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China’s third-pillar pension market ‘could be worth €1.4trn’

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China’s government has launched a pilot programme offering tax deductions for commercial insurance endowment products in a bid to encourage individuals to save for retirement.

This is seen as the first step towards establishing what is known as the ‘third pillar’ of China’s pension system. According to a recent study by KPMG, this market could grow at an annual rate of 21% and, by 2025, be worth RMB11trn (€1.4trn).

Under the pilot scheme, individuals will get a tax break for buying insurance-based pension products up to a value of RMB1,000 or 6% of their salary, whichever is greater. The individual will also pay a lower tax rate of 10% on the remaining 75% of the pension.

When they reach 65 and start to draw their pension, the first 25% will be tax free.

Qiumei Yang, ICI Global’s Asia Pacific CEO, told IPE that this was the first time that China’s government had offered tax incentives to encourage personal retirement savings.

Chinese yuan

KPMG estimates third-pillar Chinese pensions could be worth RMB11trn by 2025

Currently, the government offers tax deductions to enterprise annuity schemes (which cover employees of large Chinese corporates and state-owned enterprises) and to occupational pensions (which cover government employees).

The pilot is being conducted in three areas: Shanghai, China’s biggest city; Fujian province on the country’s south-east coast; and in Suzhou Industrial Park in eastern Jiangsu province.

Wina Appleton, Asia Pacific retirement strategist with JPMorgan Asset Management, told IPE that a recent survey by the Asset Management Association of China found 48% of respondents would save for their retirement if the government provided incentives. 

Appleton said China had accumulated a pension funding gap of $11trn (€9.2trn) by 2015 – a gap which, according to a World Economic Forum paper, will reach $119trn by 2050.

She noted that China’s enterprise annuity scheme, created in 2004, had assets of over RMB1trn. Occupational pensions, established in 2014, have been growing by RMB150bn annually, and are projected to reach RMB1trn by 2020. These two models form China’s second-pillar pension system.

The third pillar, based on insurance company endowment products, is intended to cover the self-employed, contract workers, and workers who do not have adequate retirement savings.

Appleton said it was widely acknowledged that the government was likely to allow banks and mutual fund management companies to offer pension products.

ICI Global’s Yang said China’s total pension assets were approximately equivalent to 14% of the country’s GDP. This compared with 121% in the US.

She said: “If you think about the ageing of China by 2025, the number of Chinese over 65 will be 300m – almost the size of the US population. The ageing issue is really urgent in China.”

Five government agencies preside over a taskforce to establish China’s third-pillar pension system, and they will analyse the results of the year-long pilot trial, which began yesterday.

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