Move aims to have more market entities join in building third pillar of the system

China plans to set up a new pension insurance company to further promote the development of its third-pillar pension market and encourage more market entities－including banks－to participate experts said.

The third pillar of China's three-pillar pension system consists of personal savings-funded endowment insurance as well as commercial endowment insurance. It is still underdeveloped and only takes 6 percent of the country's total pension insurance funds－even if the percentage is calculated based on the broadest definition of the third pillar, Guo Jinlong, a research fellow with the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said in an article published by the Beijing-based newspaper Financial News earlier this year.

With a registered capital of 11.15 billion yuan ($1.72 billion), the to-be-formed pension insurance company in Beijing has 17 initiators among which 10 banks' wealth management subsidiaries take a total stake of 66.81 percent, according to the Insurance Association of China. The pension insurance company is still awaiting regulatory approval.

The company may aim to increase the supply of the old-age financial market in China by integrating insurance with wealth management solutions, said Wang Guojun, a finance professor at the University of International Business and Economics in Beijing.

Once the company is set up, the wealth management subsidiaries of commercial banks holding its shares will be allowed to design wealth management products that also function to protect clients against certain risks, including the loss of income due to retirement, rather than simply selling pension insurance products offered by the insurers that signed sales commission contracts with the banks' head offices or branches, Wang said.

Whether the new company will grow into a large business depends on policies to further promote the development of financial services for the purpose of providing old-age security, he added.

"In the future, each person or family should have a retirement account covering different types of financial products, such as commercial endowment products and pension-themed wealth management and trust products," Wang said. "It is expected that people will invest a certain amount of their earnings on mixed-asset portfolios of these products every month, and we hope the government will allow them to enjoy account-based tax deductions rather than product-based tax benefits."

China began a pilot program of individual income tax-deferred commercial endowment insurance, which is part of the third pillar of pension insurance, in Shanghai, Fujian province, and Suzhou Industrial Park in Jiangsu province in May 2018.

By the end of April 2020, 23 insurers had participated in the pilot program, which insured 47,600 people and realized premium income totaling 300 million yuan, according to the China Banking and Insurance Regulatory Commission.

"The announcement of a plan to establish a new pension insurance company, whose shareholders are mainly wealth management subsidiaries of banks, shows that the government looks forward to expanding the scope of participants in the third-pillar pension market," said Wei Chenyang, director of the China Insurance and Pension Research Center at Tsinghua National Institute of Financial Research. "It encourages more banks, apart from insurers, to take part."

The relevant wealth management subsidiaries of banks can provide quality asset management services. They have strong capabilities in terms of market influence, types of products and distribution channels, thanks to the large size of banks' assets, Wei said.

He noted that a tremendous number of bank clients have short-term deposits, and that authorities are looking to guide short-term personal savings into the third-pillar pension market in the country.

"The market expects that supporting policies including tax incentives will be launched later this year to encourage the transition of demand deposits－bank deposits that can be withdrawn without advance notice－into third-pillar pension assets," he said.

Yang Zeyun, a finance lecturer at Beijing Union University, said the plan to establish a new pension insurance company comes out when China is facing a major challenge of growing old before it gets rich.

The number of people aged 65 and above nationwide reached 190.64 million, accounting for 13.5 percent of the population of the Chinese mainland, according to the 2020 results of the country's census.

Given the circumstances, China should build its third-pillar pension market into a market shared by various types of financial institutions, including insurers, banks, trust companies and fund management companies, Yang said. The country should also lower the threshold of finance-themed products for seniors to satisfy the needs of the general public.