Faced with a rapidly ageing population and the shortfall of their two existing pension schemes, China has decided to launch its first private pension program in 36 cities, allowing individuals to open retirement accounts to buy products ranging from deposits to mutual funds.
This is China’s version of the IRA, or Individual Retirement Accounts in the United States.
A select list of banks, wealth management funds, and insurance companies have officially been given the green light to market private pension products in certain Chinese cities, including Beijing, Shanghai, Guangzhou, and Chengdu, informed the Ministry of Human Resources and Social Security.
After months of discussions regarding regulations for the budding industry, Chinese authorities decided which companies and products can participate in the private pension sector.
Educating investors will be an important factor in the success of the plan. China's private pension system could reach between 1.8 trillion to 3.5 trillion yuan (U$258 billion to U$501 billion) in assets, according to a report by the Insurance Association of China, which added that the country is facing an 8 trillion to 10 trillion-yuan public pension shortfall in the next five to 10 years.
The biggest government-led nationwide pension scheme covers some 1.03 billion people and has assets of about 6 trillion yuan. It is supported by central and local government finances, as well as individual and company contributions.
A second, voluntary, plan for certain employees at state-owned enterprises and other companies has about 70 million participants and roughly 4.5 trillion in assets, according to official data.
Both systems are struggling to cover the country's retirement needs as more people leave the workforce and China's birthrate dwindles. The country's retirement age is also relatively young, at age 60 for men and 55 for women.
Two decades from now, approximately 28% of China's population will be over 60 years old, versus 10% today, making it one of the world's most rapidly aging societies, according to the World Health Organization (WHO).
The private pension scheme is expected to become a US$1.7 trillion industry by 2025. Currently, the system is limited to certain areas and only a handful of companies are authorized to participate in the industry.
Since September 2021, a pilot program for private pension products was offered in select cities across China, with a few wealth management companies permitted to join. However, the private pension scheme was officially set in motion in April, 2022, followed by the approval of regulations for banks and financial firms last November.
Among the companies permitted to offer private pension products are national commercial banks which meet regulatory requirements and have a net tier-1 capital of more than RMB 100 billion (US$14.2 billion), municipal commercial banks with strong cross-regional service capabilities; and wealth management companies that have been included in the pension wealth management pilot program.
The first pilot program was initially set to last one year. At that time, only three wealth management institutions, which were permitted to raise up to RMB 10 billion (US$1.4 billion) for pension wealth management products, were permitted to operate within certain cities. In February 2022, the program was extended to more cities and 10 institutions.
Last November, the China Securities Regulatory Commission (CSRC) listed 34 companies approved to participate in the private pension scheme:
Six state-owned banks: Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC), China Construction Bank (CCB), Bank of Communications, and Postal Savings Bank of China;
Twelve joint-stock banks: CITIC Bank, Everbright Bank, Huaxia Bank, Minsheng Bank, China Merchants Bank (CMB), China Industrial Bank (CIB), Ping An Bank, Guangfa Bank, Shanghai Pudong Development Bank (SPDB), Zheshang Bank, Bohai Bank, and Hengfeng Bank;
Five municipal commercial banks: Bank of Beijing, Bank of Shanghai, Bank of Jiangsu, Bank of Ningbo, and Bank of Nanjing; and
Eleven wealth management companies: ICBC Wealth Management, ABC Management, BOC Wealth Management, CCB Wealth Management, Bank of Communications Wealth Management, China Post Wealth Management, BlackRock Jianxin Wealth Management, Everbright Wealth Management, CMB Wealth Management, CIB Wealth Management, and CNCB Wealth Management.
According to authorities, pension funds should invest in products that are “safe, mature and stable, have standardized objectives, and a focus on long-term value preservation”. They must also comply with laws and regulations, and the provisions of the CSRC.
Some of these products include pension target funds with at least RMB 50 million of assets at the end of the last four quarters; stock funds, hybrid funds, bond funds, funds of funds, and other funds with stable investment styles, clear investment strategies, good long-term performance, and sound operation compliance that are suitable for long-term personal pension investment.
Insurance companies are permitted to offer private pension insurance products, such as annuity insurance, endowment insurance, and other products recognized by the China Banking and Insurance Regulatory Commission (CBIRC).
Currently, only a limited number of banks and wealth management funds have been authorized to participate. However, the CBIRC’s recent expansion to allow more insurance companies to offer pension insurance products will provide opportunities for more firms, including foreign ones, to be a part of the industry.
At present, there are about 130 mutual funds products available under the new scheme.
Qualified fund managers are working alongside banks to incentivize take-up through discounted fees and cash handouts. Most of these investment products are relatively low-risk bond and fixed-income assets and require investors to lock up their holdings for a set period.
Domestic workers covered by China’s public pension insurance can participate in the private scheme and contribute up to 12,000 yuan ($1,676) per year to their individual accounts and receive tax benefits. A key target market is people 35 to 45 years old who will be moving into retirement over the coming years. Participants are prohibited from pulling out money invested in the scheme until they hit retirement age or meet certain conditions, such as moving abroad.
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