Two important documents－this year’s Government Work Report and the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035－put forward that the so-called third pillar of endowment insurance will develop in a well-regulated way.
China entered the club of aging societies in 2000. While the total population is growing at a low speed, the elderly group has been growing at a high speed in recent years.
According to the seventh national population census, which has been disclosed in early May, China’s total population increased by 72.06 million, or 5.38 percent, over the past 10 years. And the number of the elderly aged 65 or above increased by 71.71 million, or 60.3 percent, from 2010 to 2020.
In 2020, the number of the elderly aged 65 or above was 190.64 million, accounting for 13.5 percent of the total population.
It can be seen that China has not only a large scale of elderly population, but also a rapid rate of increase in the aging group. In the future, the aging population in China will reach a plateau and stay there for a long time after hitting a peak. This means, there is an urgent need to implement the national strategy to actively deal with the aging society.
During this process, it is necessary to develop a multi-level and multi-pillar endowment insurance system, especially to develop the “third pillar” in a well-regulated way.
In May 2018, China began to pilot the individual tax-deferred commercial pension insurance, which was named as the third pillar of pension insurance, in Shanghai, Fujian province and Suzhou Industrial Park in Jiangsu province.
According to data of the China Banking and Insurance Regulatory Commission, 23 insurance companies had participated in the pilot of individual tax-deferred commercial pension insurance, and 19 insurance companies had issued policies.
The accumulated premium income reached 426 million yuan ($61.76 million), and people participating in this business had risen to 48,800 by the end of 2020.
Meanwhile, according to data from the Ministry of Human Resources and Social Security, 998.82 million people are participating in basic pension insurance. Participants in sectors of enterprise annuity and occupational annuity reached about 58 million. In contrast, the third pillar of pension insurance has a relatively larger development space.
To develop the third pillar of pension insurance, China needs to fully mobilize the enthusiasm of young people. This is mainly because the biggest feature of aging population in China is “getting old before getting rich”.
In addition, the absolute number of the elderly is large and the aging level has rapidly increased, so it is more necessary to take various measures to cope with the aging population now than ever before. From the experience in foreign countries, the development of pension insurance can build the enthusiasm of the many parties concerned, which in turn will boost investors relating to the pension products.
Besides, it should be the key to guide young people to plan their pension investments well and accumulate insurance assets, in accordance with their own needs, in a timely manner, to secure investment returns for the future.
In view of the current situation, the enthusiasm and potential of young people in China to carry out pension planning and accumulate pension assets need to be further improved. According to the survey data of the China Aging Finance Forum 50 in 2020, the proportion of people who did not participate in the pension insurance market in different age groups was 35.16 percent in the group aged 18-29, the largest share compared with 12.34 percent for people aged 30-39, and 23.57 percent for people aged 60 or above.
Even for the groups participating in the pension insurance market, 72.07 percent of the respondents reserve pension assets through bank deposits or asset management products－the most preferred ways for domestic residents.
The reasons include: individuals, especially young people, have less awareness of the importance of making pension planning before they get old. There may be insufficient incentives in the current system to promote relevant policies, and financial institutions appear to provide very limited choices in terms of pension financial products for consumers.
The ongoing individual tax-deferred commercial pension insurance pilot still has some problems, waiting to be fixed. These include insufficient motivation and inconvenient practice for investors, which constrained the growth pace of the business.
About half a year after the pilot program, China implemented the reform of personal income tax. The rise of the personal income tax threshold and the establishment of special additional deduction have further reduced the relative attraction of the deferred commercial pension insurance of individual tax.
In addition, the seller market concentration was high in the initial stage of the pilot project, which means the buyers had the bargaining power, and the lagging product design in a few insurance companies had directly affected customers’ experience.
Therefore, to fully mobilize the enthusiasm of young people and encourage them to participate in the third pillar pension insurance, policymakers need to further explain the necessity of developing the market and making the young generation better understand the benefits. They also need to improve the regulation and enrich the supply of financial products of financial institutions.
First, promote the right understanding of the third pillar of pension insurance. Balancing the income and consumption at all stages of life and accumulating wealth for the elderly is a decision that individuals need to make rationally.
Accumulating pension assets is not simply relying on savings. It is necessary to establish a proactive attitude and a correct concept of investment for the elderly, adhere to the idea of long-term and value investment, and realize the value maintenance and appreciation of long-term pension.
Considering the basic situation in China, residents have a relatively higher level of deposits compared with other major countries, and the reserve money is usually used for housing, medical care, and education, while investment in pension products is limited.
In this case, it is more necessary for individuals to participate in the third pillar pension insurance market, and increase the income of personal pension with the help of professional financial institutions.
Individuals should be encouraged to increase their financial knowledge, and actively participate in pension investment, based on their own situation and expectation for the future.
Second, regulate and enrich the product supply of financial institutions. In guiding individuals to actively participate in the third pillar of pension insurance, financial products providing good customer experience could improve the financial education of consumers, which is a prioritized option for financial institutions.
In the process of promoting the accumulation of pension assets overseas, there are various kinds of financial products, such as long-term care insurance, target-date fund, and housing reverse mortgage.
Domestic financial institutions also need to further strengthen research and analysis, pay attention to the needs of young people and other groups at different life-cycle stages, fully consider the capital characteristics and risk preference of pension, improve professional investment ability, highlight pension characteristics, innovate and develop targeted financial products, and set the duration of products through reasonable allocation of asset categories.
Financial institutions need to ensure the security and added value of pension, enrich product sales channels and facilitate the convenience.
Third, optimize and improve policy supports. The individual tax-deferred commercial pension insurance should be promoted based on market rules. The sound development will help ease pressure of the basic pension insurance and occupational pension, which needs the government to optimize and improve policy supports.
Specifically, the tax preference for the third pillar of pension insurance should be identified clearly in the system, and the dynamic adjustment mechanism should be established according to changes of the local situation.
Different incentive methods should be adopted for different groups. The high-income groups should receive mainly tax incentives, while the middle- and low-income groups, such as farmers and part-time employees, should receive such amount of subsidies as benefits.
While providing policy supports for financial institutions to enrich the third pillar of pension insurance products, financial regulators should keep the financial market in order and strengthen the supervision on such financial products.
Meanwhile, they need to intensify the crackdown on all kinds of illegal and criminal activities in the third pillar of pension insurance market, and protect the legitimate rights and interests of consumers.
The writer is a senior researcher of Postal Savings Bank of China, and a postdoctoral candidate at the State Information Center.
The views don’t necessarily reflect those of China Daily.