This report presents an update on pension product and policy developments, as well as perspectives from a recent dialogue we hosted with leading pension experts.

In the months since we published our primer on China’s pension system (Ageing and pensions in China, 21 October 2021), the potential and challenges of the private pension market have been illustrated by a mixed reception to a range of pilot products.

China’s upcoming individual account system provides the missing foundation to streamline distribution and simplify administration. The introduction of individual retirement accounts in major markets, e.g. US IRAs, SIPPs (UK), RRSPs (Canada), have boosted structural inflows into investment assets.

Individual tax-advantaged accounts. Workers covered by public pensions will be entitled to make tax-advantaged purchases of qualified financial products, up to a limit initially set at RMB12,000 per year. The impact of tax treatment alone may be modest, considering the small base of individual income tax payers in China (circa 8% of the working population). Participation is more likely to hinge on ease of access, demand for low-medium risk investment products and possible future subsidisation.

Short- and long-term expectations. Regulators are initially expected to prioritise implementation of an open architecture system in pilot cities, product governance and investor education. Given cautious risk appetites, participation rates should accelerate when pension products achieve a track record of outperforming longer-term fixed deposits. Private pension assets now amount to less than 2% of the country’s public assets (RMB8.7tn in 2020), with the aim of reform being to enlarge the system and achieve more balance between the key pillars.

Market implications. Although product pricing may be highly regulated, banks are positioned to reallocate a portion of China’s vast household savings towards their wealth management subsidiaries, distributed mutual funds and insurance products.

HSBC’s China Financials Survey has previously found that banks remain most trusted to advise on financial products. The rise of pension funds tends to support the development of institutional financial services and lead to a higher stock and bond allocation within household assets. We have estimated that c16% of China’s pension assets are invested in equities vs. 43% in the seven largest pension markets.