China’s pension system has been continuously developed since its launch in 1951, with a focus mainly on public pensions. Through seven decades of development, China has made impressive strides in retirement payments, with a public pension coverage of almost 960 million people in 2019. However, the size of the pension in China is still relatively small, mainly due to a lack of a private pensions system that encompasses enterprise annuities, occupational annuities, and pensions for individuals. As it faces a rapidly aging population and traditional family roles change, China is actively improving social security mechanisms for elderly residents, with the aim of developing the world’s largest multilayered pension system. KPMG analysis points to several overarching trends affecting the development of China’s multilayered pension system in the next few years:

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First, China is considering a unique model for its multilayered pension system. This model will integrate public pensions, private pensions and senior care services throughout an individual’s life cycle under a risk-monitoring framework adopted by participants. A report by KPMG points out that China’s public pension system has been well developed. Nevertheless, the average replacement ratio (pension benefit as a percentage of pre-retirement wage) had declined from 72.9 percent in 2002 to 48 percent in 2018 due to a lack of private pensions to supplement the overall ratio. According to the data of the Ministry of Human Resources and Social Securities and the National Council for Social Security Fund, the scale of public and private pensions of China in 2019 was only $1.85 trillion, which is approximately 12 percent of its GDP, while the percentage was 136 percent in the US and 66 percent in Japan. This may likely leave the Chinese government overburdened by public pensions going forward.

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Public pensions-the Public Pension Fund and the Social Security Fund-are the main pension pillar, accounting for about 74 percent of the total scale. It will be a huge challenge to maintain its sustainability as China ages more quickly over the next 30 years. The second pillar-the enterprise annuities and occupational annuities-is comparably less developed, with a size of $480 billion, about 26 percent of the total and covering only 3 percent of the workforce. And the third pillar-individual private pensions-is still in its infancy. KPMG research suggests that the structural reform of China’s pension system is imperative, and the aging population will be propelling an increase in demand for investments with sustainable returns and alternative solutions that provide long-term benefits.

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