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A starting point

By Hui Ching-hoo   
  • Asia
  • China
  • Global
Third pension pillar policy seen as game-changer

Asia Asset Management, with support from Changjiang Pension Insurance Co. and S&P Dow Jones Indices, held its 13th Annual China Roundtable in Beijing on May 19.

Themed Pensions and Investments: Move to a Sustainable Regime, the event brought together a group of market practitioners to share their views on the third pension pillar reform in China.

The first of three keynote addresses was delivered by Hu Xiaoyi, chairman of China Social Insurance Association (CSIA), an official insurance research group under China’s Ministry of Human Resources and Social Security.

Mr. Hu described China’s recent move to allow individuals to defer tax on a portion of income used to purchase private pension insurance products as a “very significant” step for pension reform in the Mainland.

The initiative, which was jointly announced by five government bodies, including the Ministry of Finance and the China Securities Regulatory Commission on April 2, allows individuals to delay paying the tax until they retire and start withdrawing from the pension funds.

According to Mr. Hu, “it is a good timing for the government to launch the policy, especially when Mainland individuals have accumulated tens of trillions RMB in personal savings. The significant amount of savings will provide a strong foundation for the initiative”.

He predicted that the new policy will help divert public savings to the private pension market and used as a supplementary pension fund in a country facing with an aging population.

China’s private pension market, or the third pension pillar, has strong growth potential because the country’s life insurance and pension industries are still in their infancy with assets of only about “several hundred billions” renminbi, he added.

He described Beijing’s move as only a “starting point”, noting that there are still many areas that Chinese authorities and the insurance and pension industries must work on to further enhance the pension system.

He suggested Beijing should strengthen integration of third pillar products with the other two pillars – the fundamental pension plan, and the enterprise annuity (EA) and occupational annuity (OA) – such as by establishing a centralised platform for taxation, information and contribution.

The fundamental pension plan is a government-funded compulsory retirement programme, while the EA and OA are retirement schemes for Chinese enterprises and government organisations.

The next keynote speaker was Cao Deyun, executive vice chairman and secretary-general of the Insurance Asset Management Association of China (IAMAC).

Mr. Cao agreed that the new tax-deferred policy is very significant in providing better retirement protection for Mainland Chinese, adding that it will also boost awareness about saving for retirement, which can help mitigate the pension system’s deficit.

According to Mr. Cao, IAMAC has done a lot of work for implementation of the policy. For example, it recently launched an elderly cost of living index and conducted several studies on how domestic insurers design appropriate commercial pension products to complement liberalisation of the third pillar market.

Xu Jinghui, chairman of China Pacific Life Insurance Co. Ltd, and Changjiang Pension Insurance Co. Ltd, who delivered the third keynote address, said commercial pension products should not be viewed as a quick fix for the prolonged imbalance of the country’s three pension pillars.

“The participation rate for EA schemes is still very low while the private pension market is still at its infancy. As such, the overall pension system will still rely on the fundamental pension plan in the near future,” he said.

But he believes third pillar pension products will play an increasingly important role in the longer term by offering pensioners all-round healthcare and retirement protection solutions.

He said pension product providers should use data technology and robo-advisory services to create customised retirement solutions and to carry out thorough risk management for their customers. The product mix will also need to further diversify into overseas investments such as the Stock Connect and One Belt, One Road (OBOR) programmes, he added.

Stock Connect allows international investors to trade stocks listed in Shenzhen and Shanghai, and Mainland investors to access Hong Kong-listed stocks. The OBOR programme is a China-led infrastructure plan aimed at strengthening economic connectivity along 60 Asian and European countries.

Long-term pension management

After the keynote addresses, Geoff Su, board director and president of Changjiang Pension Insurance Co. Ltd, delivered a speech on Focusing on Long-term Pension Asset Management, Bringing Pension Insurance Companies’ Expertise into Play.

He said China’s pension regime still lags the US in coverage, adequacy ratio, and structural balance.

He noted that US pension assets amounted to US$28.1 trillion at the end of 2016, or 151% of the country’s gross domestic product, compared to just $7.5 trillion and 10%, respectively, in China.

Also, he said, the first pillar only accounted for 10% of the US pension market compared to a whopping 85% in China. And the participation rate in corporate pension schemes in the US is over 60% versus just 3% in China’s EA scheme.

Nevertheless, Mr. Su believes China’s ongoing pension reform will bring growth opportunities for all three pension pillars.

On pension asset management, he said Chinese pension product providers should strengthen their investment and risk control capabilities to generate more stable long-term returns for their clients.

The next speaker was Zheng Bingwen, director general of the Centre for International Social Security Studies at the Chinese Academy of Social Sciences (CASS), with a speech on Investment Movement towards Long-Termism: Issues and Risk Challenges.

Mr. Zheng, who noted that Chinese investors typically have a short-term investment mentality, emphasised the importance of a long-term view for pension asset allocation.

He said pension funds should keep an eye on their asset-liability matching, and that their investment boards should be at arm’s length from the government to ensure their independence.

Mr. Zheng said active investment is also another key factor for pension management, citing the example of the Canada Pension Plan Investment Board, which invests the assets of Canada’s largest pension fund. He noted that the Canadian fund had significantly improved overall returns after shifting strategies from passive to active investment-centric in 2008.

Long-term risk management

After a tea break, the roundtable continued with the first of three panel discussions, entitled Pension Fund Long-Term Investment and Risk Management.

The panel comprised Sun Shixi, director of life insurance supervision department at China Banking and Insurance Regulatory Commission; Xu Yong, deputy general manager of Changjiang Pension Insurance Co. Ltd, Song Jiawang, deputy general manager of investment management department at CCB Pension Management Co. Ltd; and Zhang Yinghua, research fellow at CASS’s Centre for International Social Security Studies.

According to Ms. Sun, commercial pension products need to fulfill three major criteria: long-term stability, profitability and security.

“Security will definitely be the most important factor. Investments in private pension products are all from Mainlanders’ ‘life-saving monies’, so the assets need to be managed safely,” she said. “By contrast, the funds do not need to chase high returns because high return means high risk exposure. It is sufficient for a fund to generate a slightly higher than inflation return.”

Mr. Xu agreed that long-term stability is a key characteristic for pension products.

People generally take many years to contribute to their retirement accounts and to make withdrawals after retiring. The investment and withdrawal processes involve many market cycles, so they need to pay attention to long-term risk control of their pension assets, he said.

According to Mr. Song, China’s s pension funds find it challenging to achieve long-term investment objectives. He said contribution ratios are declining as the population ages, and investment returns have come off their peak because of changing market conditions. This, he said, puts intense pressure on the pension system’s financial stability.

In addition, the scope of investments for pension products is still very narrow and does not meet demand for long-term asset allocation, he added.

The panel discussion was followed by a speech from Liyu Zeng, director of Index Research & Design of S&P Dow Jones Indices, on Portfolio Decarbonisation – From Faith to Fact.

She said environmental, social and governance (ESG) criteria are playing an increasingly important role in pension management, and that decarbonisation is one of the key components in the ESG space.

Ms. Zeng expects approximately $93 trillion to be deployed for decarbonisation infrastructure over the next 15 years globally, presenting considerable investment opportunities.

To enable more investors to take advantage of the trend, S&P Dow Jones Indices and its subsidiary Trucost plc have jointly compiled an index to measure a series of carbon emission data such as carbon footprints and carbon intensity, she said.

The next speech was by Dong Keyong, a professor at Beijing-based Renmin University of China and secretary-general of the China Ageing Finance Forum 50, with a paper on The Idea of Developing a Third Pillar Pension System in China.

Mr. Dong stressed the importance of the government implementing the third pension pillar to cope with financial stress in the existing system.

He said China’s retirement protection still counts heavily on the fundamental pension fund, but the first pillar system is facing many challenges, such as a limited adequacy ratio, while the second pillar is still underdeveloped with a low participation rate.

Solution for ageing population

During the second panel discussion, on Addressing Pensions for an Ageing Population: Global Trends, National Council for Social Security Fund Director Li Na said the rationale for the establishment of the Social Security Fund (SSF) in 2000 was to act as a reserve fund to boost public confidence in the pension regime.

But she said the SSF by itself can do very little to mitigate financial stress in the pension system because of the increasing number of single-child families. As such, she said, it’s important for the government to raise public spending for the elderly in order to solve the problem.

Elvin Yu, principal of Hong Kong-based pension advisory firm Goji Consulting Limited, gave an overview of the pension system in Hong Kong. He said most smaller-sized private pension plans and the city’s Mandatory Provident Fund are still very restrictive in their asset allocation.

In Thailand, meanwhile, the second pension pillar has yet to develop, according to Dr. Pisit Leeahtam, president of the country’s Association of Provident Funds. He said Thai provident funds are structured on a voluntary third pillar basis, but they have been drawing less interest in recent years because “many workers don’t want to save for the future”.

While China is developing its third pension pillar, Thailand is doing the opposite to establish the second pillar to push compulsory savings, he added.

Philip Lin, vice president and head of China at the global investment services division of T. Rowe Price Group, Inc, gave a brief introduction about the US pension market.

He said many US firms have shifted their pension schemes from defined-benefit (DB) to defined-contribution (DC) plans because the former are expensive, and employers are responsible for all the risk. As a result, the asset pools of DC schemes have surpassed that of DB schemes.

Heman Wong, chief executive officer of Hong Kong’s Pension Schemes Association (PSA), delivered a presentation on Planning for Post Retirement Needs: Some Practical Strategies.

He shared his views on how individuals need to be better equipped for “good retirement”, and identified health, wealth, and lifestyle adjustment as the three major areas for retirees to focus on.

The last speaker at the event was Pranay Gupta, managing director of Allocationmetrics Limited and research consultant at the National University of Singapore’s Centre for Asset Management Research and Investments.

In his speech on The Impact of Fintech in the Financial Services Industries, Mr. Gupta said financial technology revolution is very conducive in “promoting the application of data analysis and data collection in the financial industry”.

The third panel discussion was on Impact Finance and Impact Investing: Achieving Sustainable Development Goals.

Dr. Ilex KK Lam, senior advisor of the United Nations Development Programme (UNDP) Sustainable Development Goals (SDG) Impact Finance, said impact investing “does not have any big difference from the traditional wisdom of modern portfolio theories, investment, return and risk, but now we add additional dimension – the importance of social impact”.

“Apart from the risk and return perspective, [impact investing] also involves an impact alpha, which refers to the social value creation out of your portfolio management or corporate strategies,” he added.

Richard S. Roque, managing director of SA Capital Limited, said impact investing is about taking a systemic approach to how investments affect the entire social and environmental system.

“On a risk-adjusted basis, [impact investing strategy] is actually reducing the risk because it’s taking a ‘stakeholder approach’ to align all the stakeholders together,” he added.

The roundtable concluded with a panel on Effectively Utilising ESG in Pension Investment.

Flora Wang, head of investment stewardship, Greater China, at BlackRock Inc., said many investors view ESG investing as equivalent to sustainable investing because both focus on investment sustainability.

“Owing to pension funds’ long-term investment characteristics, they’re looking for something that can generate sustainable return. As such, an increasing number of pensions put more emphasis on the ESG performance of the companies they invest in,” she noted.

Jie Zhang, general manager at the asset management department of Mitsui Sumitomo Insurance (China) Company Limited, said many large Japanese companies focus on corporate social responsibility (CSR) rather than ESG.

“ESG is part of CSR. Compared to the three elements in ESG investing, CSR companies take a more macro view on how to be more social responsibility-engaged,” he said.

According to Lawrence Au, business leader, corporate intrapreneur, book author, it’s important for pension funds to figure out why they want to include ESG in their portfolios.

“Once they define the objectives, they need to have a strategic plan to ensure that their ESG investments are well implemented,” he said.