“The journey to provide a better retirement for its large population of older people and to help ensure the long-term social stability of the country will not be simple. Creating a sustainable pensions framework is a multi-dimensional challenge, which will require stakeholders across public and private sectors to work together. However, with the urgent need for reform, China is ready to take practical measures including taking advantage of lessons from other jurisdictions as well as embracing new technology-enabled solutions,” Abby Wang, partner, head of China, asset management, KPMG China, said.

While China’s ageing population is creating challenges for the retirement system, it is also building opportunities for finding solutions in the form of pensions products, the firm added. “Given the demographic change in China, there is an urgent need for reform as the current pension system will be unable to cope. This means that there are opportunities for global asset managers in China’s pension market as the nation’s retirement programme undergoes a major programme of reforms. In particular, the recent introduction of private individual pensions has created a new and potentially massive market,” Eugenie Shen, managing director and head of ASIFMA Asset Management Group (AAMG) continued.

Although some of the drivers of a pensions sector differ from those of wealth management, there are parallels, such as often long-term time horizons and a need to consider how liabilities can be drivers of asset allocation and risk management. 

China’s reforms started with the basic pensions introduced under Pillar 1 in 1991. Then, between 2004 and 2014, it introduced enterprise annuities (EA) and occupational annuities (OA) under Pillar 2. These include contributions from enterprises and employees. However, participation in EA has remained very low, the firm said. The most significant recent reform was the arrival of Pillar 3, which opens the market to individual private pensions for the first time. The Pillar 3 market is projected to grow to RMB4 trillion under the current regulatory landscape by 2030 and could be RMB7 trillion if the expected reforms are carried out, the firm continued.  

“This area is very new and has so far been undergoing pilot programmes, but the potential is clearly promising as a new form of investment, especially in light of recent challenges in the Chinese real estate market where Chinese investors have traditionally put their savings in addition to cash. Already around 30 million tax-deferred individual accounts were set up shortly after they were launched last November. We see particular potential here for foreign players who have experience in pensions,” Vivian Chui, head of securities and asset management, Hong Kong, KPMG China, added.

A number of interrelated elements are fuelling the case for change in China’s pensions system: an ageing population, rising healthcare expenses, unsustainable funding for Pillar 1, and inadequate pensions provisions, the firm continued. The research shows that the current situation will not be able to support the nation’s growing elderly population in the future.