Corner Office Views | Q2 2021

Where Is the Potential in China’s Retirement Market?

China’s third pillar pensions has the most promising opportunities for managers wanting to break into the country’s huge retirement market

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Key Implications

  • China has so far been relying heavily on the first pillar to fund retirement. It accounted for more than 80% of total retirement assets as of end-2019.
  • The second pillar comprises Enterprise Annuity (EA) and Occupational Annuity (OA). The latter holds more opportunities for managers, as it is mandatory for all civil servants.
  • Amid impending expansion in the country’s third pillar, managers’ patience in educating investors and consistent performances are essential in breaking into the huge market.

Authored by

Kangting Ye

Kangting Ye

Senior Analyst

Bio →

Kangting Ye

Kangting Ye

Senior Analyst

Based in Singapore, Kangting leads Cerulli’s China research practice, and has provided primary quantitative analysis for various Asian publications and projects.

Prior to joining Cerulli Associates, Kangting held internships with Unilever and China Construction Bank.

Full biography here.

Mei-Hwen Wong

Mei-Hwen Wong

Senior Editor

Bio →

Mei-Hwen Wong

Mei-Hwen Wong

Senior Editor

Based in Singapore, Mei-Hwen edits Cerulli's range of Asia Pacific research reports and works closely with analysts, the production team, and freelancers. She also writes for The Cerulli Edge monthly and quarterly publications, drafts press releases, and reviews external presentations to ensure they are client-focused and reflect the Cerulli brand.

Prior to joining Cerulli, she edited and wrote for an insurance trade publication, covering Asia and the Middle East, for over 10 years.

Full biography here.

The Aging of the Largest Population

China’s old-age dependency ratio is set to quadruple to 44% over 50 years to 2050, according to the World Bank, yet the retirement funding gap continues to widen. According to the state-run Chinese Academy of Social Sciences, the country’s Basic Pension (BP) system may be depleted by 2035 as the world’s largest population ages, with its chief component–the urban workers’ BP–expected to run into deficit after 2028, surpassing RMB11 trillion (US$1.6 trillion) in 2050.

Asia Ex-Japan Asset Managers' Views on Factors Increasing the Chances of Winning Mandates, 2020 (RMB billions)

Source: Cerulli Associates | Analyst Note: Regional managers with businesses in multiple countries in the region were surveyed.

China has so far been relying heavily on the first pillar to fund retirement. The BP and the NSSF together form the first pillar of China’s retirement market, which accounted for more than 80% of the total retirement assets as of end-2019. Made up of the Basic Pension (BP) and the National Social Security Fund (NSSF), the first pillar accounts for more than 80% of total retirement assets. The NSSF is expected to increase its outsourcing, but it could be very selective of foreign managers.

The second pillar, comprising EA and OA, is mostly targeted at employees working in big or state-owned enterprises (SOEs) and civil servants, but covers only a small portion of the country’s vast population. The OA holds more opportunities for managers, as it is mandatory for all civil servants.

Encourage Participation

Regulatory change in the third pillar will encourage fund manager and insurer participation.

The fledgling third pillar is an area where Cerulli expects regulatory changes, which will encourage deeper market participation by fund managers and insurers.

What is the third pillar?

Following a guideline by the State Council’s guideline in 2017, which laid out the government’s intention to support the growth of the third pillar, Shanghai, Fujian Province, and Suzhou Industrial Park began to pilot the tax-deferred commercial pension insurance scheme. Under the plan, individuals can defer tax on part of their income to buy private pension insurance until they retire.

The regulator also introduced pension target funds (PTFs) in early 2018 to allow fund managers take part in the third-pillar pension space. However, they were not included in tax benefit schemes at the time of writing.

Lukewarm response

As of April 2020, the tax-deferred pension insurance scheme accumulated premiums of around RMB300 million and about 47,600 scheme participants through three types of private pension products (income-determined, income-guaranteed, and floating-income products), far below the market’s expectation, according to media reports. While some market players doubt that the tax-deductible amount—6% of monthly labor income or RMB1,000, whichever is lower—is sufficient to lure participants, limited pilot regions could explain the lukewarm response to the scheme.

Pilot Regions

Limited pilot regions could explain the lukewarm response to the scheme.

Other possible reasons include low income, tedious processes in claiming tax deductions, unattractive product returns (2.5% to 3.5% for pension insurance products, similar to returns of money market funds, which are more liquid), a volatile stock market, and the lack of distribution models, which encourage long-term holding of investments. Furthermore, no new products were included in the tax benefit scheme in May 2019, one year after the start of the pilot.

Recently, however, the authorities announced the initial design of a new voluntary retirement pension system, which will provide tax incentives for eligible mutual funds and bank-issued wealth management products. You Jun, a vice minister with the Ministry of Human Resources and Social Security, said during a press briefing in February 2020 that the new private pension scheme will be introduced on an “individual account-based, voluntary participation basis”. No specific timeline was given, but he said it will be launched “as soon as possible” and it will encourage the growth of China’s third-pillar pension system.

China’s Retirement Investable Assets, 2015-2019

Source: Cerulli Associates | Analyst Note: 1.Includes worker pensions, rural citizen pensions, basic medical insurance, work injury insurance, and unemployment insurance. 22 provinces agreed to outsource RMB1,093 billion to the National Council for Social Security Fund (NCSSF) as of end-2019, and RMB908. 1 billion has been transferred to the NCSSF. 2. Provinces have outsourced RMB100 billion to the NSSF. 3. Figure as of end-May 2019. 4. Premium income. 5. Includes all third-party managers for enterprise annuities, not restricted to fund management companies.

Some managers told Cerulli that mutual fund buyers could be more responsive to tax incentives compared to insurance policyholders. Once individual account issues are resolved, they expect good prospects for PTFs to at least distinguish themselves from similar balanced funds or ordinary funds of funds.

Need for stable products

Cerulli believes that managers should provide stable products amid China’s volatile stock market, so that investors can see their assets accumulate in the next three to five years, and gradually build their awareness of investing in mutual funds for their retirement needs. Managers who are patient in educating investors and show consistent performances should eventually be able to break into the huge market.

Although the retirement space seems limited for global managers at this moment, the recent rule changes on foreign ownership of pension insurance firms and FMCs will enhance the accessibility of Chinese retirement assets to some extent. Foreign managers that are optimistic about the market’s long-term potential should prepare early and try to build their onshore reputation before the rules are officially implemented.

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