It is no news that China’s pension system faces increasing pressure. Various projections have reiterated the imminence of the depletion of China’s pension fund, or, at least of its first pillar, the Basic Pension Insurance (BPI) and the National Council of Social Security Fund (NCSSF), which, despite what the name suggests, is a reserve in case the former dries up. Every time a new forecast comes out, the warning is thrusted with a heightened sense of urgency. The latest doomsday is said to be as early as 2029 and no later than 2035. The driving force behind this rush to a cliff, we are told, is demographics. We make no attempt to validate or disprove this kind of projection, because to do so requires more space than what is afforded to a periodic review of China’s ongoing pension reform. But we do know that demographics does not necessarily result in a pension depletion, failure to manage the demographics does. And this is the perspective of this report: the interaction between the reforms and the desired outcome is not one-way. In this report we will be reviewing the key developments in China’s pension space in 2024 and focusing on how those developments interact with China’s demographics in different ways. We will be examining what these developments are, where they come from, and what implications they have for the immediate stakeholders as well as the broader community. Let’s start with what has been lauded the most: the nationwide roll out of the private pension scheme or individual retirement account (IRA), the Chinese version of the third pillar.

China first committed to a multi-pillar pension system in its 14th five-year plan in 2021, more than 30 years after the World Bank first floated the idea. At that time, China already had a first pillar with universal coverage, and a second pillar that had been around for almost 20 years, though its growth never got to the level expected of it. In June 2022, the State Council called for a private pension scheme to be built and later that year in November, five of its agencies including Ministry of Human Resources and Social Security (MoHRSS), Ministry of Finance (MoF), State Administration of Taxation (SAT), National Financial Regulatory Administration (NFRA) and China Securities Regulatory Commission (CSRC) released an implementation plan that kicked off the IRA trial in 36 major cities, thus commencing the build out of the third pillar of China’s pension system. The Chinese version of the IRA allows each BPI participant to create an IRA and invest up to CNY 12,000 every year on a tax-deferred basis into a whitelist of products that include bank deposit, pension insurance, mutual funds and wealth management products.

The result of the trial is a mix at best. While more than 70 million people have opened an IRA, the fund flow has been limited. Only 20% of the accounts have seen funding, and fewer still have seen any actual investments. According to MoHRSS’ data, the average IRA size is CNY 2,000, less than 10% of what the cap allows to save over two years.

So how come, with the regulatory encouragement and the tax benefit, the IRA products are less popular than a plain vanilla investment product? In fact, our research shows that the biggest handicap is precisely the tax benefit. IRA products’ tax benefit comes with an annual investment cap of CNY 12,000. And this creates a strong incentive for banking sales staff not to pitch an IRA product to their clients, when average investment product purchase is several times higher than 12,000. Among the 23 banks licensed to sell IRA products, three still have yet to make a single sale after two years. To people who are familiar with Chinese banks’ prowess as a distributor, the dismal performance is proof of deliberate rejection rather than incompetence. (Banks rolled out more than 30,000 wealth management products in 2024. By comparison, fewer than 100 new IRA products were brought to the market during the same period of time.) And because practically all financial products in China rely on banks to sell, the apathy of the banks means that product manufacturers cannot bring new products quickly enough to the market.

But the invisible sales cap is not the only encumbrance. The sales process (or rather, the purchase process) is onerous, with initial purchase of IRA products required to take place in person, and to be video and sound recorded. After the purchase is successful, the administration of the IRA holdings is not as effective as other products, not to mention the disconnection with the other two pillars and the lack of an integrated pension dashboard. Also, while a central IRA product directory has been set up, the information available there is scant.

Of course, none of this would have been a particular problem if the IRA products posted strong performance. For a really good product, Chinese retail investors will crawl through a sewer for the privilege of buying. The IRA products typically yield 2-6% a year, decidedly similar to non-IRA products, even when tax savings are accounted for, though some did register a much wider variance, for better or worse. And then there is the last straw: all IRA investment remains locked up until the account holder retires, or emigrates, or becomes incapacitated, or expires, for that matter.

It was under these blended auspices of curiosity and confusion that the programme was expanded. In December 2024 came the Circular on the Full Implementation of the Private Pension Scheme (关于全面实施个人养老金制度的通知) that expanded the programme from 36 cities to the whole country. In addition, the new rule also added government bonds, negotiable deposit certificates and index funds to the permissible investments.

Both the press and the pension industry welcomed this development with great enthusiasm, mixed with lip service and renewed pledges. Despite an insipid start, there are reasons to be excited: it confirms the Chinese government’s commitment to use the market mechanism in its pension reform. It represents a win-win solution on several fronts: individuals will enjoy the tax relief, the government can shed some fiscal burdens, and it promises the banks, insurers, asset managers and wealth managers a new market.

We find the new rule more interesting than important because it acknowledges the current shortcomings and provides a high-level target state, but falls short of offering any actionable guidance. The promises include that circumstances will be defined for the participants to take IRA money out. It also mentions that a hybrid online/offline channel will be built to allow better customization and better administration of IRA investments.

These promises are elliptical, but nevertheless relevant. As we have discussed, the future growth of China’s third pillar will come from activating existing accounts rather than opening new ones. Key expectation for the young third pillar is to build universal coverage without making it mandatory. The wide success of many retail financial products in China has shown that this is not impossible. So far the rules have equipped the IRA with one element: a nationwide platform. But experience from fast-growing retail products like Yuebao is that to actually expand its coverage, it needs several new things: a compelling risk/return feature, or enough product choices with high customisation level. In either case, the platform needs to provide a rich dashboard and a more coherent customer experience.

And it is against this backdrop that the second development we will be discussing, the merger of the dual systems of the BPI, also becomes relevant to the broader pension reform in China.

The dual systems refer to the arrangement where the employees of the government agencies and public service institutions, defined as not-for-profit ones such as schools, hospitals, railways, postal offices, radio and TV stations, had a more generous pension plan than other people. Employees of these institutions were exempt from paying 8% of the monthly salary as pension accumulation and were entitled to a defined benefit plan with higher monthly pension after retiring. While a corporate worker typically enjoys a pension with a replacement ratio of 40%, those who retire from the governments and public sector can get 80%, sometimes even more. Early retirement is also more common in the public sector.

Dual systems are not uncommon around the world. In East Asia, more countries have dual systems than not. They are usually the result of legacy issues; e.g. civil servants were the first to get a pension. This was also the case in China. China's first pension plan for public service sectors and for enterprises both came out in the 1950s, designed by the same person, Li Lisan, who was a unionizer and incidentally at one point the de facto supreme leader of the Chinese Communist Party. When Li was designing Red China’s first social security system, China was not that much different from Comte de Mirabeau’s Prussia, hence the army, and later the government employees got a better deal. But the divergence between the two tracks is perhaps better explained by the pension reform over the last 30 years. While the enterprise workers’ pension has seen several retrenchments since 1978, the public one has remained intact ever since. Gradually, the system became increasingly tenuous and there was growing support to reform it. But while there have been multiple attempts, no action was taken until 2015, when the Decision of the State Council on the Reform of the Pension Insurance System for Staff of Government Agencies and Public Institutions (国务院关于机关事业单位工作人员养老保险制度改革的决定) introduced a new plan where all public sector workers will have to pay 8% of their salaries as pension contribution every month, turning the defined benefit plan they had been enjoying into a combination of defined benefit and defined contribution. To help smooth out the change, the government promised to set up occupational annuities for everyone affected and it was given a ten-year transition period.

October 2024 therefore was the end of the transition and the beginning of a unitary BPI system in China. Unlike the launch of the IRA, there was not much press about it. Notwithstanding the understandable quietness, the merger is a remarkable achievement. By our estimates, more than 60 million people have moved to the new pension plan as a result of the merger. This brings an additional contribution of CNY 440 billion to the BPI every year. After the 2025 wage raise for civil servants, the number is closer to 460 billion. And BPI is not the only system that gets a windfall. Setting up an OA plan for all civil servants and public service workers means that there is an additional inflow of CNY 700 billion to the second pillar every year. And all the public sector workers now have stronger incentive to join the third pillar too. Removing the privileges of the civil servants also promotes social mobility. By giving everybody the same pension plan, social equality is also improved. The administration of the pension also has become more streamlined and the consequent efficiency boost is conducive to future nationwide reforms.

And the third major development in 2024, perhaps the most significant one, is the raise of the retirement age.

In September 2024, as soon as the transition into a unified BPI system finished, China announced that the retirement age of men would be lifted from 60 years old to 63 years old, and women’s from 50 for blue-collar workers to 55 and 55 for white-collar workers to 58 respectively.

The former retirement age of 60 for men and 50/55 for women were set out in 1951, when average life expectancy in China was 42 years. Incidentally, when setting up the world’s first modern pension system, Otto von Bismarck also set the retirement age at 70, when the life expectancy in the German Empire at the time was 38. (Well done, Chancellor Bismarck!) By 2014, China’s life expectancy had risen to 77 years, and continues to rise by one year every decade, calling the current system’s long-term financially viable into question. In addition to rising life expectancy, there has also been wide early retirement, as anyone who has made 15 years of monthly contribution is entitled to her pension. Pensioner’s average retirement age is estimated to be 58 for males and 54 for females respectively.

The discussion to lift the retirement age has been going on in China for years. But several things have been holding it up. Firstly, while there has always been agreement that people need to work longer, precisely for how much longer is more difficult to ascertain. Secondly, it was also difficult to decide when the right time was to implement the changes needed. The hesitation was exacerbated by the doubt about whether the low-hanging fruits have been exhausted before resorting to such drastic measures. And lastly there was the COVID that put everything on hold for three years, until the new rule, Decision of the Standing Committee of the National People's Congress on the Gradual Delay of the Statutory Retirement Age (全国人民代表大会常务委员会关于实施渐进式延迟法定退休年龄的决定) was finally ratified in September 2024.

In addition to raising the retirement age, the Decision stipulates that a person will need to have made at least 20 years of monthly contribution before she becomes entitled to a pension upon retirement. The early retirement is also limited to three years.

This is the biggest change since the 1990s and in a sense more sweeping than any pension reform China has ever seen. (No reform has ever been applied to a nationwide unitary pension system.) To minimize the potential pushback, several safety valves were put in place. Like the merger of the dual tracks, a phased-in approach was adopted. The retirement age will be lifted by one month every four months, over the course of 15 years. There is also the possibility to negotiate an early retirement as long as the number of minimum contribution years has been met. Like the circular on IRA, the Decision also promises to work on several subsystems to complement the reform, including a more complete paid annual leave system for everyone, and a pension arrangement for flexible employment.

On social media people have responded with memes and satires to this seemingly abrupt if not arbitrary change. (Because it has been going on for years, people feel it will go on ad infinitum.) But to say that it has met with universal discontent will be to underestimate Chinese people’s shrewdness. Most have already formed an intuitive grasp over the necessity of the change. Some may even have looked forward to working longer. The #1 killer of old people is, as every Chinese who watched Kill Bill 2 was told, retirement. Besides, years of debate and discussion have inculcated the inexorability. Not all Chinese people are teleologists, of course. Their concerns are more about where the reform will go from here.

The paradox is that either the reform will make a difference or not have little terminal effect on the labour force. If all goes well, raising the retirement age has the potential to boost China’s labor force by half to one million in 2025, and as the effect gradually kicks in, the number can go to 10-15 million by the time the retirement age reaches 63. But this will likely have a crowd-out effect on the youngsters. The contre-coup may actually aggravate the issue, as it is the young people that come equipped with the necessary knowledge and skill. Or, raising the nominal retirement age will not translate into a raise of the effective retirement age, as multiple empirical studies have predicted. Then the aging of the labour force and the consequent financial woes continue to deteriorate. And the question becomes what other changes are needed and why it will work when exorbitant measures as raising retirement age does not.

Having discussed the three most drastic changes, we will finish this report by mentioning two fine tuning measures. One is the joint circular from the MoF, MoHRSS, State-owned Assets Supervision and Administration Commission (SASAC), Interim Measures for the Operation and Management of State-Owned Equity and Cash Proceeds Transferred to Replenish the Social Security Fund (划转充实社保基金国有股权及现金收益运作管理暂行办法) that streamlines the management of pension assets.

China has been using state-owned assets to supply its pension since the beginning of the century. The shares of Sinopec were the initial bedrocks of NCSSF. During the heyday of the IPO market in 2006-2007, all SOEs going public abroad transferred 10% of shares to NCSSF. This practice was codified in November 2017, when the State Council in a circular stipulated that large and mid-sized SOE, as well as state-owned financial companies should transfer 10% of their shares to BPI, who will then delegate to NCSSF to manage the assets to plug the potential gap. The 2017 rule set up a double-layer system, where the shares of the central SOEs (usually the largest, the most profitable and the best managed) are given to the NCSSF and, due to bandwidth of the NCSSF, and following the 80-20 rule, the shares of provincial SOEs are given to each province’s holding company. While the central plane has been running according to plan and garnered plenty of applause for its efficiency and transparency, in the past, the provincial wing has largely been flying under the radar. Consequently more and more shares and cash were accumulated at the provincial SASAC holding companies, which due to lack of regulatory clarity, either started making very bold investments, or more likely, chose to sit on a growing pile of cash. Neither helps achieve the goal set out for them.

Hence the rule was updated in 2024 to elaborate on how the yields from SOE shares held for local BPI, as well as proceeds from the disposal of these assets should be managed and reinvested. 50% of the cash dividends now have to be delegated to the NCSSF, while the local governments get to retain the ownership. The rules also define the target asset allocation of the remaining half as 40% fixed income, 30% equity and 30% alternatives, the same as OA and EA investments. In reality we expect those provincial portfolios to be kept highly liquid.

The other is a 2024 circular, Opinions of the General Office of the State Council on Optimizing and Improving the Management Mechanism of Local Government Special Bonds (国务院办公厅关于优化完善地方政府专项债券管理机制的意见) that local governments must not use proceeds of municipal bonds issuance to pay pensions or salaries. Note that this is almost a word-by-word copy of a 2020 rule. The reiteration, of course, is because the problems persist, and probably have worsened, as local governments who historically rely on land sales are almost suddenly and entirely cut off from this source due to a cooling property market. The reason why the Central government does not want its subsidiaries to have access to this funding source is probably to keep them focused on the national centralisation of the pension management, and prevent the system from going fragmented again. Better financial discipline also brings better accountability, a prerequisite to various urgent changes needed.

The irony here is uncanny. The top policy makers need a national administrative apparatus to give the pension reform it espouses the necessary reach and penetration. But firstly, they need to do some wing clipping, to make the whole bureaucracy, well…. less bureaucratic. These two rules are representative of the quintessential forces at work in China’s pension reform, both on a day-to-day basis and at a strategic level: a central government trying to rein in a ruthless local bureaucracy, local governments juggling hard to make ends meet, resources at once scarce and ample, an institution that devours itself and regenerates, and lastly, a people that is both the victim and the beneficiary of this institution.

And these are the forces that will go on to determine if China’s pension reform will succeed. For a reform in China to succeed, pension or not, it will need to succeed in vitro as well as in vivo, first from its functionaries and eventually from most of the society. Or rather, a new dimension has to be bestowed on the existing administrative apparatus.

Widespread pension reforms started in the 2000s globally to tackle the sustainability issue of the intergenerational subsidy of a pay-as-you-go pension system most of the world had got used to post-WWII. The usual solutions include tweaking the parameters of the state pensions, introducing private pension schemes, and raising the retirement age. The year of 2024 marks China has finally done all three and yet new reforms are already needed. Chinese policy makers and administrators have so far largely avoided binary choices, but look increasingly cornered in one: to continue the benevolent, or at least the apolitical technocracy, or to find support for retrenchment from, counterintuitively, the grassroots.

Stars Align - China Pension Report 2024 I