Ongoing reforms to China’s challenged retirement system present big opportunities for global asset managers wanting to tap into the 28 trillion yuan (US$3.8 trillion) potential market, according to a joint report by KPMG China and the Asia Securities Industry and Financial Markets Association (ASIFMA).

China’s pension system is in urgent need of reform, as the current framework is unable to cope with the needs of an increasingly elderly population, Eugenie Shen, head of ASIFMA Asset Management Group, said in the report released on Monday.

“There are opportunities for global asset managers in China’s pension market as the nation’s retirement programme undergoes a major programme of reforms,” she said. China’s pension market stood at 9.4 trillion yuan in 2020, and KPMG forecasts this to grow to 28 trillion yuan by 2030.

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China’s reforms started with the basic pensions introduced under Pillar 1 in 1991, which was followed by the Pillar 2 reforms between 2004 and 2014, which introduced enterprise annuities and occupational annuities, with contributions from both enterprises and employees.

Two elderly men play Chinese chess at a park in Beijing on April 25, 2023. Photo: AFP alt=Two elderly men play Chinese chess at a park in Beijing on April 25, 2023. Photo: AFP>

Pillar 3, which first began pilot schemes in 2018, opened the market to individual private pensions for the first time. To encourage participation in the private pension system, tax deductions were made available on personal pension contributions for the first time in January.

“The recent introduction of private individual pensions has created a new and potentially massive market,” said Shen. The Pillar 3 market is projected to grow to 4 trillion yuan under the current regulatory landscape by 2030 and could reach 7 trillion yuan if additional expected reforms are carried out, according to KPMG and ASIFMA.

Pension products are a very new and promising investment product, said Vivian Chui, head of securities and asset management at KPMG China. This is true especially in light of the challenges facing China’s real estate market, where Chinese investors have traditionally put their savings, she added.

The firm sees particular potential for foreign players who have experience in pensions. Financial institutions including banks, insurers and wealth-management companies have already begun gearing up for the new market.

The government has yet to reveal a detailed plan for future reforms, but there are compelling reasons to believe further changes are likely, the report said, including rising healthcare expenses and unsustainable funding for Pillar 1.

“Foreign financial firms will need to consider their circumstances and competitive edge when deciding where to play in the China pensions market,” said Chee Hoong Tong, partner at KPMG China.

Global asset managers will need to actively consider the regulatory environment and work to build relationships with the various regulators, he added.

As reforms roll out, product design, adequate distribution to reach the large customer base and access to customer data will determine success, the report said. Localised marketing campaigns as well as an understanding of the unique Chinese market will also help global asset managers access the China pension opportunity, Tong said.

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