China’s new pilot scheme insufficient to meet pension shortfall

More can be done to support the scalability of the programme and engagement with individuals, experts say, although they believe the pension gap is not inherently “urgent”.
China’s new pilot scheme insufficient to meet pension shortfall

China’s newly launched pilot scheme meant to encourage personal pensions for individuals provides much-needed innovation to the market, but more can be done to address the pension shortfall, experts told AsianInvestor.

The China Banking and Insurance Regulatory Commission on May 16 announced a pilot programme to foster endowment plans that offer individuals stable returns for 10 years after retirement.

The scheme was introduced as part of the government’s plan to build up the third pillar of China's pension system: personal pension schemes. The first pillar refers to state-run schemes which include a national social security fund and provincial public pension funds, while the second pillar refers to enterprise and corporate annuities.

Six companies will participate in the pilot programme, namely China Life Insurance, People's Life Insurance, Taiping Life Insurance, China Pacific Life Insurance, Taikang Life Insurance and Xinhua Life Insurance. The one-year trial will take place from June 1 in the eastern province of Zhejiang and the city of Chongqing, according to the CBIRC statement.

Rick Wei, JPM AM

While the pilot programme is a well-intentioned and necessary move to address China’s pension gap, building up a pension system for an ageing population will be an uphill battle for the country, experts said.

“Developing a multi-layer and multi-pillar pension system amid a rapidly ageing population is a major challenge and focus for the Chinese government,” Rick Wei, JP Morgan Asset Management's head of Asia Insurance Strategy, told AsianInvestor.

“To tackle this issue, it will require close collaboration between all stakeholders such as government, regulators, insurance companies, and investment managers, especially in the third pillar pension scheme,” he said.

China is expected to have a Rmb10 trillion ($1.5 trillion) pension gap over the next five to 10 years, which will widen over time, the China Insurance Industry Association stated last December. 


China has invested huge amounts of state-owned capital to support the gap. For instance, the government is reportedly planning to set up a new state-backed firm that would help cut administrative costs and support the development of the third pillar of the pension system.

In 2018, a one-year pilot pension programme was launched in Shanghai, Fujian (including Xiamen) and the Suzhou Industrial Park that offered tax intensives to people who took up personal insurance products.

Even though the 2018 pilot did not achieve significant levels of scale, it was China’s first experimentation with tax-deferred benefits and innovative product designs that covered annuity and pension target funds, Wei said.

Wei added that these two pilot programs are critical milestones towards building a sound, inclusive and sustainable private pension system and that the new pilot will expand the number of participants eligible for pension plans, particularly workers who do not qualify for corporate pensions. 

Fred Wen, Mercer

“Going forward, the government is catching up with other developed countries to adopt for innovated pension schemes. We would like to see more initiatives to boost the savings amount to transfer into pension-wise contribution,” Fred Wen, China wealth business leader from Mercer, told AsianInvestor.

However, Mercer's Wen asserts that the need to address the pension gap is not yet urgent and that state-owned enterprises should be able to provide a capital reservoir to mitigate potential funding shortfalls.


Opening the market up to foreign participants could help expand the number of potential participants in pension schemes, JP Morgan’s Wei added.

However, few foreign insurers have taken the plunge. In January this year, Standard Life Aberdeen's 50:50 life insurance joint venture with Tianjin-based Tianjin TEDA International won final approval from regulators to open a pension insurance company.

The Edinburgh-based insurer became the ninth insurance company in the country and the first joint venture involving a foreign partnere. The JV is also the second foreign company involved in China's private pension sector.

“Further opening the pension market to more foreign participants could bring global experience and expertise in long-term pension investment, risk management, and product innovations. Global experience shows that allowing overseas asset exposures to pension investments could improve portfolio diversification and increase risk-adjusted returns over the long-term,” Wei said.

Foreign insurers only held a 2.5% stake of China’s life insurance assets as of 2019, according to a 2020 report by credit rating agency S&P. These players face new national security issues and potential joint-venture disagreements but are working to gradually build a sizeable market share in China.

China has been trying to reform its three-pillar pension system but it continues to see slow progress. Experts have said that the third pillar needs more work, particularly through investor education on retirement and long-term investments, and the hiring of more pension managers.

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