Oct 2020

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Greying population and gap in pension funding are major challenges

Source: Asia Insurance Review | May 2019

China Life & Health Pensions & Annuities Employee Benefits People

Some call it the ageing time bomb while some others call it the grey wall of China. It hardly matters how one describes it, the fact is that the increase in longevity and the declining birth-rate are leading to a rapidly greying population in China.
By Anoop Khanna
China’s one-child policy introduced in 1979 and abolished in 2015, has created major demographic, social and economic stress that is taking its toll on Chinese society. 
Life expectancy in China, backed by the one-child policy and noteworthy progress in healthcare, has improved from 43 in 1960 to 75 in 2013. The fertility rate during the same period, however, has decreased from 2.8 to 1.7.
Over the years China’s birth rate has been declining sharply. China’s annual birth rate did achieve a one-off jump in 2016 with 17.9m births as compared to 16.6m in 2015. In 2017 only 17.2m births were recorded and in 2018, 15.23m births were the lowest since 1961.
Social security and pensions are the main concern 
In February this year the People’s Daily of China in its annual online poll asked the Chinese people which social, political and economic issues matter most to them. There were 18 topics to choose from and they included corruption, poverty 
alleviation, law and order, international relations, housing, stronger military, educational reforms, social security, technological innovations and more.
The media group received 4.5m responses. The top three concerns of the respondents were corruption eradication, law and order and social security. Pension or social security have remained in the top three slots for the fifth year in running in the annual online poll.
Detailed results of the online poll showed that in social security, people specifically emphasised the need to improve basic pensions for retired citizens. This is quite significant in the light of China’s slowing economic growth and rapidly ageing population. 
Getting old before getting rich
Chinese Ageing Well Association (CAWA), a non-profit organisation and Peking Union Medical College, published their first research paper on senior health in China in January 2019. The research points out that the ageing of China’s population is faster than the country’s economic development, posing severe challenges for the society.
It said, “China is now in a state of ‘getting old before getting rich’. According to CAWA research, it would be difficult for China to ‘get rich’ beyond 2026 (based on current economic and demographic trends) when the population’s ageing becomes acute.
The parameter for ‘getting rich’ is having real GDP per capita reach $5,000 to $10,000 or above - the benchmark most developed nations reach by the time their populations have begun ageing.
It is now difficult for China to achieve the desired growth rate for its population. China is today a far more urban, financially well off, better educated society when compared to 1980s. 
One-child policy, though abandoned, has become an accepted social norm
According to China’s National Bureau of Statistics and the Ministry of Civil Affairs, China’s marriage rate has been declining for five years in a row as the younger generation delays or has given up on marriage altogether. The marriage rate dropped from 9.9 per 1,000 people in 2013 to a five-year low of 7.2 per 1,000 people in 2018.
One-child per family, though now abandoned, has become an accepted social norm. A greater number of women are now employed. The increasing cost of housing, education and healthcare, all lead to a low birth rates.
In an ageing society young couples also get serious about financial planning for their parents and for themselves too as they grow old.
These factors preclude any possibility of people having a second child. The Chinese population would therefore peak at around 1.44bn in 2029 and start declining thereafter.
‘Silver’ population increases, working hands decrease
To sustain the ageing population, China would need to improve its pension management and elderly care system. In 2015 only 16% of the Chinese population was 60 and above and 67% of the population was in the 15-59 years bracket, which translated into four working people supporting one aged senior. 
With the decline in population growth, it is estimated that by 2050, 39% of the Chinese population would be 65 and above and the working group proportion would be just 51%. This would imply that 1.5 workers would support one senior Chinese. 
Pension system largely centred on first pillar – state funding
China now has to confront financial, social and labour market implications of its ageing population. In advanced economies, the problem of social security is shared between the government, the employers and the individuals in the three-pillar pension system. 
In China, however, till very recently, funding of the Chinese pension system depended entirely on the state, the first pillar of the pension system. China has been paying its retired population with the contributions from the existing pension system that was set up in the early 1990s. 
The gap between the money coming in and payments going out has, however, been growing as more people retire and fewer join the workforce. Independent macroeconomic forecasting company Enodo Economics of UK had forecast in 2017 that the shortfall could soar to CNY1.2tn by 2019. 
This huge funding gap is emerging as the next big challenge for Chinese policymakers. In 2016, 13 pension funds in the provinces and administrative regions of China did not have enough money to pay a whole year’s pension. One of the province in North East China, Heilongjiang, has been borrowing from the central government’s social security fund since 2016. 
The huge deficit can precipitate pension crisis 
It is estimated that by 2026 around 19 provinces and autonomous regions of China from the present 10 would have to grapple with pension deficits. In China the pension funds are managed by local city/provincial governments and hence, financial woes are more glaring in some regions. 
China’s pension crisis traces its origin to the market reforms in the 1990s when millions were laid off from economically unviable state enterprises, but they were still eligible for the ‘legacy pension’. As a result, contributions from younger people primarily paid for the pensions for the older and the retired.
Before the market reforms, the government employees and employees of government affiliated institutions did not pay into the pension fund while they were employed. Post-retirement their pension was secured by the government.
Market reforms are underway
The Chinese government is now looking at ways to improve the country’s pension structure and provide more incentives to encourage people to save more for their retirement. 
The ball was set rolling in May 2018, with the commencement of a commercial private pension market that gives individuals more responsibility and encourages them to invest more for their retirement to reduce the burden on the government. It also comes with tax incentives to encourage greater contributions to pension funds by individuals.
The government has also reduced the employers’ contribution to the pension pool from 19% to 16%. This should act as an incentive to shore up their profit margins, revitalise the market and generate more employment, thus boosting employees’ contribution to the pension pool.
China is also strengthening the China National Council for Social Security Fund, a strategic reserve fund established in 2000 to serve as a support of last resort for provinces with pension shortfalls.
Commercial pension and asset management in China offer a huge opportunity for global insurers and asset management houses. In March this year Heng An Standard Life, a joint venture between Standard Life Aberdeen and Tianjin TEDA International, was granted permission to establish a pensions insurance company in China. It is only the ninth insurance company and the first joint venture business, to have received this approval. 
Challenges aplenty
Yet there are challenges ahead. A commercial pension market is yet to take root in China. Prospective retail investors will look forward to tax incentives before they take a plunge. The design of the commercial pension programme is still not very clear. These will be sorted out once more players set up shop and a dedicated distribution channel is created. 
The Chinese investor would also need to be educated and made aware of the need for retirement planning. The industry players would require a strong legal protection mechanism from fiduciary liability in case of investment loss.
Still there is hope
BlackRock’s chief executive Larry Fink’s latest annual letter to shareholders offers the prospect of hope: “My ambitions in China – forecast to be the world’s second largest investment market behind the US in less than two years – have not been dented by the US-China trade war. A 
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