Facing a looming demographic crisis, China is expanding and centralising its pension system
The government on July 1 launched a scheme to redistribute pension funds from rich provinces with surpluses to poor ones with deficits. Pressure on the pension system is one result of rapid demographic ageing – one of the most pressing issues facing China’s government. The gap between pension contributions and benefits paid out could approach 100 billion dollars by 2020. Various reforms over the past few months aim to make pension schemes more sustainable.
What next
The reforms will likely reduce the immediate pressure and make pension schemes more sustainable. However, they fail to address regional imbalances and inequalities between social groups fully. Efforts to centralise the pension system at the national level appear limited; this reform has been announced for decades but still faces tremendous difficulties.
Subsidiary Impacts
- Private and commercial insurance, now encouraged by Beijing, will likely grow rapidly in the coming years.
- Insurance products andpublic pension funds investing in equities will contribute to the development of China’s financial markets.
- The minimum benefits for the rural basic pension will rise, but enormous imbalances will persist between urban and rural residents.
- Although not currently open to foreign players, a huge market in private pensions could open in the future as the industry matures.
Analysis
China last year counted 240 million people aged over 60, accounting for 17.3% of the population. By 2030, they are expected to amount to one-quarter of the population.
Some provinces already face a shortfall of pension funds. The government does not release official data, but Wang Dehua, an expert at the National Academy of Economic Strategy in Beijing, has estimated the pension gap between workers' contributions and benefits paid out will reach 600 billion renminbi (94 billion dollars) in 2018 and around 1 trillion renminbi by 2020 if the system is not reformed.
Pilot programmes have been introduced to encourage the development of commercial pension insurance, inject money into existing pension funds, centralise pension fund management and increase minimum benefits.
One-quarter Expected share of population over 60 by 2030
Pension ‘pillars’
The division of pension schemes into ‘pillars’ has been encouraged by the World Bank since the 2000s and is now widely used internationally.
In China, the first pillar, the ‘basic pension’, comprises several schemes catering to different social groups (urban employees, public servants and rural residents). It relies on both individual contributions and state subsidies. It covers 900 million people and manages funds of 4.5 trillion renminbi at the provincial and sub-provincial level.
The second pillar, covering only urban employees and public servants, is a non-compulsory enterprise annuity, managed by companies. It currently covers around 23 million people and amounts to 1.3 trillion renminbi. The Ministry of Human Resources and Social Security announced in February the establishment of a ‘third pillar’ – private and commercial pension schemes for individual savers.
Pilot programmes launched in Shanghai, Fujian and Suzhou offer tax deductions to encourage private ‘pension insurance’. Individuals will get tax breaks for buying insurance-based pension products up to a value of 1,000 renminbi per month or 6% of their salary, whichever is greater.
Private savings are expected to ease pressure on the first two pillars and contribute to the development of China’s booming insurance market. The commercial pension insurance sector could grow 21% annually and reach 11 trillion renminbi by 2025, KPMG forecasts.
This will ease pressure on pensions in the long term, but the government is also finding new ways to inject money into existing funds, diversify their assets and increase their value.
Diversifying pension fund assets
Since 2016, provincial-level governments are increasingly investing their pension funds in stocks and assets, instead of leaving the funds in banks, or investing in treasury bills to increase their value. In March this year, twelve provincial-level regions signed contracts to entrust a total of 475 billion renminbi in pension funds to the National Council for Social Security Fund (sic) (NCSSF).
Created in 2000, the NCSSF is China’s social security reserve fund to supplement and adjust social security spending. It has broader mandates than local governments to invest in riskier assets and rules for entrusting pension funds have been relaxed over the last two years.
In November 2017, China also started a pilot programme to transfer state-owned companies' shares to pension security funds, in order to inject money without raising contribution rates. According to the Ministry of Finance, 10% of state-owned equity in a few selected enterprises will be transferred to the NCSSF or wholly state-owned companies, which will be allowed to use the funds but not to be involved in management decisions of the companies. The programme is expected to expand to more firms this year.
Centralising pensions
Another important reform is centralisation of the pension system at a national level.
Since the late 1980s, successive governments have tried to centralise the pension system; first from the county and municipal level to the provincial level, then from the provincial to the central level.
However, in most places, meaningful centralisation has not happened. Instead of pooling pension funds, most provinces have only established adjustment funds to help poorly performing counties and cities.
This seems to be the path chosen by the current administration to homogenise pensions at a central level, despite calls at the Party Congress last year to step up centralisation efforts.
Last month the State Council announced a plan to establish a central adjustment fund for urban employees' basic pension from July 1. This fund will pool a portion of the pension funds of all provinces – 400 billion renminbi annually in total, Caixin estimates – and redistribute it to the provinces that need it most.
This fund will ease some of the regional imbalances that cripple the pension system, but it is unlikely to solve the issue. Currently, Guangdong province’s employees' basic pension fund boasts a surplus of 726 billion renminbi thanks to its abundant young migrant workforce, while the province of Heilongjjiang in the north-eastern rust belt has a deficit of 23 billion. The adjustment fund only concerns urban employees' schemes, entirely leaving rural pensions to provincial and sub-provincial (mostly county-level) management.
The greatest imbalance in the pension system is the rural-urban divide
Increasing rural minimum pensions
The basic pension plan for rural residents and unemployed urbanites is one of the three schemes comprising the ‘first pillar’ of the pension system.
Unlike the urban schemes, which concern employees in enterprises and in public service, rural benefits have remained at a very low level. While urban benefits depend on individual salaries (the higher the salary, the higher the retirement benefits), rural basic benefits are fixed within local areas, unless complemented by pay-as-you-go individual accounts.
On May 14, the Ministry of Human Resources and Social Security announced it would raise the minimum standard of basic pensions for rural residents to 88 renminbi per person per month, from the previous level of 70 renminbi.
This increase will not bridge the widening gap between rural and urban pensions. Urban pension funds per participant are about ten times higher than for rural pension funds, and state subsidies per participant are about four times higher in the urban schemes. In 2016, state subsidies to rural pension schemes grew by 2.4%, while they grew by 10.2% for urban company employees.
This article was first written for the Oxford Analytica Daily Brief, which is the copyright holder.