Chinese fund firms get shot at pension promised land

China is turning to fund houses to build out its pension system, having already reached out to life insurers, raising hopes of a major new line of business for the industry.

But it could take time for local savers to warm to their retirement products.

A total of 14 asset management companies* have been given the official okay to roll out funds specifically for retirement purposes, becoming the first in China to be allowed to do so, the Economic Observer reported last week.

Some, such as E Fund, are raring to go and intend to sell such funds "very soon", a spokeswoman told AsianInvestor.

Beijing's co-opting of asset managers follows the launch in May of a one-year pilot scheme for tax-deferred pension insurance products and the publication in July of new rules governing the management of these products, among other things.

In line with World Bank guidelines, China is developing a pension system with three "pillars": one funded and run by the government, another mainly made up of corporate annuity schemes, and a third built from personal savings and voluntary individual contributions. For fund houses, this final category represents a potential treasure trove -- a key source of consistent long-term capital. 

According to a report released by KPMG in November, pension assets under the third Chinese pillar are predicted to grow almost fivefold to Rmb11.4 trillion in the 10 years to 2025.

“The third pillar will be the blue ocean in the asset management industry in China,” said a company spokesman at China Asset Management (ChinaAMC), also among the first batch of approved companies.

But first both the government and financial industry need to take a bigger role to help raise public awareness of the importance and benefits of putting aside more money for retirement, he warned.

Whether commercial pension products, including fund and insurance products, are well received by the Chinese market will also depend on the first pension pillar.

If people can expect to receive a public pension fund that is already 70% to 80% of their income before retirement, then people will be less interested in buying such products, Lu Quan, secretary general of China Association of Social Security, told AsianInvestor.

According to the Pension at a Glance report released by the Organisation for Economic Co-operation and Development in 2017, China’s mandatory public pension scheme has a replacement rate of 76% on average.

Other estimates, though, put it lower.

It's also not hard to imagine the country's urban middle classes being prime targets for the fund firms selling pension savings products as they look to maintain their increasingly comfortable lifestyles into their old age.

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 the population, by 2050, state news agency Xinhua reported.

Offering tomorrow's Chinese pensioners the chance to boost their retirement income by making additional voluntary contributions in the interim, and according to their own needs and risk preferences, is the objective of the third pension pillar.

It's also why China is pushing both on the fund and insurance front, to create a diversified range of pension products that can best meet the investment needs of different people, the China AMC spokesman said.

According to the draft rules released by the China Securities Regulatory Commission in March, the  pension fund products of asset managers must take the form of funds of funds (FOFs). 

The rules also state that two investment strategies should be employed: target date and target risk.

In a target-date fund, the amount of equity in the fund gradually decreases as the investor approaches his or her retirement date, so the investor takes less risk as the investment horizon shortens. In a target-risk fund the asset manager has to ensure that the level of risk is not greater or less than the fund's target-risk exposure.

*The 14 fund houses are ChinaAMC, China Southern, Bosera, Zhong Ou, Guangfa, E Fund, Penghua, Manulife Teda, Wanjia, Fullgoal, ICBC Credit Suisse, Yinhua, Harvest, Bank of China. Half of them have confirmed to AsianInvestor about the regulatory approval.

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