Greying China seeks reforms to shore up the three pillars of its pension system

Despite pension asset growth rates that have led the world for the past 10 years, China is expected to further reform its three-pillar pension system in a bid to tackle its increasingly ageing population.

China's pension system rests on three fundamental tenets, namely: a government-run basic pension scheme, enterprise-run annuity schemes and finally individual private pension schemes.

The reforms will target the first and third pillar of China’s pension system by improving funding for government pensions and introducing a greater range of individual private pension products through various pilot schemes.

All measures will help China to cope with the challenges emerging from a rapidly ageing population, said Wu Haichuan, head of retirement, China at Willis Towers Watson.

According to Thinking Ahead Institute’s latest global pension assets study, global institutional pension fund assets in the 22 largest markets have reached a new record, totalling $56.6 trillion by the end of 2021, up 6.9% from the previous year.

China has been the fastest-growing country in pension assets over the past 10 years, with a growth rate of 20.6%, followed by 12.2% in Korea.

Source: Thinking Ahead Institute

However, in terms of the ratio of pension assets to gross domestic product, China only achieves 2.2%. Australia, meanwhile, tops Asia Pacific at 172.4%, and Netherlands leads the world at 213.3%.

One factor to note is that the study only includes enterprise annuity (EA) assets, representing just half of the defined-contribution plans in China today. Occupational annuity, with funding started in late 2020, has grown rapidly in assets, getting closer to the size of EA assets. This makes the actual 10-year asset growth rates much higher than the 20.6% stated in the report, said WTW’s Wu.

Defined-contribution plans are funded primarily by employees while employers can match the contributions up to a certain amount if they choose.

China’s government-run pension, or first pillar, schemes provide defined-benefit plans that guarantee an income for life after retirement, with employers contributing a specific amount for each member.

AGEING CHALLENGE

Despite its fast-growing pension assets, China will need to tackle an increasingly ageing population as the growth rate approaches zero, analysts say.

Latest figures in 2021 showed that China’s population only rose by 480,000, or 0.034%, to 1.413 billion in 2021. Many demographic experts predict that China’s population may have peaked, and will start to decline in three years, which is at least five years earlier than previous estimates.

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As for the greying society, Chinese regulators have been implementing various pilot schemes to better fund the glut of retirees expected to hit the economy over the ensuing decades.

Most recently, China Banking and Insurance Regulatory Commission (CBIRC) gave the green light to BlackRock CCB Wealth Management to launch pension wealth management products in Guangzhou and Chengdu in a bid to enrich the supply of pension products in China. Total funds raised from the two cities under a one-year pilot programme are limited to less than 10 billion yuan ($1.57 billion).

Meanwhile, CBIRC will also expand its commercial pension pilot scheme nationwide from March 1 this year and allow other pension providers to participate in a one-year pilot scheme for commercial pension products in Zhejiang and Chongqing province run by six Chinese life insurers starting June 1, 2021.

The regulator has called on pension providers to keep exploring new products that will meet the needs of a greying demographic as well as new shifts in flexible working.

“All of these measures will contribute to the improvement of the [pension assets/GDP] ratio in the first quarter, and more importantly, the nation’s readiness to cope with the challenges from a rapidly ageing population,” said Wu.

“We will see more and more of these types of pilots or trials, and I would not be surprised to see many of these programmes being expanded into more cities or even nationwide.”

Wu said there had already been improvements in the asset management approaches of China’s pension funds, with government social security pension and enterprise annuity or occupational annuity assets expanding to allow greater equity exposure to Hong Kong stocks.

This article has been edited to clarify that the findings were published by the Thinking Ahead Institute, a research organisation within Willis Towers Watson.