China’s race to upgrade its retirement options

The country is attempting to rapidly reform its pension system after failing to do enough for years. It needs to move quickly, to avoid growing poverty.
China’s race to upgrade its retirement options

Building a national public pension system, potentially letting corporate pensions invest overseas, opening up the pension business to insurers and fund managers; China is sparing no effort to build a multi-layered system to meet the retirement needs of its 1.4 billion population. 

But it’s in a race against time. The number of Chinese citizens aged 60 or above reached 241 million by the end of 2017, representing 17.3% of the country’s total population. The China National Committee on Ageing (CNCA) expects that figure to grow to 487 million, or nearly 35% of its population, by 2050.

The National Academy of Economic Strategy estimates the funding gap in the pension system will reach Rmb600 billion ($87.7 billion) this year, and it will widen to Rmb890 billion by 2020. 

To meet this rising cost, Beijing needs to build out a more sophisticated social security network (the so-called ‘first pillar’ of a pension system), while convincing local companies and workers to save more for their retirements (the ‘second pillar’) or individuals to save more themselves (the ‘third pillar’). 

In a healthy pension system, the three pillars would be roughly equal in size, to help cover the needs of people from different backgrounds. But China has leaned too heavily on the first pillar. 

A KPMG report released in November last year estimated the country had Rmb5.5 trillion of assets in the first pillar as of 2015, versus Rmb1 trillion for the second pillar and Rmb2 trillion for the third. They are estimated to grow respectively to Rmb20.4 trillion, Rmb12.8 trillion and Rmb11.4 trillion by 2025.

Along with being too much the focus of China’s retirement system, the first pillar has structural problems limiting its usefulness. It is fragmented between 32 administrative units, each of which have provincial public pension funds (PPFs). But demographic changes mean some provinces are seeing pension payments exceed contributions, while other – more urban districts – enjoy more of a surplus. 

In July, the State Council took an important step to try to reform the first pillar with the creation of a new centralised adjustment fund, which takes more funds from provinces with contribution surpluses and giving them to those with more retirees. This marks the first step to build a national pension insurance system in China. 

But it can’t be the last. Reforms in the second and third pillars of China’s pension system are also being pursued, and they need to be successful if Beijing is to avoid a demographic crisis in a decade or two. 


Concerns about China’s fragmented social security system have existed for a long time, and they were underlined by the latest report by the China’s Ministry of Human Resources and Social Security (MoHRSS) released in 2017.

It revealed that 13 local governments, representing almost a third of the Chinese population, would see pension payments exceed worker contributions during 2017. Northeastern Heilongjiang province, for example, had an accumulated pension fund deficit of Rmb23.2 billion by the end of 2016, and had to lean on fiscal expenditure to make up the shortfall. Guangdong was the healthiest; it had a surplus would cover pension expenses for nearly five years.

Pension fund deficits typically occur when a province has an ageing workforce or, as in the case of Heilongjiang, many younger workers move elsewhere in search of better job opportunities.

“[Urban areas like] Guangdong, Beijing don’t have big problem, as more [working] people are contributing. Many people are leaving for big cities because of urbanisation in China,” Wu Haichuan, head of retirement business for Greater China at Willis Towers Watson told AsianInvestor

But this won’t be true forever. “[Taking the country as a whole], there are still more people contributing now, as the working force aged between 20 and 60 is still more than the dependants … but the excess will decline gradually, even in Beijing and Shanghai,” Wu warned. 

The State Council’s new adjustment fund system is designed to mitigate these demographic problems. By shifting payments from contribution-rich provinces to those with a deficit, it hopes to ease some of the financial problems being faced by the latter. 

It is part of a broader push to build out a national pension system; simply transferring funds among provinces cannot meet the needs of the entire pension system, Lu Quan, secretary general of China Association of Social Security, told AsianInvestor

A national pension system is mandated in the country’s Social Insurance Law, and Beijing will likely finalise it by 2025, he added.


But building a centralised system offers its own problems. 

Different provinces have different economic conditions and pension system operations. Richer provinces will likely be reluctant to surrender their pension surplus to other regions, Lu said.

Zhang Howhow, KPMG

Others agree on the scale of the undertaking. “If it’s a pension business, it’s like a national one with hundreds of millions of clients and trillions of assets,” Zhang Howhow, director of global strategy group at KPMG, told AsianInvestor

He pointed to the merges of Aberdeen Asset Management and Standard Life, or Amundi and Pioneer, as examples. These took a year or two to integrate their respective assets, and that was between two organisations, not 32. Integrating them all will not be quick, or easy. 

“It’s urgent. There’s no time to wait. But it can’t be rushed,” Zhang said. 

Details of the centralised system are not yet clear, including whether investment of the PPF assets will be managed together with the Rmb2.22 trillion National Social Security Fund (NSSF), the reserve fund to support province pension expenses. But retirement experts caution against having an overly large investment fund. 

“A centrally managed system may not mean maximum efficiency for fund management…A portfolio with a huge fund size can be difficult to manage, because buying anything may move the market,” a Hong Kong-based pension consultant told AsianInvestor.

There is also the risk of insider trading. If a fund of such size began buying shares or other assets, individuals within its investment staff may try using their own money to front-run its orders, argued Stuart Leckie, a Hong Kong-based independent specialist who has advised China on its pension system.

This is the first in a two-part series looking at China's pension industry, adapted from a feature in AsianInvestor August/September edition. Look out for part two in the coming days. 

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