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May 2024

Bridging the pension gap in ageing China

Source: Asia Insurance Review | Jun 2022

Will China’s new commercial pension insurance scheme for individuals be able to take care of the rapidly ageing population of the country? Asia Insurance Review takes a look at the market, the scheme and the initial reactions to it.
By Anoop Khanna
It was in the year 2000 that China acquired the status of an ‘ageing’ society when the population of over-65s touched 7%. In 2021 the ratio reached 14%, making China an ‘aged’ country. China is expected to achieve the ‘super-aged’ status in 2035 when the aged population is likely to be 20%.
According to an estimate, by 2050 when the aged population will be 39%, the working population will be just 51% which means that 1.5 working hands will support one aged citizen.
Also, life expectancy in China has improved from 43 years in 1960 to 77.15 years in 2021. The fertility rate during the same period, however, has decreased from 2.8 to 1.07 per 1,000 live births.
To sustain this rapidly growing ageing population and increasing dependency, China will need to improve its social security, pension management and elderly care systems.
In February 2019 in an online poll the Chinese were asked which social, political and economic issues matter most to them. There were 4.5m responses and the top three concerns of the respondents were corruption eradication, law and order and social security.
Pensions or social security had remained in the top three slots for the fifth year running in the annual online poll. In social security, people specifically emphasised the need to improve basic pensions for retired citizens.
Pension based on three pillars concept
China’s old-age pension funding system is based on three pillars concept. The first pillar consists of the national and provincial social pension funds. The second comprises enterprise and occupational annuities - and the third consists of commercial pension schemes.
According to the China Pension Finance Survey Report (2021) the average expected level of pension benefits under the first pillar (state-run basic pension scheme) is CNY1,868 ($290) per month, however, the actual average monthly basic pension pay-out in 2020 was about CNY174 ($25).
At present, there are more than 300m employees enrolled in the basic old-age pension scheme. They represent about 70% of the 428m people employed in the urban market. Most of the pension assets are concentrated on pillar one, which accounts for over 82% of total pension funds by asset value.
Commercial pension scheme unveiled
In April, the General Office of the State Council of China announced a new commercial pension scheme for individuals, which provides for personal pension accounts where subscribers make contributions themselves and the funds are not pooled for pay-outs to third parties.
The National Pension Insurance Co established in March 2022 has been designated to lead the development of the third pillar of the national pension system.
The new scheme ‘Opinion on Promoting the Development of Personal Pensions,’ proposes that workers who are the members of the state-run basic pension insurance scheme are eligible to participate in the new individual pension system.
In the new scheme, subscribers set up personal pension accounts through the personal pension information management service platform. They can contribute a maximum of CNY12,000 ($1,767) per year per person to their personal pension accounts. They may also enjoy preferential tax benefits. The personal pension accounts can be opened at approved commercial banks.
Subscribers will be allowed to use the balance in their personal pension accounts to purchase financial products from financial institutions that meet the regulatory requirements or through sales channels entrusted by the financial institutions. The subscribers themselves will bear the corresponding risks in such investments.
The financial products that can be acquired with personal pension funds include bank wealth management, savings deposits, commercial pension insurance and public mutual funds.
Under the new scheme, subscribers who have reached the age of receiving basic pensions; have completely lost the ability to work; have settled abroad, or who have fallen into other circumstances stipulated by state regulations, can receive personal pensions either on a monthly, instalment or a one-off basis. On the death of a subscriber, the beneficiary can inherit the balance in the personal pension account.
Four big banks to run the pilot
The system will be first tested as a pilot system in selected areas for a one-year period before being implemented across the country.
China Banking and Insurance Regulatory Commission (CBIRC) in May 2022 designated four state-owned banks to launch the pilot programme for retirement savings products.
The banks are Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank.
According to Xinhua news agency these banks will handle pension funds of up to $1.47bn each in the pilot programme. The pilot products are being developed by the CBIRC and the People’s Bank of China. These are expected to be long-term investment plans with stable yields, fit for risk-averse residents.
CBIRC to regulate and promote
CBIRC has also issued a notice to regulate and promote the development of these commercial pension plans, outlining several principles to be followed by insurers and other financial institutions that engage in the business.
The document ‘Notice on Regulating and Promoting the Development of Commercial Pension Business’:
  1. Clarifies the development concept for commercial pension, supports and encourages insurers, banks, and other institutions to develop related businesses and enrich product supply
  2. Stipulates the basic standards and principles that insurers and other financial institutions are to observe in offering commercial old-age financial services
  3. Emphasises that insurers and financial institutions should fully disclose information, carry out consumer education, and cultivate the concept of pension funding
  4. Spells out basic operating requirements, such as the management system and fee income, that insurers and financial institutions engaged in commercial pension business have to take heed of
New scheme the new growth engine
In its first China pension report released in January 2022, EY said that the third pillar of retirement funding - comprising commercial pension insurance and personal retirement savings - will become the new growth engine of China’s three-pillar pension system. It said the first and the second pillar will continue to balance the entire pension system.
EY predicts that, as part of the first pillar of the pension system, the National Social Security Fund will still be oriented towards institutional business and will continue to be pursued by asset management companies. In asset allocation, the market will pay increasing attention to ESG investing.
The report said the establishment of the National Pension Company will serve as a catalyst in a market in which demand for commercial pension is weak. Regulators are encouraging insurance companies to make pension plans more attractive to the public.
Awareness will increase
In a sector comment ‘Promotion of private pension is credit positive to financial institutions’ published in April 2022, Moody’s Investor Service said, “Direct fund flows to insurers’ retirement savings insurance (mainly annuities), arising from the private pension scheme introduced by the government, will be moderate at the beginning of the scheme.”
The ratings agency, however, expects the new scheme will gradually raise individual awareness of private pension needs. Specifically, the requirement to lock up funds until reaching retirement age will redirect pensioners to focus on long-term yield stability for their retirement assets.
Moody’s said, “The development is credit positive for financial institutions including banks, securities companies, asset managers and insurers, because it will provide revenue opportunities in the private pension market However, the benefits will be gradual and depend on the participation rate, which is still highly uncertain.” A 
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