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China’s new state firm to speed up private pension development

The country is setting up a public agency to act as a clearing house to support its underfunded pension system. The plan could involve spinning off a government unit.
China’s new state firm to speed up private pension development

The Chinese government's plan to create a new state-backed pension firm is seen by experts as a "necessary and reasonable" move that will help cut administrative costs and support the development of individual pension schemes, which are lagging behind those of developed economies. 

The China Banking and Insurance Regulatory Commission (CBIRC) is mulling a national pension company with state-owned banks and insurers as shareholders, according to a Bloomberg report in early March. Details such as the shareholding structure and size of investment are still being worked out, it said.

CBIRC did not reply to emailed questions from AsianInvestor about the new firm's details.

Liu Shichen,
Z-Ben Advisors

Liu Shichen, head of research at Shanghai-based consultancy Z-Ben Advisors, told AsianInvestor that China was probably setting up a "clearing house" structure under the new plan. This may prove similar to a system in Sweden where a public agency acts as a clearing house and intermediary between workers and investment managers.

The Swedish approach has been to use the clearing house model to centralise many functions, which helps to keep administration and asset management costs of pensions down, Liu explained.

While the clearing house format will likely involve many different authorities and could take a long time to be implemented, it is an effective way to connect individuals, asset managers and products, he said. It is also an efficient way to allow participants to select, switch and settle their pension products.

PENSION SHORTFALL

A particular advantage of this approach is that should help simplify the approach of individual pension schemes. This is an important point for the Chinese government, which wants to encourage citizens to save more for their retirement to help slow a growing pension hole. 

According to the National Council for Social Security Fund (NCSSF)'s 2019 annual report, published in September, China's pension fund assets stood at Rmb2.63 trillion ($389 billion) in 2019. This falls well short of the country's projected needs.

The nation is expected to see a Rmb8 trillion to Rmb10 trillion ($1.13 trillion to 1.4 trillion) pension gap emerge over the next five to 10 years and it will widen even further over time, according to the China Insurance Industry Association in a report on pensions released last November. The country's elderly population could reach 300 million by the end of 2025.

As with most advanced nations, China’s retirement system comprises three pillars: a national social security fund and provincial public pension funds; enterprise and occupational annuities, and individual pension schemes. Liu noted that the currently complex administration process and the inadequate returns of the products have curtailed individuals' enthusiasm to put money into individual pension schemes under the third pillar.

"Although the government has implemented tax incentives to drive interest in individual pension schemes, the outcome was not particularly satisfactory, given that many individuals tend to buy wealth management products to get a higher return," he said.

SPIN-OFF

One way of accelerating the plan to establish a new national pension company could be to spin-off CBIRC's China Banking and Insurance Information Technology Management (CBIT). Beijing-based CBIT was set up in 2013 to support CBIRC's information and technology duties.

"The new unit may be taking over what CBIT has been doing and adding more services supporting and transferring duties," said Liu.

He added that the proposed unit is likely to act as a manager of the pension protection fund (PPF), which protects the benefits of members of defined benefit or cash-balance pension plans. If an employer goes out of business or a pension plan member can't fund their retirement plans, the PPF will pay compensation.

Regarding the potential shareholders of the proposed unit, Liu said they were likely to be "top-tier players from state-owned banks and insurers," adding that, instead of acting as asset managers, their roles would most probably be to provide support for China's massive pension scheme.

GROWING PENSION DEFICIT  

While China’s pension market has seen uneven and slow development, its prospects have already attracted foreign players.

"China is one of our focused markets, and we have a draft plan to get into the pension market when the time comes," the head of institutional business for China at a large European asset manager told AsianInvestor on condition of anonymity.

He noted that it was a "very reasonable" move to set up the new unit given that the third pillar has seen limited progress and the government urgently needed to introduce some national players to drive its development.

"The management model for the second and third pillars needs reform, and solely relying on market players is not enough."

¬ Haymarket Media Limited. All rights reserved.
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