China's private pensions need drastic stimulus as national pool dries

Although a three-pillar pension system has been established in China, the country is in urgent need of more drastic changes as its population ages and declines.
China's private pensions need drastic stimulus as national pool dries

China has been urged to push forth on firm stimulus policies for its newly established private pension scheme in order to increase the thus-far muted demand in the personal retirement savings market. 

Industry experts believe the central government and regulators need to introduce more tax incentives as well as more sophisticated investment products to attract meaningful inflows into its private pension scheme, all while the national pension pool dries up due to a declining and increasingly ageing population.

The world’s second-largest economy reported its first-ever population decrease in January of this year. The country recorded 850,000 fewer people in 2022 compared to 2021, or a -0.6% growth rate, with the total population standing at 1.41 billion.

Meanwhile, the population aged 65 and above increased by 0.7%, while the working-age population between 16 to 59 shrank by 0.4%, in 2022.


Zhou Xiaochuan

In an alarming speech, China’s former central bank chief Zhou Xiaochuan warned that because of a rapidly aging population, the country’s pension fund pool could easily pose a crack.

“A reality in China is that there is a large population, and the scope of coverage of pension funds continues to expand. Generally speaking, due to an ageing population, the pension fund pool is prone to gaps,” Zhou told a wealth management event in Beijing on February 25.

“In this case, the national pension is only guaranteed to the basic demand, or the relatively large gap will need to be supplemented by personal pensions to a greater extent,” he said.

Zhou was the governor of the People's Bank of China from 2002 to 2018.

Currently, China’s pension funds, despite its large reserves, only account for 10% of the national GDP, much less than many other economies’ 50-100% pool.

“We are still not doing enough to communicate with the public on the level of pensions they will need for retirement life; the incentive mechanism still has certain flaws,” Zhou said, noting that there is still a large group of Chinese people who haven’t reached the lowest personal income tax threshold, which makes the personal pension scheme’s tax incentive unattractive to them.

According to a China pension fund report published by the Chinese Academy of Social Sciences in 2019, the balance in China’s national pension fund will have run out by 2035.

Meanwhile, China is expected to surpass most developed countries in 2040 to become one of the countries with the highest aging rates in the world.


He stressed that China needs to address the problem right away with no time to spare, considering the remarkable ageing trend and the challenges of shifting the pension system away from a national pension-dominated model.  

With an increasingly ageing population, China rolled out the third pillar private pension scheme in April 2022 and released implementation guidelines in November of the same year.

It caps the amount of contribution that can enjoy tax exemption at Rmb12,000 ($1,745), which many believe is too small an amount and simply not attractive enough.

According to data from Bain and Company, it is estimated that only 60-70 million Chinese citizens, or 5% of the total population, is eligible for the tax break.

Wu Haichuan, WTW

“Tax policy can be the engine or brake for any retirement schemes,” said Wu Haichuan, head of retirement, China at WTW.

“More tax incentives (are needed) to encourage more plan and account setups and more individual contributions. There have also been many discussions to integrate the individual contribution part in Pillar 2 (also known as enterprise annuity) and Pillar 3,” Wu told AsianInvestor.

He also thought regulators should explore incentives targeting small business owners, self-employed people, or employees whose companies don’t offer enterprise annuities.

Currently, only around 10% of employees in China are covered by company-sponsored annuities.

China’s relatively early retirement age is also adding pressure to the pension system. The current retirement age for Chinese men is 60 and 50 for women, and 55 for women leaders.

As the population continues to age, the Chinese government is planning to change the policy that has been in place since the 1950s by postponing the retirement age to as late as 65 for both men and women. 

As of 2021, the size of China's pension market was about Rmb15 trillion ($2.2 trillion). Since 2022, with the accelerated implementation of the third pillar private pension scheme, trillions of incremental funds went into the market, including wholly foreign-owned fund management companies that recently rushed into the mutual fund industry.

Bain and Company’s China pension market white paper published on February 15 forecast that before 2025, the short-term growth rate of China's pension market could reach 15%, and the total scale can reach Rmb26 trillion. By 2030, the size can reach Rmb48 trillion.

From top to bottom bar: first, second and third pillar (by trillion yuan) (Source: Bain and Company)

To increase the attractiveness of commercial pension plans and reverse a status quo where national pension plans still dominate Chinese people’s retirement savings, Bain suggested more diversified portfolio offerings, especially funds with a higher weight on equity and alternative assets to increase the long-term return prospects of the third pillar.

Currently, most private pension plans in the market are fixed income-heavy products.

More customised products should be available to cater to the different needs of people of varying ages and income levels, the report said.

Moreover, Bain advised allowing fund transfers from second-pillar accounts to third-pillar personal accounts in order to share the tax incentives and further increase the attractiveness of enterprise annuities as well as fund sources for personal pension accounts.  

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