform intentions also send a message to the market that corporate pension assets will soon be allowed to invest overseas, an idea touted by the Ministry of Human Resources and Social Security (MoHRSS) last year.

“With what they are saying about bringing in foreign managers, I think it’s good because 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.

Reforming retirement savings is particularly important in China, which has a rapidly expanding number of retirees

The country's retirement system is divided into three pillars, in accordance with World Bank guidelines. The first pillar is the largest, and consists of social security funded and run by the government. However, it lacks sufficient assets to keep up with the country’s fast-expanding elderly population.

A less developed second pillar is mainly made up of corporate annuity schemes that include enterprise annuities (EA) and occupational annuities (OA), and the former is effectively voluntary contributions made by employers and employees. China’s nascent third pillar is comprised of personal savings and voluntary individual contributions.

THE LANDSCAPE

To date CCB Pension Management has been the only company approved to manage EA assets under a pilot scheme to help develop such specialised managers.  

Melody Yang

While it’s the only approved dedicated company under the pilot scheme, it is one of the 23 financial firms that are allowed to manage EA funds as part of broader operations.

Other types of financial firms, including pension management subsidiaries of insurers and retail fund managers, provide the same investment management service too, said Melody Yang, a partner at law firm Simmons & Simmons.

Authorities' plan is to allow foreign institutions to follow in the footsteps of CCB Pension Management, which is a subsidiary of China Construction Bank.

Yang told AsianInvestor that because only one company is approved to manage EA assets under the pilot scheme, regulators will need to clarify many details when formulating the rules over how foreign managers can apply and how this new type of pension management company will fit into the current regulatory landscape in the asset management sector.

There is likely to be strong interest from foreign managers in entering China’s pension industry. In March, Standard Life Aberdeen has become the first foreign insurer to set up a pension insurance subsidiary in China, which allows it to manage assets under the second and third pillars.

PALTRY PILLAR

China regulators are focused on reforming its second pillar in order to improve both investment performance and overall level of pension savings.

The overall size and growth EA assets have to date been limited, CBIRC admitted in its notice. EA schemes currently have about $200 billion in assets under management, covering 24 million Chinese workers – less than 6% of China’s workforce. The scale is small, asset growth is slow and coverage is low, mostly because it is voluntary. Currently, big state owned enterprises are the only notable companies to offer EAs, said Appleton.

While officials are mulling how to introduce more pension managers, its bigger challenge will be to incentivise the creation of more corporate pension funds, and getting individuals to save more money for their retirement.

China’s regulators have previously attempted to meet this goal by lowering the total retirement contribution rate from both employers and employees from 16.6% to 12% to prod more companies to participate. However, it appears that this effort has not been sufficiently successful. 

Appleton said China’s authorities could promote more saving would be to give more tax incentives and to introduce a matching mechanism in which a dollar contributed by employers is matched by employees. Currently employers contribute up to 8% of an employees' salary at most, and employees can contribute a maximum of 4% of their salaries. 

They could also consider implementing rules in which part of employees’ salaries are automatically set aside, but they are given the choice to manually opt out from the programme if they wish, she added. Opt-out saving schemes tend to encourage more savings than opt-in versions.

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