Searing reforms proposed by a former high-ranking board member of China's national pension fund manager have had a polarising effect on pension experts, with some welcoming the proposals and others deriding them.

Under the plan put forward by Wang Zhongmin, ex-deputy chairman of the National Council of Social Security (NCSSF), investment assets would be shifted onto individuals for management rather than left with provincial authorities.

The idea forms part of a set of suggested reforms that would arguably see China’s public pension system make better use of an historic account-based structure and overhaul management of the National Social Security Fund (NSSF).

"The broad direction is right ... [although] it lacks specifics," Janet Li, wealth business leader for Asia at consulting firm Mercers, told AsianInvestor. “NSSF’s investments tend to be conservative, mostly cash. If individuals [make their own investment choices] they can do it according to their own situations.”
 
Under the first pillar, workers in China have to pay about 8% of their monthly income into a pension pot run by each provincial government. Another 10% to 11% contribution is paid by employers and it's then up to the government to make up any projected shortfalls in pension payments with fiscal revenues. 

But with China faced with a growing challenge as the country's population ages and fewer working-age payments are made, Wang's idea is to put individuals’ compulsory contributions into “personal accounts” instead of social security funds, 21st Century Business Herald reported on Sunday.

“If personal accounts are implemented, individuals have to use this part of money to make investments. Returns made every year will be saved in it and compounded over the years … This will not raise any expense for individuals but increase their wealth,” he said at weekend public forum in Qingdao.

It would potentially allow individuals to invest for their retirement according to their life stages and risk appetites, while also reducing the fiscal pressure on the government, Li said.

CONTROVERSY

Wang didn't elaborate on whether public pension payouts would change after such reforms.

It's also unclear how much influence Wang retains within government circles. It's fair to surmise, though, that Lu Quan probably hopes it's limited because, as secretary general of the China Association of Social Security, he thinks Wang's proposals wholly inappropriate.

“I think his idea is totally wrong ... a core concept of [public] pension is pay-as-you-go. Personal accounts in the second and third pillars are acceptable but not in the first pillar, he told AsianInvestor.

China's retirement system is divided into three pillars, in accordance with World Bank guidelines. The first pillar dominates and consists of social security funded and run by the government. A less developed second pillar is mainly made up of corporate annuity schemes, while a nascent third pillar comprises personal savings and voluntary individual contributions.

To put the first pillar on a more sustainable base, Lu said a more sensible approach would be to raise the retirement age, which in China is just 55, rather than just place the onus on individuals to improve their investment returns.
 
“China’s stock market is not performing well now. They think it needs the support from more capital injection … but this is not what a social policy should think about”, he said.
 
China's first pension pillar originally comprised two parts when first designed: pay-as-you-go plus fully-funded personal accounts. But shortfalls in the pay-as-you-go part resulted in personal account money being used to fund pension payouts, leaving them empty for years, Lu explained.
 
CAPITAL MARKETS
 
Wang also suggested using capital transfers from state-own enterprises (SOEs) to fill up empty personal accounts. This is after China began shifting 10% equity stakes in SOEs to its public pension system in late 2017.
 
Lu suspects that the thinking behind Wang idea's is more about encouraging the flow of pension fund money into capital market than about long-term financial sustainability.
 
For Mercer's Li, pension money should be used to help promote capital markets and in that sense the proposed reforms are fit for purpose.
 
However, she admitted a lot of clarifications will be needed, such as what financial products are allowed and what happens if individuals make poor investment choices, especially the financial literacy among the mass public is not high in China.