Retirement systems in China and India, home to the world’s largest populations with around 1.4 billion people in each country, are still in nascent stages but are expected to grow as their economies expand and their demographics shift.

In both countries, the first pension pillar — a state-sponsored pension system — has been seen as inadequate, and the second pillar — employer-sponsored retirement plans — is often insufficient in meeting people’s rising post-retirement needs. A third pillar focused on building up individual, private retirement accounts is still in very early stages in both countries, but as the two economies grow, so will these retirement schemes, industry players said.

An early version of a public pension system emerged in 1951 in China, but as population dynamics changed through the years post-Cultural Revolution, the government restructured the pension system in 1997 into the three-pillar iteration that more closely resembles the system today.

In India, various pension schemes were introduced when the country was under British colonial rule in the 19th century, but these underwent changes after the country gained independence in 1947. The Employees’ Provident Fund Organisation was set up in 1952 to manage provident funds in India and it has managed the $90 billion Employees’ Pension Scheme since 1995. The defined benefit Old Pension Scheme for government employees was abolished in 2004 and replaced by the National Pension System, a defined contribution plan.

Currently, a state-provided pension in India is “virtually non-existent,” with only a small proportion of government spending dedicated to social security compared with OECD countries that spend around 8% of GDP on social security, said Ritobrata Sarkar, the head of retirement in India at Willis Towers Watson, based in Gurgaon, India.

“The overall size of the pension market is roughly about $500 billion, which is also fairly small, compared to what you generally see in the West, where the pension assets may be more than the GDP of the country,” he said. India’s GDP in 2022 was $3.39 trillion, making it the fifth-largest economy behind Germany at $4.07 trillion and Japan at $4.32 trillion. The U.S. was the world’s largest economy, with $25.46 trillion in GDP, followed by China at $17.96 trillion.

Workers covered by retirement plans are mostly employed by companies whether in the private or government sector, but more than 90% of people in India belong to the “unorganized sector,” which includes occupations such as farmers, small business traders, domestic workers and gig economy workers, Sarkar said.

Most of India’s $500 billion retirement industry comprises employer-provided plans, including the National Pension System, which caters to government employees, and provident funds that are mandatory for employers with more than 20 workers. The NPS has around $110 billion in assets as of April, and the provident funds collectively have around $250 billion in assets.

Employees can also participate in the voluntary Corporate National Pension Scheme, in which employers and employees contribute to the employees’ retirement savings. It has assets of about $15 billion.

In 2015, Prime Minister Narendra Modi launched Atal Pension Yojana, a government pension scheme targeted at the unorganized sector. It has 300 billion rupees ($3.6 billion) in assets as of Aug. 25.

Private retirement plans in India have an even lower penetration rate than the corporate or state retirement schemes, and it will be difficult to convince people to contribute voluntarily as long as the country remains a relatively low-income country, Sarkar said.

However, India is projected to be a upper-middle-income country by 2030, so that might change with time, he said.

The World Bank classifies economies that have a gross national income per capita range of $4,466 to $13,845 as upper-middle income. The GNI per capita in India was $2,389 in 2022.

“The government has to push some of the Pillar One (state pension) initiatives, so that at least the bare minimum coverage is provided to all citizens, and they can lead a respectable retirement,” he said.

Only 6% of the population participates in private retirement plans, and many people assume that their corporate retirement accounts will be enough for post-retirement, said Preeti Chandrashekhar, business leader for health and wealth at Mercer India.

“People often do not realize that the amount only covers 30% of their total post-retirement corpus requirements,” Chandrashekhar said. “The reality is you need to achieve an additional 60% to 70% of pre-retirement income to have a decent living post-retirement.”

Prompted by an aging population, China launched a private retirement plan scheme last November to relieve some of the pressure on the public pension system amid insufficient funds, particularly in the poorer provinces, and the aging population.

In 2022, China had 10.4 million deaths and 9.5 million births, marking the first time deaths surpassed births in the country. By 2040, elderly people aged 60 and older are expected to make up 32.5% of the population, up from 17.8% in 2020.

However, the take-up rate for private retirement accounts has been slow, experts agreed, due to low awareness and a lack of sufficient tax benefits for participants. By March 31, 33 million people had opened an account, contributing an estimated 15 billion yuan ($2.1 billion) in total.

“One of the key issues could be the lack of understanding and familiarity around how the system works and how they can benefit from this system. Many people could still be quite conservative in their investment approach, traditionally buying properties or relying on bank savings,” said Mandy Chan, Hong Kong-based retirement services leader for Asia at Mercer.

“The limited choice of investment products in the third pillar could be an issue too … Having a more diverse mix of investment products like including bonds, and adding more choices of wealth management products and commercial pension insurance products, could help,” she said.

Wu Haichuan, the head of retirement in Greater China at WTW based in Shanghai, added that current tax incentives are not appealing enough to both high- and low-income segments.

Capital gains are not taxed in China the way they are taxed in the U.S., Wu said.

Investors are taxed on transactions but not on returns, so the tax savings of contributing to a private pension is not significant, he said.

Wu added that the contribution limit of 12,000 yuan, or about $1,650, per year is too low to “make a significant dent for high-income people,” while lower-income workers do not pay much tax and do not stand to benefit from the tax deduction.

However, China’s private retirement scheme will likely see some changes in the future as authorities fine-tune the program, experts said.

“My guess and most people’s guess is the (contribution) limit will be increased and then with tax reforms, we will start to have property tax, investment tax, capital tax — (so the tax) advantage will be very significant,” Wu said.

Thomas Cheong, president for Asia at Principal Financial Group, anticipates that some flexibility will be introduced to allow participants to transfer assets from a corporate or public pension account to a personal account.

“If you look at the experience of the U.S., 90% of the money that goes into the U.S. individual retirement accounts — which is Pillar Three in our definition — comes from a rollover from Pillar Two,” said Cheong, who is based in Hong Kong.

The slow growth of the private pensions pillar in China is partly attributed to money being tied up in the public and corporate pensions, he said. Allowing the transfer of assets between pillars will create cohesion across accounts that people can access even after they switch jobs or careers.

However, he noted that making these changes is a complicated process that needs time.

“If you talk to a lot of the Chinese, they will tell you that even getting a proper pension pillar out in the first instance is a huge achievement,” he said.

The Chinese are good at scaling and iterating, so while the focus previously was getting the retirement schemes rolling, the next step is to fix and fine-tune the existing pillars, which will be years in the making, he said.

Principal Asset Management, the fund management arm of Principal Financial Group, had assets under management of $525.2 billion as of June 30. Principal Financial Group has a joint venture with China Construction Bank that provides retirement services across all three pillars in China. A spokesperson declined to provide a regional breakdown of Principal’s AUM.

Corporate retirement plans in China are also going through an evolution, WTW’s Wu said. The corporate retirement plans in China, like the rest of the world, are moving away from defined benefit to defined contribution, he said. However, there are still some shortfalls.

“Most of the DC plans don’t have a matching scheme. The majority of contributions are paid by the employers … which is different from the U.S. So I think we need to have more employee contributions. I guess that’s a reason the government rolled out Pillar 3,” Wu said.

Employers contribute around 5% to 8% of the employee’s salary to their corporate retirement plans, and while the number is decent, it will not be enough to support workers after retirement, Wu added.

The retirement system in India will also likely grow in size and sophistication in years to come, particularly amid demographic and cultural shifts. India does not yet have an aging population where the share of elderly is increasing against the younger population, but people are living longer, have higher lifestyle standards post-retirement and are increasingly educated, with younger generations likely to join the organized sector.

Indians have also started to become more savvy investors and have smaller families, which has driven a need for elderly care facilities and a rise in expenses.

“That is a massive cultural shift that is happening,” WTW’s Sarkar said. “Old age care is something that people have to spend a lot of money on … Previously, you would just stay with your children and there was no real expense really. So now there is a massive change that is happening and will continue to happen in the next few years,” he said.

For private pension providers such as HDFC Life Insurance Co., Mumbai, the demographic shifts, combined with the fast-growing economy and increasing issuances of long-term government bonds, present an opportunity to grow the annuity and retirement business. HDFC Life manages 2.5 trillion Indian rupees ($30.1 billion) in assets.

The Indian government has been issuing more long-tenured bonds, with around one-third of government bonds now at 15 years or more, said Vibha Padalkar, CEO and managing director of HDFC Life.

India now issues 40-year bonds, which is appealing because returns are locked in for 40 years, enabling the insurer to provide retirement solutions to younger customers, she said. The 40-year government bond was yielding 7.42% as of Oct 2. On Sept. 27, the Indian government said it will introduce 50-year bonds for the first time, and will issue 300 billion rupees worth of these ultra-long tenor bonds by March 2024.

“A few years ago, we at maximum would have had a 25-year government paper and not a 40-year, in which case the retirement solutions would have been around 25 years. They could not have been at 40 years because then the company would be taking an (asset-liability management) risk. … On the liability side, you’re giving a guarantee, but on the asset side, you’re open to reinvestment risk of the then prevailing interest rate regime,” she said.

Around a fifth of HDFC Life’s business is in retirement and annuity, for which Padalkar is projecting a 20% year-on-year growth over the next five to 10 years.

“Today, we are about $2,200 per capita GDP. China, for example, is fives times where India is. As India continues on its path over the next 10 years to innovate, some of the affluence percolates to lower levels or at least the middle levels. … As affluence comes through, we’ll find more numbers of people and higher amounts of savings and that will give us that kind of 20% growth,” she explained.

“The number of people in the age group of 65 and above is meaningfully going to go up,” she added.

Projections show that over the next 30 years, the proportion of elderly population will increase by 2.5 times to approximately 250 million people, which is bigger than the population of many advanced countries, she said.