How are Chinese Investors Preparing for Retirement?

ASK THE EXPERT: Workers in China are increasingly having to take responsibility for their own pension provision rather than relying on the state

Emma Wall 28.10.2015
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Emma Wall: Hello and welcome to the Morningstar Series 'Ask the Expert' I'm Emma Wall and I'm joined today by Qiumei Yang, Chief Executive Officer for ICI Global.

Hello Qiumei.

Qiumei Yang: Hi, good morning.

Wall: So we are here today to talk about the changing pension's landscape in China. The last 20 years have seen some big changes in the way the Chinese are employed and that’s affected their pensions. Hasn’t it?

Yang: Yes. And China pension system has been evolving along with the reform of SOE, state owned enterprise reforms, which started late 1980s. Because lot of workers had to transfer from state sector to private sector and the pension regimes have to be changed and reformed to fit their needs. So over the years there were many trials and experiments and many kind of regimes and platforms. But the biggest news actually is beginning of this month.

Why, because finally after 30 years the public civil servants and public institutional employees they are required to pay 8% of their salary just as all the other workers in the country.

So now the country has one unified urban pension system for everyone that brings the equality issue to the end. People have been talking for 30 years, that civil servants getting very good pension when they retire, but they were not paying, probably just because they were accepting lower salaries. And there is another parallel regime which is rural pension system which is a bit different, because they pay very little every month, every year.

So, but the government also said by 2020 the whole country is going to have a standard unified rural urban pension system.

Wall: This isn't that different from what's been going on in the U.K. In times gone by if you were a state employee, if you work in the public sector you earned a fantastically generous pension and those in the private sector didn’t so much. It's moved to a defined contribution scheme. A bit like the one you are talking about. You have to make contributions in order to benefit in retirement.

Yang: Exactly.

Wall: So with these changes that are going on, what are the challenges?

Yang: I think the challenges right now are still two. Number one is there are still a lot of (SOU) workers who retired before or who are not participating in this new regime that is starting this month. So there is shortfall funding issue.

How the government is going to fund them? You can't let retired workers to pay for them right now, right. So to solve the issue you do need to think about how to increase that return of investment. In this sense I think the long term investment or mutual funds or pension funds are very important in maintaining a long term return to the investment. And so this is one issue is the funding issue.

The other one is how to diversify investment and then of course you also want to think about this employees and individual contribution. Because in China they do have the second layer which we call enterprise annuity or occupation annuity, but this part comparing for first layer we just talk about we call it basic insurance is only 17% and then the first layer is 83%. The third layer usually in the west, in the U.K. is like commercial. You pay all by yourself, that’s almost zero in China.

Wall: So there aren’t any SIPPs, basically. No, one is looking after their own personal pension scheme.

Yang: Not really right now. They just – they know they have to contribute, but they are not responsible for selecting the pension funds, regimes and they just have to contribute right now.

Wall: You talked about diversification there. So presumably that ties in with foreign ownership but that is opening up at the moment, things like the Shanghai Connect. Meaning that you can get more diversified portfolio, but there are still restrictions on international equities that could be held and indeed international bonds aren't there. And we all know that markets can be volatile if you only invest in one type of equity. So how does that tie in with what they are trying to achieve in pension schemes.

Yang: I think the government, had long been promoting the participation of institutional investors. The foreign institutional investors for example QFII, RQFII and the one you talk of Stock Connect. So the government realized this is a biggest challenge for them. They want to introduce more, but right the percentage really is low.

QFII and RQFII put together the market cap is like less than 2%. So in that way is long way to go and the good news is in August this year the government has decided after many, many years of debate. They allow 30% of pensions to be invested in stock market. And in that sense I think it is very good signal for diversifying their investment and if you talk from ownership. If I want to invest overseas, invest American securities market, you better hire a American fund managers and this is where market is opening up is very important for investors.

Wall: Qiumei, thank you very much.

Yang: You are very welcome, Emma.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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Emma Wall  Emma Wall is Editor for Morningstar.co.uk

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