Private pension accounts to be encouraged

Rapidly aging population, need for more income-earning flexibility cited

China should encourage individuals to open personal accounts and choose investment vehicles under a private pension plan rolled out by the country, and the plan should be better connected with basic old-age insurance and occupational pensions to complement the current guaranteed retirement income system, industry experts said.

The nation unveiled the framework of a private pension plan earlier this year amid increasing efforts to address the needs of its rapidly aging population. At the end of last year, those aged 65 years and above accounted for 14.2 percent of the more than 1.41 billion population on the Chinese mainland, said the National Bureau of Statistics.

People covered by basic pension insurance for urban employees or by basic pension insurance for urban and rural residents are allowed to contribute up to 12,000 yuan ($1,739) per year to their pension accounts. Funds held in the accounts will be invested in certain financial products that meet regulatory requirements, including banks' wealth management products, deposits, commercial pension insurance and mutual funds. The government will offer tax incentives to encourage participation in the plan, said the General Office of the State Council.

In order to accelerate development of the private pension plan, China needs to encourage workers engaged in flexible employment to join the plan, said Wang Xiangnan, deputy director of the Research Center for Insurance and Economic Development of the Chinese Academy of Social Sciences, in a report issued jointly by the center and the 21st Century Institute of Finance at a recent seminar in Beijing.

Wang suggested the government require large operators to help flexible employees associated with them open personal accounts under the private pension plan and advised financial institutions to strengthen cooperation with large platforms and industry associations to design investment products based on the needs and characteristics of the workers.

In addition, China can consider establishing a mechanism to share tax incentive quotas between occupational pensions and private pensions, allowing those who have not joined an occupational pension scheme to enjoy higher tax incentives under the private pension plan. The government could also boost enthusiasm for opening personal accounts under the private pension plan if the investors are allowed to withdraw in advance part or all of their money in accounts for various reasons, such as paying for large medical bills and child care expenses, he said.

Chinese participants in pension plans pay close attention to returns on investments. Amid a low interest rate environment, pension holders notice more focus on equity asset investments and offshore investments, and the ramping up of investment in nonconventional assets such as real estate investment trusts, hedge funds and structured products, he said.

Liu Zhiyong, vice-president of China Wealth (Asset) Management Registry and Custody Co, said with strict risk management systems, strong capabilities of macroeconomic assessment and asset allocation experiences, commercial banks will sort out sound investment strategies for WMPs, which will meet investor requirements for safe and stable pension investments. As a result, banks' WMPs are expected to become a major type of investment products for participants of the private pension plan, Liu said.

Starting from March 1, China expanded the scope of a pilot program for WMPs for retirement planning from four cities to 10 and also increased the number of banks' wealth management subsidiaries participating in the program from four to 10.

As of the end of June, 27 WMPs for retirement planning had been sold to 231,000 investors, with a total subscription amount of 60 billion yuan by individual investors, he said.

Commercial banks can sometimes take advantage of the comprehensive operations of their parent groups by coordinating with financial subsidiaries, including asset management companies and fund firms, to provide asset management services to customers. At the same time, banks can also offer custody services for asset management products for retirement planning, said Wu Jinmei, vice-president of BOC Wealth Management Co.