The structural reform of China’s pension system is imperative, and the country’s aging population will be propelling an increase in demand for pension funds to be allocated to investments with sustainable returns and alternative solutions that provide long-term benefits, according to Ms Dong Mei, a partner and the head of Aged Care in KPMG China.
In an article for China Watch, a think tank powered by China Daily, she points to several overarching trends affecting the development of China’s multilayered pension system in the next few years:

First, China is considering a unique model for its multilayered pension system. This model will integrate public pensions, private pensions and senior care services throughout an individual’s life cycle under a risk-monitoring framework adopted by participants. A report by KPMG points out that China’s public pension system has been well developed. Nevertheless, the average replacement ratio (pension benefit as a percentage of pre-retirement wage) had declined from 72.9% in 2002 to 48% in 2018 due to a lack of private pensions to supplement the overall ratio. According to the data of the Ministry of Human Resources and Social Securities and the National Council for Social Security Fund, the scale of public and private pensions of China in 2019 was only $1.85tn, which is approximately 12% of its GDP, while the percentage was 136% in the US and 66% in Japan. This may likely leave the Chinese government overburdened by public pensions going forward.

Public pensions—the Public Pension Fund and the Social Security Fund—are the main pension pillar, accounting for about 74% of the total scale. It will be a huge challenge to maintain its sustainability as China ages more quickly over the next 30 years.

The second pillar—the enterprise annuities and occupational annuities—s comparably less developed, with a size of $480bn, about 26% of the total and covering only 3% of the workforce. The third pillar—individual private pensions—is still in its infancy.

Long-term investment

Second, pension funds are keystone assets for long-term investment, which are critical for China’s growing capital markets. China has the world’s largest middle-income population with approximately $25tn in investible capital as of 2020, according to the CBIRC. As such, the potential of individual investment may cultivate a private pension market of $10tn, assuming 40% of the $25tn financial assets being assigned to long-term investment as suggested by the Standard&Poor’s family assets quadrant map.

Private pension plans

To kick off the development of the multilayered pension system, KPMG sees China is accelerating the development of private pensions.

On the one hand, policymakers have been introducing a number of incentives and strong risk-prevention mechanisms to lay a solid foundation for the development of private pensions. Consideration has been given to establishing dedicated regulations for private pensions, including proper and timely execution, transparency, and regular review and assessment under an authorised legal framework.

On the other hand, industry players are vying to compete by reinventing investor services. Major players, including commercial banks, life and pension insurers and senior care services investors, are nurturing private pension businesses in more integrated ways, and have been gauging experience in operations management and data-driven system establishment, product diversification, risk control and customer services. In the context of the emerging health-and-retirement finance and services ecosystem, industry leading players, particularly investment services providers, have been beefing up their ability of actuary, asset allocation, financial advisory and risk reversals to become end-to-end service providers.

In addition, value-added and integrated services such as the B2B2C model with its alliances start a virtuous cycle, thereby boosting cross-selling opportunities. To better reap the advantage of being a comprehensive service provider, some institutions are also working toward organisational improvement through the implementation of digitisation and risk diversification structures.


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