As China seeks to improve the amount of retirement savings in the country, the government will need to bolster savings in its second and third pillars. Doing so would create cost savings and product synergies and maximise the effectiveness of the entire pension system. 

But getting this to happen will require getting an array of territorial and overlapping regulators to agree on the way forward. And their disputes risk badly eroding any such potential synergies.

Different watchdogs monitor each of the three pillars. The National Council for Social Security Fund (NCSSF) oversees management of NSSF, while China’s provincial pension assets are managed by the respective provincial governments. The second pillar is mainly overseen by the Ministry of Human Resources and Social Security (MOHRSS), while the China Banking and Insurance Regulatory Commission (CBIRC) and China Securities Regulatory Commission regulate pension insurance products and target funds.

That means financial firms require multiple permissions to offer pension products under all three pillars. One possible move would be for asset managers tasked with managing NSSF money to instantly qualify to manage pillar two and pillar three money, said Howhow Zhang, partner for global strategy group at KPMG China. 

“There is very little disagreement that this [would create] a more efficient system. But on an operational level, it’s difficult to predict when those changes will happen,” he said.

A sensible step would be for China to ape the systems in the US and Canada, which effectively combine pillar two and three solutions together

A sensible step would be for China to ape the systems in the US and Canada, which effectively combine pillar two and three solutions together, said Calvin Chiu, head of retirement for Asia at Manulife. In effect, corporates in those countries can offer individual solutions and products but lump them together as a group arrangement, which offers economies of scale.

In another example, MOHRSS said in June an account-based structure will be implemented under the third pillar. This would let individuals access and easily switch their pension savings between fund products, Sally Wong, chief executive of the Hong Kong Investment Funds Association, told AsianInvestor

She believes this idea should not just be introduced; it should be applied across all the three pillars of an individual’s pension savings. That would give them a holistic view about the state of their retirement savings and help them facilitate planning.

It’s an admirable goal. But it would require structural and institutional changes, given the different make-ups of each pillar, which means it’s unlikely to happen soon, said Wong.

Could such cross-pillar synergies happen one day? Zhang is hopeful. “I won’t be surprised if the industry is going to move towards a more synergistic or collaborative situation [across the three pillars]. It’s [just] difficult to predict when it is going to happen,” he said.

For now, China’s top priority should be to build stronger second and third pillars. Hopefully the regulators’ coming new rules will solidify their growth too, so that they outpace the first pillar. 

The country needs them to, if it’s to avoid a worrying shortfall of retirement savings in the years to come.

China’s pension system
at a glance

China divides its retirement system into three pillars. The first pillar is dominant and consists of social security, comprised of 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 public and private companies and compulsory occupational annuities (OA) schemes for civil servants. A nascent third pillar consists of personal savings and voluntary individual contributions.

The pension system scores 48.7 in this year’s Melbourne Mercer Global Pension Index, putting China in grade D – among the lowest nine in the study that covers 37 retirement income systems. The report said its pension system has some desirable features but also major weaknesses, with its efficacy and sustainability in doubt without major improvements.

China obtained 60.5 for adequacy, 36.7 for sustainability and 46.5 for integrity. It is in a race against time to improve these scores. 

The China Population and Development Research Center said locals aged 65 or more are expected to exceed 400 million by 2050, nearly one-third of the population.

This story was adapted from a feature on China's pension industry that originally appeared in AsianInvestor's Winter 2019 edition.