Pension target funds (PTFs) stand to gain from the implementation of the pilot private pension scheme announced by the government in April, which encourages individuals to invest in a wide array of financial products.

Under the voluntary scheme, participants can invest in deposits, bank wealth management products, mutual funds, and other financial products through individual accounts. Workers can contribute up to RMB12,000 (US$1,790) per year in the initial stage of the scheme flexibly ways, and enjoy tax incentives.

PTFs, which are funds of funds (FoFs) using either target-date fund or target-risk fund strategies, were introduced in 2018 following regulatory initiatives. Following this, PTF assets under management (AUM) posted stellar year-on-year growth, from RMB4.1 billion in 2018 to RMB26.0 billion in 2019 and increased 126.9% in 2020 and 91.8% in 2021 to reach RMB113.2 billion. As of May 2022, target-date and target-risk pension funds reached 192, with AUM of RMB106.3 billion, according to Eastmoney. Cerulli expects growth to accelerate under the new private pension scheme.

As the pilot scheme is rolled out, Cerulli understands asset managers will speed up their participation in the PTF market, resulting in increased competition. Compared with the stable marketshares and rankings of fund management companies (FMCs) in the overall fund management industry, those of PTF players have been quite volatile in the last two years, given that this is a new segment. The changes in marketshare and rankings show that even some mid-sized FMCs which had an early focus on PTFs can still demonstrate their competitive advantages. However, only time will tell if they can maintain their leading positions, as other FMCs attempt to catch up.

The top 10 PTFs by AUM have a one-year duration, catering to investors’ preference. When asked about the key challenges in attracting retail interest to voluntary personal retirement schemes or retail retirement products, asset managers cited long lock-up periods, lack of understanding of the concept of retirement investing, and over-reliance on mandatory retirement schemes. Many investors still prefer comparatively high-liquidity financial products, while most pension products are invested in a long-term horizon.

Cerulli believes that investor education will be a key factor determining the success of the private pension scheme. “Investors should understand the differences in investment horizons and methodologies between PTFs and more commonly used financial products. Distributors, including commercial banks and financial advisors, will shoulder some responsibility in educating investors and helping them choose suitable products, as well as providing post-sale advice,” said Pan Yanjun, analyst with Cerulli.

She added, “Effective communication with investors is important to avoid the impact of market volatility on maintaining their fund holdings. Only by focusing on the steady income of long-term diversified allocations can investors realize value preservation and appreciate pension savings funds.”