Multi-layered system to help reform and streamline the policy regime

The COVID-19 pandemic has forced China's financial system to tackle immediate challenges including the very survival of some businesses. But top regulators have not ignored a longer term issue that is as pressing as the former, if not more so－namely, the sustainability of the pension system.

As stepping up efforts to reform its gigantic pension system has become a must-do for China with its aging population, foreign financial institutions are eagerly getting themselves ready to take a seat at the table.

Foreign retirement product managers, due to their rich global experience and China's continuous opening-up agenda, are well-positioned to thrive in the country's personal pension market, which is on the verge of explosive growth, experts said.

The Communist Party of China's central leadership has proposed developing a multilayered, multi-pillar pension insurance system in the upcoming 14th Five-Year Plan period (2021-25), according to a document released after the Fifth Plenary Session of the 19th Central Committee of the CPC.

It is a "very urgent" task for China to develop a third-pillar pension system, formed by personal retirement products and complementing the current State-run first pillar and the employment-based second pillar, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission.

Guo urged faster development of the third-pillar pension system on at least three different public occasions this year, pledging to unify standards of retirement-related financial products, roll out of more pilot projects and encouraging the share of retirement funds in the capital market to catch up with the global average.

"Compared with many countries, the third pillar has seen relatively slow growth in China, taking up a low proportion within the whole pension system and providing far from adequate support for retirement funding," Guo said at the Annual Conference of Financial Street Forum 2020 in Beijing in October.

During the 13th Five-Year Plan period (2016-20), the country stepped up efforts to establish the regulatory framework for the third-pillar pension system. In 2018, China rolled out its tax-deferred personal pension insurance pilot program, which offers tax incentives.

About 47,000 clients had already purchased personal tax-deferred pension insurance products worth a total premium of 1.24 billion yuan ($188.7 million) by the end of last year, said the Annual Report on the Development of China's Aging Finance (2020).

Meanwhile, 1.07 million individual accounts were subscribed to involving 22.83 billion yuan worth of pension target investment funds as of the end of April, the report said.

However, the scale is still limited compared with the first-pillar system, which involves nearly 1 billion people.

First-pillar pensions amounted to 8.05 trillion yuan in 2018, accounting for 79 percent of the country's total pension system. The remaining 21 percent was taken up by the second-pillar employment-based pensions, according to a report co-released by KPMG and China Health and Elderly Care Group Co Ltd in July.

This first pillar-dominated structure must be reformed in the coming decades, experts said, as government-run pensions rely on contributions from the working-age population to fund the retired, while the size of the former is destined to shrink in relation to the latter amid rapid demographic changes.

The KPMG report estimated that by 2030, the value of personal retirement products will amount to 46 trillion yuan and represent 40.7 percent of the total pension system, indicating a compound annual growth rate of as much as 33 percent from 2018 to 2030.