David Li, a mid-level executive at a wealth-management firm in Guangdong, knows he cannot rely on his basic government pension, or even on his extra personal investment in retirement insurance, to maintain his standard of living after retirement.

“I feel anxious when talking about retirement,” said the 43-year-old, who worries his pension and insurance might not keep up with inflation.

However, a new option for Li arrived in late April when the Chinese government pushed out a new framework to expand the nation’s private pension scheme. The new option allows qualified employees to set up private pension accounts, for which they will be able to choose from among a menu of investment vehicles.

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This so-called third pillar of China’s pension infrastructure joins the first pillar, the compulsory state pension, and the second pillar, voluntary additional contributions by state-owned entities, companies and their workers. The third pillar is seen as vital given China’s rapidly ageing population of 1.4 billion and decreasing birth rate are putting pressure on its existing pension system. Amid predictions that the system could run dry by 2035, China has also signalled that it will increase the mandatory retirement age after holding firm for seven decades.

The plan also creates a market that will be worth around 10 trillion yuan (US$1.5 trillion) by 2030, according to McKinsey & Company. That opportunity – 5.5 times its size in 2020 – has financial-services companies of all stripes, both in China and overseas, preparing to compete.

“The market consensus is that pillar 3 will be a major battleground for players competing in the pension market,” said Charlene Wu, partner at McKinsey. “The ‘make or break’ moment for each type of player is whether it can define its value proposition and play to its strengths.”

Financial institutions including banks, insurers and wealth-management companies are gearing up for the new market. In its push to develop the third pillar, the government is spearheading pilot programmes involving savings products from four state banks, which are expected to launch soon. This followed Beijing expanding pilot programmes in wealth-management products and commercial pension insurance from four cities to 10.

Elderly people exercise in Changzhou, in China’s Jiangsu Province on July 22, 2020. Estimates say that in 20 years, 28 per cent of China’s population will be more than 60 years old. Photo: Getty Images alt=Elderly people exercise in Changzhou, in China’s Jiangsu Province on July 22, 2020. Estimates say that in 20 years, 28 per cent of China’s population will be more than 60 years old. Photo: Getty Images>

A 2018 pilot programme introducing target pension fund of funds (FOFs) marked the first time that the third pillar market opened to non-insurers, according to McKinsey.

Some international players told the Post that they have been advising the Chinese government and regulators on the development of the pension system.

Manulife, for example, has participated in the target pension fund of fund (FOF) initiative from the beginning, the company said.

“Manulife has long been a trusted advisor to the government, relevant regulators and industry bodies on China’s retirement system design,” said Calvin Chiu, head of Asia retirement for Manulife Investment Management. “In particular, Manulife was invited to provide our recommendations on the development and promotion of the third pillar pension framework to the State Council.”

Fidelity International has also been advising the government and is among the companies ready to increase its offerings in the Chinese market.

“Over the years, we have been adopting a holistic approach to participate in the development of China’s pension system, covering contribution to policy development and driving investor education,” said Lily Cong, chief representative in the Beijing representative office of Fidelity International. “In due course, we plan to provide professional retirement products and services to the Chinese people.”

US-based Invesco will engage through its joint venture, Invesco Great Wall, which began introducing pension pilot products in 2019 in anticipation of this programme, said Renee Kwok, the firm’s chief operating officer for Asia-Pacific. “This will give us a head start once the programme will be officially launched.”

Hong Kong-based asset managers are chasing the large pile of funds from the mainland. The Hong Kong Investment Funds Association, the industry body representing the fund-management sector in the city, has submitted a proposal to allow funds from the second and third pillars to invest in pooled investment funds approved by the Hong Kong Mandatory Provident Fund.

“A renminbi (RMB) share class can be added so that the employees can invest and redeem in RMB, and let the professionals handle the foreign exchange conversion,” said Sally Wong, the association’s CEO. “This can also help to enhance product diversity and give employees more choices. If we wish to encourage a greater sense of ownership among individuals, a sufficiently wide array of products is important.”

Other international institutions getting involved include BlackRock, Standard Life Aberdeen, and Deloitte.

BlackRock set up BlackRock CCB Wealth Management, a joint venture with China Construction Bank that launched its first product in April. Standard Life Aberdeen became mainland China’s first foreign shareholder in a pension insurance company in early 2021 when it set up Heng An Standard Retirement Insurance, a joint venture with Tianjin TEDA International. Consultancy Deloitte is ready to advise both mainland and international players interested in the market, it said.

The Chinese government is trying to build up a sustainable ecosystem that involves financial-services companies both in China and overseas. For example, National Pension Insurance Company, established in March, has major shareholders including banks’ wealth-management units, private companies, securities companies and insurers.

The country recognises that it needs the rich experience and pension know-how that foreign financial institutions have.

“Especially in wealth management and asset allocation there are many companies overseas which specialise in pension businesses and know how to tailor to the needs [of participants in the pension system],” said Jimi Zhou, partner at PwC. “The pension system, involving a population of more than 1 billion, with so many transactions of depositing and withdrawing money, is very complex and demanding in terms of infrastructure and technical aspects.”

The size, stability and long-term nature of pension funds will enable financial institutions such as asset managers to expand and support the growth of the capital markets, industry participants and experts said. The third pillar is expected to draw US$17.8 billion a year into the asset-management market, and demand for financial services and professional advice will also provide new lines of business.

“The capital from pension funds is on a substantial scale, with the money expected to be used for investment with stability and for the long term,” said Wang Ling, a fund manager at E Fund Management, China’s largest fund management company with 2.6 trillion yuan under management as of March 31. Wang manages six retirement-themed funds since the company was approved as one of the first to launch pension FOFs in 2018. “It’s a good way to both realise social responsibility and business development.”

She foresees a more diverse category of pension products in the future, ranging from bonds, stocks, monetary and hybrid funds, based on overseas experience.

A group of elderly Chinese people enjoys a day in Beijing in April 2007. In 2021, China had 267.36 million people aged over 60 and 200.56 million people aged over 65. Photo: AFP alt=A group of elderly Chinese people enjoys a day in Beijing in April 2007. In 2021, China had 267.36 million people aged over 60 and 200.56 million people aged over 65. Photo: AFP>

The growth of the market will also boost China’s capital market and retirement-related services, industry players said.

“We also see opportunities in the growth of capital markets and improvements in the market structure and asset quality,” said Chiu of Manulife. “Sustained development of capital markets and long-term capital are inseparable.” With their large potential volume and long duration, consistent pension fund flows are the primary growth driver for institutional investments, he said.

At the same time, financial institutions, in particular insurers, are working with retirement and nursing service providers to increase their value in serving the needs of retired people.

“The money that will be withdrawn is used for the elderly for living expenses or other services including nursing and health management,” said Zhou from PwC. “If the money in these accounts can be directly transferred into such services, they will be happy to enjoy it. Banks, security firms, funds, insurance companies and trust companies are all trying to do something in this to connect the dots in the whole value chain and ecosystem. The most typical one is that insurers are building retirement communities.”

Various challenges exist for the smooth advancement of the third pillar.

A complex system involving such a huge population will take time to evolve, especially as it also involves a number of regulators and a variety of sectors.

Commuters wait at an intersection in Beijing on August 25, 2021. The new pillar of the country’s pension scheme will allow qualified workers to direct 12,000 yuan per year into self-selected investment vehicles. Photo: Bloomberg alt=Commuters wait at an intersection in Beijing on August 25, 2021. The new pillar of the country’s pension scheme will allow qualified workers to direct 12,000 yuan per year into self-selected investment vehicles. Photo: Bloomberg>

However, one of the biggest challenges may be cultural, as Chinese elders traditionally count on their children to finance their retirement. Changing that mindset will demand the right policies, systems, infrastructure and pension products, as well as marketing to educate the market about the concept, experts said.

“Pension products, with low liquidity and a longer investment time horizon, are new to Chinese investors,” said Leo Shen, head of the fund-management business in China at German financial giant Allianz Global Investors. “More efforts shall be spent on investor education and product design to convince investors of the need and benefits.”

Beijing’s private pension scheme allows individuals to voluntarily deposit up to 12,000 yuan per year. The quota will be adjusted when appropriate, according to regulators. The government will offer tax incentives to encourage participation, but these have not been finalised or announced. And looking ahead, industry players expect the government to roll out more measures to enhance participation.

Meanwhile, rising competition is likely to push out some players. “In many markets, the pension business is not a high-margin business,” said Duan Lei, consulting partner at Deloitte China. “Keen competition will drive out low performers. Many pension providers in Hong Kong disappeared a few years after the introduction of the MPF.”

As for Li, the Guangdong executive plans to create a pension account under the new pension scheme to prepare for his retirement.

“It’s a good way to encourage people to invest for retirement, and more tax reduction policy [in the future] may stimulate me to invest more,” he said, adding he is considering funds with allocations in both equities and bonds.

Li admitted that even though he works in wealth management, he has not thought systematically about his retirement. “I think most other people might not have that concept of pension for retirement,” he said. “It’s a good call from the government, although a bit late, but it’s better than having nothing.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.




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