FILE PHOTO: An elderly man smokes on a street in Nanjing, Jiangsu Province, Dec. 27, 2010. Photo taken on Dec. 27, 2010. REUTERS / Sean Yong / File Photo
May 20, 2021
BEIJING (Reuters) – China is optimizing its $ 1.2 trillion pension system to increase private sector participation as its population ages rapidly and underfunding looms. However, experts say fundamental changes are needed to provide adequate safety nets.
China’s Banking and Insurance Commissioner (CBIRC), the country’s leading banking and insurance regulator, announced over the weekend that it is expanding a pilot private pension program to two more regions – Chongqing and Zhejiang Province.
Sources with direct knowledge of the matter told Reuters that CBIRC is also considering approving a list of private pension funds and appointing a group of professional managers to run them under a new system.
The change comes days after China revealed the magnitude of its demographic challenges, reporting that citizens 65 and over made up 13.5% of its 1.4 billion population in 2020, up from 8.87% a decade ago.
China’s pension problem is serious. The Chinese Academy of Social Sciences (CASS), a state-run think tank, announced in 2019 that state-run coverage could peak at 6.99 trillion yuan ($ 1.09 trillion) in 2027 and be depleted by 2035.
This scenario, along with the population’s banking and wealth management savings of 100 trillion yuan, attracts the private sector. Foreign pension insurers are also waiting for https://www.reuters.com/article/cbusiness-us-china-pensions-exclusive-idCAKCN1RO0FA-OCABS to jump in if the rules allow.
But after a tame start, the private pension sector would need higher investment returns and incentives such as greater capital gains tax exemptions to attract the average investor, who typically relies on bank deposits and real estate investment returns to meet their retirement needs, experts say.
Another hurdle is China’s vast informal sector, where millions work without contracts and neither they nor their employers make any pension contributions.
“Government-run coverage faces challenges and informal employment is limiting the expansion of corporate contributions to the pension system,” said Dong Keyong, a professor at Tsinghua University, at a forum in Beijing this week.
“A third source and only the third source (for private pensions) is the way out, and we urgently need to expand this pilot experiment further.”
While the government and corporations in developed countries are the main contributors to pension systems, China’s corporate and private pensions amounted to 7.3% of GDP at the end of 2018, up from 136% in Dong’s US.
Most Chinese people rely on state-run city pension funds, which require employers to pay 16% of their employees’ base salaries into state pension funds every month, a ratio higher than in many other countries.
Former Treasury Secretary Lou Jiwei said last year that the state pension is only supporting retirees on average with less than 50% of the pre-retirement income, and that the rate is expected to continue to decline.
According to Professor Dong of Tsinghua University, the proportion of citizens aged 65 and over will increase sharply before stabilizing at a third of the total population.
The CBIRC did not immediately respond to a Reuters query on Thursday for comment.
(Graphic: China’s aging population over the decades China’s aging population over the decades: https://graphics.reuters.com/CHINA-SOCIETY/CENSUS/qmypmexenpr/chart.png)
Some local insurance giants, including People’s Insurance Company of China and China Pacific Insurance Group, as well as some mutual fund houses, have sold commercial pension products, but these are short-term and last no more than a few years.
China Pacific Insurance Group also sold longer-term products with real estate investments, which were better received.
The insurers named in the first private pension investment study in Shanghai, neighboring Suzhou City and Fujian Province have only attracted around 400 million yuan in purchases in the past three years. That was only a fraction of China’s current 8 trillion yuan pension system.
It “started off on the wrong foot,” said Zheng Bingwen, an expert at CASS, in 2019, citing reasons such as insufficient political incentives for individuals and sales representatives.
The long-term goal of the CBIRC is to stimulate private pension investment, backed by China’s 80 trillion yuan in bank deposits and 20 trillion yuan in wealth management products.
“We should examine massive individual savings with no pension characteristics and convert them into long-term, secured and profitable pension products. I believe that is what we need to do and that we already have the basis for it, ”CBIRC vice chairman Xiao Yuanqi told the Boao Forum in April.
($ 1 = 6.4382 Chinese yuan renminbi)
(Reporting by Cheng Leng, Zhang Yan, and Ryan Woo; Additional reporting by Beijing Newsroom; Editing by Muralikumar Anantharaman)
This article originally appeared on www.oann.com