Public pension continues to be the most important and fastest-developing sector
China’s three-pillar pension sector sees healthy growth prospects, improving investment returns and growing participation following regulatory changes. China’s total pension assets are expected to have grown by 19 percent in 2019 to more than RMB 15 trillion. This is a year-on-year growth rate similar to its long-term average of 17 percent recorded over the last decade.
According to KPMG’s latest China Pensions Outlook report, the increase was due to the development of occupational annuities and continued capital injection under Pillar One (government scheme). Fundamental developments, including opening up to foreign entrants, additional use of professional managers, and the beginnings of a centralised operating model, give hope for sustained longer-term development.
Howhow Zhang, Partner, Global Strategy Group, KPMG China, says: “We expect that Pillar One will continue to be the largest and most important part of China’s pension system. Some of the most beneficial reforms are also likely to be rolled out under Pillar One first, including management centralisation, streamlining of capital injection, overseas investments, as well as better selection and monitoring of external managers.”
The Public Pension Fund (PPF) and National Council for Social Security Fund (NCSSF) combined already account for about half of the country’s pension assets and have a much wider coverage than the other two pillars. The coverage and size make the PPF, and its reserve, the NCSSF, the most indispensable part of China’s pension system. This means that various policymakers and administrations will have a strong incentive to make sure that Pillar One continues to function efficiently. As a result, it will likely develop most rapidly in relation to other pillars.
Enterprise annuities, which are under Pillar Two, are expected to finish 2019 with more than RMB 1.7 trillion in total assets, representing growth of 19 percent year-on-year. By comparison, participation growth has been subdued, with the number of plans and individual participants growing 6.9 percent and 4.9 percent year-on-year respectively.
A much higher participation rate is essential to realise sustainable growth in the scheme. In addition to high labour costs and insufficient tax incentives, a lack of customisation and personalisation, restrictions on investment, and low visibility on historical and expected returns have exacerbated the situation.
By comparison, occupational annuities, which is also part of Pillar Two, saw rapid development in 2019, as more provinces announced plans for OA launches, or awarded vendors actual mandates. Firstly, the OA plan benefits from its mandatory nature. This ensures high participation, better funding status and consistent long-term contributions. Secondly, the scheme also benefits from the fact that Ministry of Human Resources and Social Security (MoHRSS) acts as the gatekeeper and runs a centralised vendor selection programme. Thirdly, scope remains for the participation rate to further rise.
Bonn Liu, Partner, Head of Asset Management in ASPAC and China, KPMG China, says: “Aside from the growth in assets and penetration, the biggest development in 2019 for Pillar Two was Chinese policymakers’ decision to open up the pension industry sector to foreign players, as part of the opening up of the financial services industry. The pension market in China is big enough for more entrants, and Chinese policymakers and regulators continue to work to attract more foreign players.”
Pillar Three (private pensions) registered the slowest growth during 2019, although the sector continues to attract some new entrants, both on the tax-deferred annuities plan side and the fund-of-funds mutual funds side. Compared with 2018, there was a clear cooling-off of interest in tax-deferred annuities products in 2019 with just one new tax-deferred annuity plan brought to the market, compared with 17 in 2018.
This is partly because most of the large insurance companies that harbour ambitions in the pension space launched their offerings in 2018. It may also be due to the fact that other players are becoming more cautious about this opportunity, as the first round of products did not generate meaningful inflows.
There was a similar slowdown in the launch of target-date fund of funds, although fund management companies in general are showing more interest than their insurance peers, despite equally sluggish sales results. Some 34 fund management companies were offering a total of 59 funds at 2019 year-end.
While China’s pension system is expected to maintain its growth rate because it remains in its early stages, it will continue to experience rapid and often long-lasting changes. The competition for the pension money of Chinese investors will also rapidly intensify.
As a society, Chinese customers are at an inflection point where they realise they will need to take more personal responsibility for their pension plans. Their participation will bring profound changes to the industry, the report notes. On the regulatory side, more stringent consumer protection regulations are expected to be put in place. Distributors, product manufacturers, and other contenders for Chinese retail’s pension money are expected to upgrade their client onboarding process.
Zhang concludes: “The shift from a pure government-sponsored pension system to a hybrid model means individual investors must take more responsibility for their financial affairs or risk not having enough resources for their retirement. We expect Chinese retail customers to take a more proactive role in managing their pension money. Pension managers will need to be ready to meet their unique demands.”
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