China’s new national pension company got regulatory approval on Wednesday, and a seasoned banker and senior forex official were appointed to manage the 11.15 billion yuan ($ 1.72 billion) retirement fund.
The state-owned pension institution was established to fill a huge funding gap as China’s rapidly aging population and shrinking workforce put increased pressure on the finances of the pension system. of State.
Here are four things to know about the creation of the National Pension Insurance Co. and the role it will play in China’s three-pillar pension system.
Why did China create the new pension company?
China operates a three-pillar pension system that relies heavily on the first pillar, a basic public pension program for urban and rural residents and employees. It is managed by the provincial governments. The state pension system held a reserve of 7.8 trillion yuan at the end of 2018, representing about 80% of total pension funds in China.
As in many countries, the public pension system is slowly but surely moving towards a funding crisis, a concern exacerbated by recent census data. The state pension fund will run out of cash by 2035 amid a shrinking workforce, according to a government-backed think tank.
The second pillar is made up of funds that employers pay into company and occupational pensions. Since companies and individuals already make large contributions to the government program, employers have little incentive to develop company annuity benefits.
Third pillar funds are private and personal insurance policies, which are still in their infancy. Recourse to the third pillar is extremely low, since it represents 1.25% of total pension assets. The enlargement of the third pillar is an important objective to alleviate the pressure on the public pension fund.
The new national pension company will be an important part of China’s third pillar project. It aims to convert large sums of short-term savings into long-term retirement products that are relatively safe and generate higher returns.
As part of the 14th Five-Year Plan, the government has undertaken to expand coverage of the state’s basic pension insurance system, encourage the growth of the occupational and private pension sectors, and delay the legal retirement age.
Who will finance the new pension company?
The company has a registered capital of 11.15 billion yuan and will be based in Beijing.
Seventeen the financial institutions will take stakes in the pension company. The wealth management units of China’s five big banks are each investing 1 billion yuan for an 8.97% stake, the China Insurance Association announced last month.
Eleven asset management units will hold 71.3% together. Two investment firms reporting to the Beijing State-Owned Assets Administration and Supervision Commission will participate, Beijing Infrastructure Investment Co. Ltd. taking an 8.97% stake and Beijing Xicheng Capital Holdings Co., a 4.48% stake. State-owned investment company China Reform Holdings Corp. Ltd. will hold 8.97%.
Zhongjin Pucheng Investment, a unit of China International Capital Corp., China’s largest brokerage firm Citic Securities Co. (600030.SH) and Taikang Life Insurance will also participate.
Who will run the business?
Ye Haisheng, director of the capital account management department of the State Foreign Exchange Administration (SAFE), has been proposed as chairman of the new pension company, according to the China Banking and Insurance Regulatory Commission (CBIRC ). He previously held positions in the Economic Restructuring Office of the State Council.
Huang Tao, currently vice president of Bank of Shanghai, will be appointed general manager. Huang, 50, is a seasoned banker who has held various management positions at China Construction Bank. He obtained an MBA from the University of Oxford.
What to watch out for next?
The market is carefully monitoring what type of products the company will offer and what their advantages are over existing retirement products. For example, do its investment products offer a higher return? Will there be a mandatory policy to force people to invest?
All companies offering commercial pension insurance products participate in the third pillar market. But only those approved by the CBIRC can benefit from certain preferential treatments such as deferred taxes. The market is also hoping that the new company will fill in the gaps in the market instead of competing with existing players. The preferential policies and tax arrangements that the new pension company will benefit from are also closely watched by the market.
The new pension company potentially faces competition from foreign insurers. Huang Hong, vice chairman of CBIRC, said the commission supports foreign investors in establishing pension insurance companies in China. Heng An Standard, a joint venture of Standard Life Aberdeen and Tianjin TEDA International, received the CBIRC approval to create a pension insurance company, but there is no word of approval from the Ministry of Human Resources and Social Security, which is responsible for regulating the investment scope of annuity funds.
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