- Various government and regulatory agencies have pointed to the third pillar as the reform focus
- China’s pension system will move from its current institutional setup to become more retail-centric
- The changes will prompt participants to prepare by investing in six strategic pillars
Ernst & Young Transactions Limited (EY-Parthenon) released its inaugural China Pension Report which summarizes the outlook for the China pension market, comments on recently announced pension-related polices, and highlights the key aspects of a winning strategy in China’s pension market.
China’s pension market reached RMB12 trillion at the end of 2020, doubling from 2014. Pension reform is now a top national priority, with more guidance and announcements coming from the top policymakers and regulators, including the mention of building a more robust pension industry in the 14th Five-Year Plan.
According to recent national announcements and policies, Pillar 3, Commercial Pension Insurance and Individual Saving Pension Insurance will be the new growth engine in the pension industry and individuals will be given more choices to help build a more balanced pension system in China. It is expected that the whole industry will shift from its current reliance on institutional mandates to more retail participation because of that.
Outlook for the three pillars
Pillar 1, which includes the Public Pension Fund and the National Social Security Fund, had a challenging year in 2020 as the government lowered the mandatory contribution rate to help enterprises fend off the pandemic.
The Public Pension Fund showed a drop in its income and reported a deficit for the first time in history, with its year-end balance falling. The National Social Security Fund, on the other hand, continued to see growth and finished 2020 with a total asset of RMB2.9 trillion.
Policy makers have stressed the long-term objective of Pillar 1 is to continue expanding its coverage, ensure long-term sustainability and centralize its management, in order to secure its huge market potential. It is expected that Pillar 1 to remain as an institutional business and continue to be dominated by asset management players, while the asset allocation will be stable, there is increasing focus on ESG investments.
Pillar 2, with Enterprise Annuities and Occupational Annuities combined, showed resilience, and saw accelerating growth in 2020. Pillar 2 recorded a 43% year-on-year growth in 2020 and reached a total asset of RMB3.5 trillion. The number of companies enrolling in an Enterprise Annuities scheme continues to grow, along with an improving investment return. Occupational Annuities is expected to continue growing too, given potential of participant numbers and average account size.
Pillar 3 saw limited growth in both asset size and participation rate in 2020. Despite lukewarm demand so far, fund managers continue to bring new pension fund of funds to the market, while regulators also introduced a new pension insurance product trial to encourage insurance companies to expand their pension offerings. Pillar 3 is expected to see more participating firms and its customer base grow.
Jonathan Zhao, Asia-Pacific Financial Services Strategy and Transactions Leader at EY-Parthenon, says: “The latest national census results revealed that China is on the edge of becoming what the United Nations defines as an aged society. The number of people aged 65 or above has grown by 60% in the last decade to 190.6 million, making up 13.5% of the nation’s total population.
“As a response, top policy makers have given the pension sector the top priority on the country’s reform agenda, with the 14th Five-Year Plan making direct mentioning of pension reforms for the first time. Key targets include reforming Pillar 1 to achieve long-term balance, higher participation, and national centralization; establishing a multi-layered, multi-pillar pension system including a stronger Pillar 2 and Pillar 3; ultimately creating a national social security platform that integrates all three pillars.”
The changes will prompt all participants to get prepared by investing in six strategic pillars: a distribution model that combines traditional channels with disruptive ones, customization of product and service, recreated customer experience, upgraded risk and compliance, digital capabilities that allows quick scaling up of the business, and a platform that maximizes the use of existing licenses and is fully compatible with future options.
The report identifies six key aspects of a winning strategy in China’s future pension market, covering distribution, product, customer, risk, technology and platforms.
Christine Lin, Greater China Wealth & Asset Management Leader at Ernst & Young, says: “The accelerating pension reform will create more opportunities for pension managers, domestic and foreign. Both pension managers and distributors need to keep innovating their current business models and make corresponding operational investments, as the industry shifts away from an institutional business and reaches more retail investors. Firms eyeing the opportunities in China’s pension market are urged not only to rethink their approach, but also to start making the preparations now.”
Howhow Zhang, Hong Kong Strategy and Transactions Partner at EY-Parthenon, says: “We are entering an era of tough decisions for pensions and retirement savings. Pension reform in the 14th Five-Year Plan also suggests that some of the more systematic challenges, such as insufficient tax incentives, a multi-agency regulatory framework, and the absence of an individualized pension administration system, will be resolved soon.
“For various financial services companies, the accelerating pension reform is as much a strategic opportunity as a call of duty. New licenses and approvals alone are not enough to lift the market off. For the industry to rise to the challenges, product manufacturers, distributors, and advisors will all need to invest to create a new business model that truly centers around each individual customer. And only through the combined effort and a holistic approach can the retirement security of the whole society be achieved.”
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