China’s pension reform creates opportunities for financial firms

For many years, China has maintained one of the lowest retirement ages of any major economy.¹ However, as the country confronts an ageing population and shrinking pension budget, the next generation will need to stay in the workforce longer.

In September 2024, Beijing announced a gradual increase in the country’s retirement age for the first time since 1978.² For women, the retirement age will rise from 50 to 55 for blue-collar jobs and from 55 to 58 for white-collar occupations. For men, the retirement age will increase from 60 to 63. These changes will take effect in January 2025, with retirement ages rising incrementally every few months over the next 15 years.

Starting from January 2030, the minimum contribution period required to access the basic pension will also gradually increase. Employees will need to contribute for 20 years by 2039, up from the current requirement of 15 years.

Pressures on China’s pension system

In 2022, China recorded its first annual population decline since the early 1960s after six consecutive years of falling birth rates. The United Nations projects that China’s population will drop from 1.42bn in 2022 to 1.31bn by 2050, potentially falling below 800mn by 2100.³⁴ Meanwhile, life expectancy, which stood at 77.7 years in 2019, is expected to reach 81.3 years by 2035.⁵

The demographic challenge extends beyond a shrinking population and rising life expectancy. China's old-age dependency ratio – measuring the number of retirees relative to working-age individuals – places increasing pressure on income earners to support a growing elderly population. Projections suggest that this gap will continue to widen over the coming decades, exacerbating the financial strain on the workforce.⁶

To address these demographic challenges, Beijing has been reforming its pension system. Part of these reforms include the introduction of a private pension scheme, making it easier for individuals to invest in a wide range of financial products.⁸

China's pension system is currently structured around three pillars.

1. The first pillar is the mandatory basic pension system, funded by contributions from current workers. This pillar covers 60 per cent of the overall pension system, serving 1.05bn residents, making it the largest in the world.⁹¹⁰ However, given the rapid pace of population ageing, this fund is projected to be exhausted by around 2035.¹¹
2. The second pillar, introduced in 2004, consists of enterprise annuities and occupational annuities. Enterprise annuities are voluntary programmes typically established by state-owned enterprises or large private companies, though their voluntary nature constrains their growth potential. Occupational annuities, meanwhile, are reserved for government agencies and public sector employees, further limiting their expansion beyond this group.¹²¹³
3. The third pillar was introduced through pilot schemes in 2018 and marked the first introduction of individual private pensions, including tax-deferred commercial pension insurance.¹⁴¹⁵ In 2022, the State Council expanded this pillar by issuing the "Opinions on Promoting the Development of Personal Pensions”, allowing participants to contribute voluntarily to personal accounts and invest in various financial products.¹⁶ By 2023, the private pension system had been piloted in 36 cities and regions across China, with over 60mn accounts opened across financial institutions. These institutions now offer more than 500 types of savings deposits, bank wealth management products and commercial pension insurance.¹⁷

Growth potential in China’s private pension sector

China’s private pension market presents considerable opportunities, especially as the third pillar of the pension system is still in its early stages. According to KPMG China and the Asia Securities Industry and Financial Markets Association (ASIFMA), the private individual pension segment could reach Rmb7tn ($990.63bn) by 2030,

within an overall market size of Rmb28tn ($3.96tn).¹⁸¹⁹

The expected growth creates new opportunities for both domestic and international participants, including banks, insurance companies, wealth management firms and annuity companies.

The current financial products available in the market can be divided into three categories.²⁰ First, there are bank-based products such as pension savings. Second, insurance-based products include tax-deferred pension insurance, tax-deferred nursing care insurance, and market-oriented pension insurance, providing flexible retirement planning options. Lastly, fund-based products like target-risk and target-date funds offer diverse investment avenues.

The range of eligible investments for pension products is expected to expand in the coming years, creating more opportunities for innovative financial solutions.²¹ To succeed in this growing market, financial institutions must thoroughly understand China’s regulatory environment, tailor and localise their product offerings, and improve distribution channels to reach a large customer base.

A major player in China’s private pension market is Ping An Group, one of the largest integrated financial conglomerates in the country. Operating in insurance, banking, investment, health and senior care sectors, Ping An serves 236mn retail customers. The company has been at the forefront of integrated finance for over 30 years, offering a “one customer, one account, multiple products, and one-stop services” model.

As Michael Guo, co-chief executive officer of Ping An, stated at the Annual Meeting of the New Champions 2024, also known as Summer Davos: “As average life expectancy increases, people will attach greater importance to pensions and start planning earlier. The demand for capital preservation and appreciation, with the goal of building a 'personal pension reserve', will become the core demand of wealth management."

Ping An Life, China’s second-largest life insurance company by premium income,[5] has developed more than 50 products covering the entire employment lifecycle up to retirement. Currently, it serves more than 10mn senior clients aged 55 and above. From 2021 to 2023, Ping An Life added more than 700,000 senior clients who purchased new insurance policies. These senior clients’ contribution to total new policy premiums rose from 19 per cent to 34 per cent, with new premiums totalling Rmb38bn ($5.4bn).

Ping An Bank has also tailored its offerings to the senior market, launching 149 products specifically designed for senior customers. By the first quarter of 2024, more than 1.1mn individual pension accounts had been opened.

Ping An Fund has introduced five individual pension products, including four target-date funds and one target-risk fund, managing assets exceeding Rmb1.3bn ($184mn) as of June 2024.

Now, Ping An Annuity, China’s first annuity company, is exploring opportunities in the third pillar of the pension system after years of operation in the first and second pillars. By the end of 2023, Ping An Annuity held Rmb750.29bn ($106.18bn) in net assets for corporate annuities and annuity investments, with a premium income of Rmb17.33bn ($2.45bn) in 2023. The company serves 463,000 corporate clients and 124mn retail customers.

“The strength of Ping An lies in its integrated finance ability,” Guo says, "Fulfilling the needs of seniors cannot be done by simply adding senior care products together. It requires a comprehensive solution that is organically combined and adjusted to meet the customised demand of seniors at different stages of their life."

Reference

1. https://www.wsj.com/world/china/for-years-chinese-workers-could-retire-at-50-now-china-cant-afford-it-e7cbd405?st=NcWA3P&reflink=article_whatsapp_share https://www.morganlewis.com/pubs/2024/09/china-announces-plan-to-gradually-increase-statutory-retirement-age
2. https://www.ft.com/content/56d8151e-8373-469a-bea7-11c00eb3ed16
3. https://bigdatachina.csis.org/china-is-growing-old-before-it-becomes-rich-does-it-matter/
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7. https://bigdatachina.csis.org/china-is-growing-old-before-it-becomes-rich-does-it-matter/
8.  https://www.reuters.com/world/china/why-are-there-concerns-about-chinas-pension-system-its-population-ages-2024-01-18/
9. http://www.cbimc.cn/content/2024-04/03/content_513194.html
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11. http://www.cbimc.cn/content/2024-04/03/content_513194.html
12. http://www.cbimc.cn/content/2024-04/03/content_513194.html
13. https://www.soa.org/4a56e4/globalassets/assets/files/resources/research-report/2023/insurers-developing-third-pillar.pdf
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16. https://www.soa.org/4a56e4/globalassets/assets/files/resources/research-report/2023/insurers-developing-third-pillar.pdf
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22. https://group.pingan.com/resource/pingan/IR-Docs/2023/Ping-An-Corporate-PPT--FIN-_compressed-2023.pdf