The scheme is initially being rolled out in three dozen cities, including Beijing, Shanghai, Shenzhen and Chongqing. Residents can invest in mutual funds and other approved offerings.
The pilot programme, which kicked off late last month, is designed as China’s answer to individual retirement accounts in the US, in a move that could help meet shortfalls in the country’s two existing pension schemes.
But educating investors is crucial to selling the new plan’s merits, said Andrew Wang, CEO of UBS SDIC Fund Management, the Swiss investment bank’s mutual fund joint venture in China. “I expect the third pillar to be meeting major retirement needs and gaps,” he added.
China’s private pension system could reach between 1.8 trillion to 3.5 trillion yuan (US$258 billion to US$501 billion) in assets, according to an earlier report by the Insurance Association of China, which added that the country is facing an 8 trillion to 10 trillion yuan public pension shortfall in the next five to 10 years.
The biggest government-led nationwide pension scheme covers some 1.03 billion people and has assets of about 6.0 trillion yuan. It is supported by central and local government finances, as well as individual and company contributions.
A second, voluntary, plan for certain employees at state-owned enterprises and other companies has about 70 million participants and roughly 4.5 trillion in assets, according to official data.
Both systems are struggling to cover the country’s retirement needs as more people leave the workforce and China’s birthrate dwindles. The country’s retirement age is also relatively young, at age 60 for men and 55 for women. Two decades from now roughly 28% of China’s population will be over 60 years old, versus 10% today, making it one of the world’s most rapidly ageing societies, according to the World Health Organization.
At present, there are about 130 mutual funds products available under the new scheme, according to the China Securities Regulatory Commission, with qualified fund managers working alongside banks to incentivise take-up through discounted fees and cash handouts. Most of these investment products are relatively low-risk bonds and fixed-income assets and require investors to lock up their holdings for a set period.
A key target market is people 35 to 45 years old who will be moving into retirement over the coming years, said Wang at UBS.
Contributions up to 12,000 yuan annually offer tax savings, but those benefits are not available to all potential investors so take-up could be limited to those in higher income brackets.
China has a growing wealth gap. Last year, the average annual income for people working at private companies in Shanghai, China’s financial capital, stood at just over 96,000 yuan, nearly double the average income for the same category of workers in northern Hebei province, where two cities have been approved to offer private pensions.
Investors are also prohibited from pulling out money invested in the scheme until they hit retirement age or meet certain conditions, such as moving abroad.
Educating employees on the scheme’s tax benefits, and changing mindsets in a country where property has long been a top investment choice, could be the biggest hurdles rather than market volatility, said Harry Handley, a Shanghai-based senior associate at consultancy Z-Ben Advisors.
“Participating firms will have to install the pension scheme above the current web of self-driven retirement savings practices, such as property investments,” Handley said.
Jack Liao, a 30-year-old human resources executive in Shenzhen, said he was “puzzled” by the new retirement offering. “I don’t know what the difference is between this new pension scheme and the pension I contribute to in the social security scheme,” Liao said, referring to the mandatory nationwide plan. “I have not bought a house or a car yet, let alone started getting ready for retirement.”