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Rapidly aging population is forcing China to reform pension system

Due to its rapidly aging demographics, the Chinese government has made the reform of its pension and retirement system a national priority. Last April, the authorities announced the launch of the long-anticipated “third pillar” of the country’s pension system, consisting of individual private retirement accounts.

The new pension scheme will supplement the current basic pensions and annuities provided by the state and employers while helping to develop commercial pension financial services. Under the scheme, people can make annual contributions of up to RMB 12,000 (US$1,846) into a pension account set up through a centralized platform.

China’s pension system stands on what the government refers to as “three pillars,” designed to help secure retirement income for its citizens. The first pillar, known also as the ‘basic pension,’ consists of the central government’s Public Pension Fund (PPF) and National Social Security Fund (NSSF).

The second pillar is employer based and is divided into Enterprise Annuities (EA) and Occupational Annuities (OA). This framework could be compared to the contribution plans in the United States.

EA plans have been set up mostly by State-Owned Enterprises (SOEs) and are owned by the enterprise and its employees, who can make voluntary contributions. At the end of 2020 there were over 105,000 enterprises in China with EA plans, a fraction of the 40 million enterprises operating in the country.

These employer-sponsored schemes cover only approximately 20 million employees and are limited to large enterprises as most small and medium-sized businesses lack the resources to cover the administrative costs. Total assets in the EA portion of Pillar 2 totaled only RMB 2.5 trillion (about US$373 billion) by year-end 2020.

Occupational Annuities, the other part of Pillar 2, are set up by government entities and institutions for the benefit of government employees and staff, and collectively have about RMB 1 trillion in assets. Employee contribution to OA plans is compulsory, and the program currently covers 30 million government employees.

Together, EA and OA plans have RMB 3.5 trillion (US$522 billion), a rather small number for a country the size of China. According to the China Academy of Social Sciences (CASS), a state-sponsored think tank, assets in the government’s “Basic Pension System for enterprise Employees” could be depleted by 2035.

The private pension scheme seeks to address the need for pension reform as the nation goes through one of the most extreme incidents of population aging seen in the world.

There are close to 191 million people over the age of 65 in the country, or 13.5% of a total 1.41 billion citizens, according to China’s 2020 census. The World Health Organization defines a country as ‘aging’ once its over-65 population exceeds 7% of the total; and it defines a country as ‘aged’ if the over-65 cohort exceeds 14%.

China is at this threshold as the growth in its senior population far outpaces its total population growth. In fact, China’s population grew 7.7% during the decade ended in 2020, whereas the number of people over 65 grew by 60%.

Currently, men are eligible to begin collecting a pension at the age of 60, while female workers can do so at the age of 55, or 50 if they have worked in blue collar jobs. By 2040, well over a quarter of the country’s population will be over the age of 65 and drawing benefits from retirement.

The development of the pension system’s third and final pillar started as a pilot program in May 2018 in Shanghai and Suzhou, with underwhelming results. By the end of 2020 the program had attracted 48,000 policyholders with an aggregate insured amount of RMB 400 million (US$63 million).

According to the State Council’s official website, by the first half of 2021 financial assets of Chinese citizens totaled RMB 60 trillion (US$8.95 trillion), “part of which can be invested in the third pillar pension market.”

Chinese regulators have studied closely the development and success of the United States’ defined contribution and individual retirement account (IRA) programs and hope to replicate their success in China.

The third pillar is urgently needed to ensure financial security and stability for the country’s elderly population. However, as income and standards of living rise across the country, there is a growing demand for better pensions.

Many people in China, especially the growing urban middle class, have become accustomed to a certain quality of life, which they expect to maintain throughout their senior years. With around 28 percent of the population over the age of 60 by 2040, the elderly will be an increasingly important driver of consumption and economic growth.

China is looking to improve equality and boost consumption through national strategies, such as common prosperity and dual circulation, ensuring that the elderly have enough spending power, in addition to financial stability.

Participants in the third pillar can be workers in the basic pension insurance for urban employees or the basic pension insurance for urban and rural residents in China. According to China’s National Bureau of Statistics, there were 1.03 billion people in the basic national pension scheme as of the end of 2021.

To take part in the private system, individuals can make voluntary contributions by setting up a personal pension account opened through the “Personal Pension Information Management Service Platform” (the “Information Service Platform”). Yearly contributions are capped at RMB 12,000 (US$1,846). This limit will be adjusted in the future by the Ministry of Human Resources and Social Security and the Ministry of Finance (MOF) based on factors such as economic and social development.

After setting up an account, applicants can use their pension contributions to purchase financial products from eligible financial institutes.

Each person can set up only one account through which all transactions will be handled, including contributions, earnings from investments, payments, and tax payments. The personal account can be designated or opened in an eligible commercial bank or through an eligible financial product sales agency.

To motivate people eligible to participate in the third pillar, the government will offer preferential tax policies. These policies have not been announced yet.

Once they reach the legal retirement age, have lost the ability to work, or have settled abroad, participants can withdraw the money from the pension account. Other conditions may be sanctioned by the state. The pension can be accessed either through monthly installments or a one-off payment, and funds will be transferred to the individual’s social security bank account.

Until then, funds in the personal pension accounts can be used to purchase eligible financial products, such as wealth management products, savings deposits, commercial pension insurance, and public funds. These products will be determined by the financial regulatory authorities and released to the public through the service platform. No specific details have been given at this time.

The Ministry of Human Resources and Social Security and the MOF will be expected to provide macro guidance for the development of personal pensions and formulate specific policies for matters such as establishing accounts, payment caps, treatment receipts, and tax incentives.

Meanwhile, financial regulatory authorities will supervise and guide the business aspects of the industry, including overseeing the participation of financial institutions in the operation of personal pensions.

For years, financial institutions have been waiting for the announcement of private pension funds in China. Foreign financial asset companies with decades of experience in pension funds may have a competitive advantage over domestic players who are relatively new to the field.

According to Reuters, the market is expected to grow from US$300 billion today to US$1.7 trillion in 2025.

Approved banks will be uniquely positioned to benefit from the private pension scheme as they will be able to provide a full end-to-end suite of services and products to the customers, from providing pension accounts to financial products to wealth management and investment consulting. It is unclear if foreign banks will be able to provide account services to customers in China.

Foreign companies are already participating in the wealth management and private pension industry in China. Last February, BlackRock’s wealth management JV with China Construction Bank (CCB), called BlackRock CCB Wealth Management, was approved by the China Banking and Insurance Regulatory Commission (CBIRC) to provide WMPs in two Chinese cities as part of a private pension pilot program.

China has recently approved several wealth management JVs, including a JV between Goldman Sachs and ICBC and Amundi BOC Wealth Management, a JV between French asset management company Amundi and Bank of China’s wealth management subsidiary.

In addition to financial institutions, insurance companies are also expected to benefit in the new private pension market. Insurance companies are included in the Catalogue of Industries Encouraged for Foreign Investment (2020), which lists securities, futures, and insurance companies as areas in which foreign companies are encouraged to participate.

Firms with experience in providing products and services for pension funds are well-positioned to profit from the opening of this market. More clarity and guidance are expected in the near future. Companies should pay close attention to changes and announcements from the regulatory bodies in the industry.

To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.


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