China, like much of the world, has a pension readiness problem. Pensions have traditionally been offered through a Pillar I social scheme with the option for Pillar II employer-sponsored supplemental plans introduced in the last 20 years. An aging population, declining birthrate, low social pension benefits, and limited uptake of employer-sponsored plans have created a need for an official voluntary third-pillar pension scheme that can utilize current individual savings in a regulated, sustainable, and tax-efficient manner to help individuals save for retirement. This new development is expected to help the private pension industry grow from its current $300 billion value to at least $1.7 trillion by the year 2025.
- The pilot phase of the new private pension scheme was officially launched in November 2022 in 36 cities and is initially set to last a year before being implemented at a wider scale. The first batch of eligible cities include Beijing, Shanghai, Guangzhou, Tianjin, Shenzhen, Hangzhou, and Chengdu. The Chinese government has not yet determined when the implementation will be expanded to cover all cities in China.
- Participation in the private pension plan will be open to all Chinese citizens and resident workers who currently contribute to the basic pension insurance for urban employees or the basic pension insurance for urban and rural residents.
- Individuals must open personal pension accounts through the “Personal Pension Information Management Service Platform” at a qualified commercial bank or a qualified wealth management company that meets the criteria published by the China Banking and Insurance Regulatory Commission (CBIRC).
- Individuals will be limited to one pension account each, which will be used to handle all transactions including contributions, earnings, and tax payments.
- Participants will be allowed to make voluntary contributions of up to RMB 12,000 per year into their individual pension accounts and enjoy the following tax benefits:
- Pre-tax deductions of up to RMB 12,000 from the annual taxable income of participants; and
- A reduction of the tax burden on pension benefits from the current 7.5% to 3%. The Chinese government also announced that earnings from investments will not be taxed for the current time.
- Participants can use their pension contributions to purchase eligible pension fund products that include banking wealth management products, deposits, insurance, and mutual funds. The China Securities Regulatory Commission (CSRC) specified a list of eligible pension fund products and eligible distribution companies.
- Participants are allowed to withdraw their pension benefits at the age of retirement and in the event of disability, death, or permanent immigration abroad.
The pension reform will not have a direct implication on employers as it does not create a financial or administrative role for them in the new pension system. However, employers could benefit from learning about the new pension system as they periodically design and change their occupational pension plans.