Why China pensions' long-term survival is at stake

China’s public pension system shows the most worrying sign in its sustainability, two recent studies have found. But experts believe that the ongoing asset transfer from state-owned enterprises (SOEs) should improve the situation.

The country’s pension system scored 48.7 out of 100 in this year’s Melbourne Mercer Global Pension Index, giving it a D grade – among the bottom nine in the study that covers 37 retirement income systems. 

The score is a weighted average value of its sub-indices* of adequacy, sustainability and integrity. China scored the lowest for sustainability, gaining just 36.7.

The sustainability issue in China is also highlighted in Manulife Investment Management’s report on Asia pension reform. “Coverage is high, but adequacy is low and yet sustainability remains a concern”, the report released on Monday (November 19) shows.

The country's scheme to help plug shortfalls in its public retirement system with SOE assets would potentially help to improve its sustainability as the level of pension assets will be increasing, Janet Li, wealth business leader for Asia, told AsianInvestor. Others agreed. 

“The SOE asset transfer is a good step that China is taking in their pension reform…What the transfer provides is more security to the pension system in the short term and sustainability for the long term,” Calvin Chiu, head of retirement for Asia at Manulife, told AsianInvestor.

“You don't want to create what we call intergenerational inequality, by saying that the people who are retiring right now can get the benefits, but when its working population, or younger people who are actually there paying contributions to the system retire, they may not be able to get the pension benefits,” he said.

Chines authorities rolled out the SOE asset transfer scheme countrywide on September 20 with the release of new regulations governing the shift of assets to national and provincial social security funds, following a two-year trial.

The move is expected to greatly boost the total assets held in China’s pension system. At the central government level, 59 SOEs are expected to transfer about Rmb660 billion ($93.9 billion)-worth of assets to the NSSF, according to the Ministry of Finance.

The extra assets will help. Nevertheless, the funding gap in China’s pension system is expected to reach Rmb890 billion by 2020, according to the National Academy of Economic Strategy.

ADEQUACY, COVEARGE, SUSTAINABILITY

Adequacy and coverage in China’s pension system appear to be improving. It saw its scores in these areas in the Melbourne Mercer Global Pension Index improve by 2.5 points apiece this year compared with 2018, following increases in net replacement rate and increased coverage of workers in the pension systems.

The replacement rate is the percentage of a pensioner’s income compared to their earnings before retirement. In 2016, the average pension for urban employees is about Rmb2,362 per month, accounting for 44.8% of the average monthly wage for urban employees in the previous year, according to a research paper published on journal-sharing website MDPI in March this year.

In regard of coverage, roughly 943 million people in China had some form of state-backed pension coverage by the end of 2018, representing about 70% of the population, according to the Ministry of Human Relations and Social Security (MOHRSS).

However, China among other Asian markets, also has an aging population, and is set to see the relative size of its working-age populations decline as their retiree numbers swell. That will place an unsustainable burden on pay-as-you-go systems that fund pensioners’ benefits through workers’ current contributions, according to Manulife IM’s report.

"Meeting the shortfall through government coffers will prove challenging, given the decline in the number of taxpayers concurrent with the increase in social welfare expenditure on the elderly", it said. 

THREE PILLAR APPROACH

China divides its retirement system into three pillars, as defined by World Bank guidelines. Its first pillar is dominant and consists of social security that is funded and run by the government. It comprises the reserve National Social Security Fund (NSSF) and provincial pension funds (PPFs).

A less developed second pillar is made up of corporate annuity schemes, including voluntary enterprise annuities (EA) schemes for both state-owned and private companies and compulsory occupational annuities (OA) schemes for civil servants. A nascent third pillar comprises personal savings and voluntary individual contributions.

According to the China Population and Development Research Center, people aged 65 or more are expected to exceed 400 million by 2050, close to one-third of the total population.

*China was ranked 60.5 for adequacy (the benefits delivered by a retirement system), 36.7 for sustainability (the ability of the system to deliver those benefits into the future) and 46.5 for integrity (the extent to which a system can be trusted to deliver those benefits).