China expands private pension scheme and adds index funds

Two years after China introduced a pilot private pension scheme to address the challenges of its rapidly ageing population, the programme will be pushed out nationwide with the addition of 85 index funds.

The individual pension account programme was initially rolled out in November 2022 across 36 cities including Beijing, Shanghai, Guangzhou and Shenzhen. Investors can put up to Rmb12,000 ($1,670) annually into tax-free accounts, mirroring the 401(k) plans in the US.

Despite more than 60mn accounts being opened, the actual money invested in tens of millions of private pension scheme accounts remains very low or at zero. Even with the expansion, analysts highlight that further reforms and liberalisation are needed.

A joint notice issued by four national regulators, including the National Financial Regulatory Administration and China Securities Regulatory Commission, announced that the scheme would be available across the country from December 15.

Previously the scheme only included pension funds of funds but it will now be expanded via a phased approach. Pension-linked share classes, or Y-class shares, will first be added to index funds, followed by bond products and active equities strategies at a later date.

The first batch of 85 index funds added to the individual private pension scheme from Monday will include popular products tracking broad-based indices such as the CSI 300, ChiNext and CSI A500.

E Fund Management, China’s largest asset manager by retail fund assets, will see 11 index feeder and index-enhanced products added to the pension scheme. China Asset Management will have nine products added and Tianhong Asset Management will have eight products.

Other companies with new products added to the scheme include Guangfa Fund Management, Harvest Fund Management, Fullgoal Fund Management and Bosera Asset Management.

JPMorgan Asset Management is the only global asset manager running a wholly owned business in China with a single fund added to the scheme, the JPMorgan CSI A500 Exchange Traded Open Index Securities Investment Fund Linked Fund.

Including the existing pension funds of funds, E Fund now has 24 products approved for the scheme, while ChinaAMC has 21 and JPMorgan AM’s China unit has three.

But China’s third-pillar private pension sector makes up just a “fraction” of the overall $4.4tn mutual fund industry, with domestic investors still largely unaware of the scheme, according to Morningstar.

Pension target securities investment funds account for only Rmb68bn or 0.2 per cent of the assets in onshore mutual funds as of the first quarter, and this proportion has fallen from a peak in 2021, the research firm reported in September.

Yang Delong, chief economist at Shenzhen-based First Seafront Fund, told Ignites Asia that the 85 new index fund products had been added to the pension scheme, mainly to give investors more choice.

He added that poor market conditions in the past few years were partly to blame for the contribution rate not being very high, even as more personal pension accounts were being opened.

“In the future, if the market can recover, it is expected that more people will open accounts and participate in the pension scheme,” he added.

Despite supportive top-down policies, analysts point to some elements of the scheme that could be improved.

Yang said that annual contribution limit could be raised because Rmb12,000 was not sufficient to meet the needs of high earners, and more tax incentives could be added to convince investors to build up their personal pensions.

Jia Zhi, managing director of the asset management department at ChinaLin Securities, stressed that middle- and high-income earners who wanted to save on tax felt that the Rmb12,000 limit was not enough.

If such investors could not benefit from tax incentives, they needed a moderate subsidy to increase the incentive to participate in the pension scheme, he concluded.

The CSRC has also mandated fee reductions on pension products, including management and redemption fees, in a bid to attract more investors.

New pension-linked Y-share classes for funds will be set at the lowest level. ETF feeder funds will have management fees of 0.15 per cent and a custody fee of 0.05 per cent, while most index funds have a management fee of 0.25 per cent.

The Ministry of Human Resources and Social Security is also expected to issue updated criteria, such as fund size, fees and performance, to determine eligible bond and equities products for future inclusion in the further of the scheme expansion.