China’s Private Pension Scheme Grows Nationwide with 85 New Index Funds
China’s innovative private pension scheme, introduced two years ago as a pilot project to combat the challenges posed by its rapidly aging population, is now set to expand nationwide with the incorporation of 85 index funds. This groundbreaking individual pension account initiative was initially launched in November 2022 in 36 major cities like Beijing, Shanghai, Guangzhou, and Shenzhen. Investors are allowed to contribute up to Rmb12,000 ($1,670) annually to tax-free accounts, closely resembling the well-known 401(k) plans in the United States.
Despite the enormous number of over 60 million accounts opened, the actual amount invested in these private pension scheme accounts remains significantly low, if not zero for many. Although the nationwide expansion is a positive step forward, analysts emphasize that further reforms and liberalization are essential for optimal effectiveness.
In a joint communication by four national regulators, it was announced that the scheme would be made accessible across the entire country starting from December 15. Previously, the scheme solely comprised pension funds of funds, but it will now be broadened through a phased approach. Initially, pension-linked share classes, or Y-class shares, will be introduced in index funds, with bond products and active equities strategies to follow at a later stage.
The initial batch of 85 index funds newly incorporated into the individual private pension scheme contains popular products tracking various broad-based indices like the CSI 300, ChiNext, and CSI A500. E Fund Management, China’s largest retail fund asset manager, will see the addition of 11 index feeder and index-enhanced products to the pension scheme, among others.
It is noteworthy that JPMorgan Asset Management holds the distinction of being the sole global asset manager operating a wholly owned business in China, with a single fund added to the scheme, namely, the JPMorgan CSI A500 Exchange Traded Open Index Securities Investment Fund Linked Fund. With the existing pension funds of funds also included, E Fund now boasts 24 approved products for the scheme, while other entities like ChinaAMC and JPMorgan AM’s China unit have their own allocations.
Despite the promising outlook, China’s third-pillar private pension sector remains a small fraction of the overall $4.4 trillion mutual fund industry. Domestic investors are largely uninformed about the scheme, inhibiting its growth potential. With pension target securities investment funds only accounting for a meager 0.2 percent of assets in onshore mutual funds, there is considerable room for expansion and awareness building within the industry.
Spurring investor interest in the scheme requires a multi-faceted approach, with experts suggesting various improvements for its success. Chief economist Yang Delong emphasized the need to raise the annual contribution limit beyond Rmb12,000, especially to cater to high earners. Additionally, more tax incentives could be introduced to incentivize investors to bolster their personal pensions.
Jia Zhi, managing director at ChinaLin Securities, highlighted that middle- and high-income earners, seeking tax benefits, found the current Rmb12,000 limit inadequate. To attract such investors, there is a pressing need for moderate subsidies and enhanced tax incentives, he asserted.
To make pension products even more appealing, the China Securities Regulatory Commission (CSRC) has mandated fee reductions, encompassing management and redemption fees, to attract a broader investor base. The introduction of new pension-linked Y-share classes will feature minimal management fees, while ETF feeder funds will be subject to low management and custody fees.
Looking ahead, the Ministry of Human Resources and Social Security is anticipated to issue updated criteria relating to fund size, fees, and performance that will determine eligible bond and equities products for future inclusion in the expansion of the scheme. This proactive step is intended to further boost participation and investment in China’s progressive private pension scheme.
As the private pension scheme in China witnesses significant growth through the integration of index funds and regulatory improvements, the outlook for retirement savings in the country appears increasingly promising. With continued reforms and awareness campaigns, more individuals can benefit from a robust and sustainable pension system, paving the way for a financially secure future.
