Tax incentives, government policies set to drive expansion over 20 years

Personal commercial pension schemes, which include tax-deferred pension insurance and pension securities investment funds, will see explosive growth in China over the next 10 to 20 years, fueled by the driving force of tax incentives and government policies, a newly issued white paper by McKinsey & Company said.

China launched a pilot program last year providing individual income tax deferral on commercial pension contributions, investment gains and retirement distributions. The one year trial program took effect on May 1, 2018, and covered Shanghai, Fujian province and the Suzhou Industrial Park.

"We saw strong demand for the 'third pillar' of China's pension system, which is based on commercial pension products including tax-deferred commercial pension insurance. The demand for such products will keep rising, with the support of preferential tax policies," said Sun Zheng, senior engagement manager at McKinsey, a global management consulting firm.

He added that the current problems of the pilot tax-deferred commercial pension insurance scheme in China are all technical and can be solved within two years.

"We look forward to regulatory authorities in creating a top-down design and a platform for personal commercial pension fund accounts and launch tax incentives as soon as possible," he said.

Although the procedure for filing individual income tax deferral after purchasing tax-deferred commercial pension insurance is very complicated and the upper limit for this kind of tax deductions is quite low, McKinsey experts remain positive about prospects for tax-deferred commercial pension insurance over the medium and long term.

At the end of 2018, tax-incentivized personal commercial pension schemes only contributed to a tiny share of China's pension fund market, while the basic pension insurance scheme, with its balance of assets reaching about 4.4 trillion yuan ($636 billion), accounted for more than 70 percent of the market.

Enterprise annuities and occupational pension schemes, of which the asset balance was 1.6 trillion yuan, accounted for nearly 30 percent of the market, according to the white paper.

"Introducing foreign capital will be a perfect complement to the Chinese pension system, as leading foreign insurance companies and asset managers have accumulated rich experience in product design, customer service and investment management. They will promote the development and innovation of the industry, in addition to offering customers more choice," said Sun.

Foreign financial institutions are keenly interested in China's pension fund market, according to Chen Hongming, associate partner at McKinsey.

"As the pension fund market has just begun to grow in China, foreign financial institutions believe that they will start at the same point as their Chinese counterparts once the regulators give them access to this area of business, not to mention that they have many years of experience in providing various types of pension fund products," said Chen.

In traditional areas of insurance business that are highly regulated, however, foreign insurance companies face intense competition from their large and powerful Chinese counterparts, making it difficult for foreign insurers to increase their market share here, he added.

In first-tier cities and affluent regions such as Beijing, Shanghai and the Guangdong-Hong Kong-Macao Greater Bay Area, the consumption concept and the amount of disposable income of potential Chinese clients are quite similar to those of the customers in developed countries.

For foreign financial institutions, their brands and concept of service are widely accepted in these economically developed areas, giving them an edge over their Chinese counterparts. This has also contributed to their booming interest in the country's pension fund market, he said.

During an interview with China Daily last year, Daisy Ho, managing director for Asia excluding Japan at Fidelity International, said the global investment management company hopes to participate in China's pension reform, depending on the progress of the relaxation of regulatory restrictions on investment by foreign asset managers in this sector.

"As a global leader in pensions, we would like to share with the China market the experiences we have gained from running sophisticated pension businesses in Asia and Europe. To let every elderly person live healthily and happily is always part of the Chinese Dream," she said.