The Asset Management Association of China (AMAC) is calling on Chinese authorities to facilitate the development of private pension schemes – the third pillar in a pension structure – to mitigate mounting financial pressure on the country’s retirement system.

AMAC Chairman Hong Lei says China’s pension system became more comprehensive with the establishment of the enterprise annuity (EA) system in 2004, a supplemental defined-contribution (DC) retirement plan for Chinese enterprises – the second pillar, along with the occupational annuity (OA) system.

The OA scheme, which came into force in 2015, is also a supplementary DC pension system, which is available to certain categories of civil servants in local government agencies.

However, Mr. Hong notes that the pension system is facing tough challenges.

Many employers don’t join the EA schemes to avoid paying their share of contributions. Currently, there are only 23 million employees in EA plans. That is a tiny fraction of the 776 million Chinese employees in work at the end of 2016, according to data provider Trading Economics.

Mr. Hong says the fundamental pension plan, the compulsory basic pension scheme that covers all Mainland workers – the first pillar – is also under enormous financial pressure with a declining replacement ratio, which is the percentage of a worker’s pre-retirement income set aside for withdrawal upon retirement.

Also, the “empty account” phenomenon of the fundamental pension plan is deteriorating as some existing workers’ contributions have been siphoned off to support retired members, he adds.

If the situation becomes unsustainable, the pension system will fail to provide sufficient retirement protection for the country’s ageing population.

“To address the financial deficit, Mainland authorities should press ahead with the development of the third pillar so as to improve households’ asset allocation,” Mr. Hong says in a statement on May 8.

Full Content: Asia Asset

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