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China launches private pension system

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9 May 2022

China is opening up its pension system to private providers and Western asset managers are lining up to get a foot in the door. Mona Dohle reports

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China is opening up its pension system to private providers and Western asset managers are lining up to get a foot in the door. Mona Dohle reports

The introduction of automatic enrolment in the UK has illustrated how rapid a sector can grow with regular contributions by 20 million savers. A similar revolution, but on a potentially much larger scale, is about to happen in China, a country with 1.4 billion citizens, half of whom are of working age.

In April, China’s authorities announced the introduction of an official private pension scheme. This is an attempt to tackle the shortfalls of its existing three pillar system and the demographic challenges it faces.

China has the most rapidly ageing population in the world, according to the World Health Organisation. By 2050, nearly a third of its population will have celebrated their 60th birthday, compared to 10% today.

The country holds $285bn (£224bn) in pension assets, which is less than 2% of GDP, according to the Thinking Ahead Institute’s Global Pension Asset Survey. The public pension fund, the first pillar, accounts for more than half of all assets, followed by the second pillar, which is enterprise and occupational annuities. Private pensions is the third pillar, which accounted for some ¥4.4trn (£530bn) in 2020, according to KPMG.

Rollout in stages

Unlike in the UK, China’s third pillar will rely on voluntary contributions from pension savers and will be predominantly targeted at the middle class. Chinese employees can contribute up to ¥12,000 (£1,435) per year in exchange for tax breaks. As such it serves as an addition to the second pillar pension, which consists of employer and employee contributions.

Moreover, the initiative will be rolled out in stages across different cities, the Chinese state council announced. It remains to be seen whether policymakers can persuade citizens to invest some of their salaries, given that annual disposable income per capita was ¥32,189 (£3,855) in 2020 and Chinese citizens will already be feeling the pinch of rising prices.

But consultancies are upbeat that the third pillar could become a key driver of the rapidly growing Chinese pension market, given that the market has grown at a compound annual growth rate of 20% during the past 10 years, according to Willis Towers Watson.

Foot in the door

For Western asset managers, the third pillar pension could offer a unique opportunity. The first and second pillar of the Chinese pension system have been restricted to a select number of domestic investment firms.

With the launch of the third pillar, Western asset managers could offer commercial pension policies and pension target funds. Among the firms aiming to get a foot in the door of the rapidly growing Chinese retirement savings market is BlackRock, which received regulatory approval to launch its wealth management business on mainland China last year. Goldman Sachs and Allianz have also taken steps to target the market.

Turning point

What are the implications of the reforms for UK investors with exposure to China? Chinese assets have fallen out of favour with Western investors for the past few months. Driven by market jitters over Fed tightening and the Ukraine war, the People’s Republic has seen outflows of $11.2bn (£8.81bn) in bonds and $6.3bn (£4.9bn) in equities in March alone, according to the Institute of International Finance.

This is bad news for UK institutional investors, particularly those who are invested in emerging markets through an index. The People’s Republic accounts for 30%, just under a third of the MSCI Emerging Market index.

Chinese stock markets, in particular, have historically been volatile, with 80% of the A shares market held by retail investors. A growing Chinese fund industry could take off some of that volatility and provide long-term funding to Chinese capital markets.

That appears to be the intention of the China Securities Regulatory Commission, the main regulator of Chinese financial markets. “Pension money can provide more long-term, and stable funds to develop the real economy, via capital markets,” the regulator said in a response on its site.

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