It is no secret that China has an ageing population and insufficient means of providing for it in the future. A World Bank study in 2005 estimated that China’s implicit pension debt – the total value of the welfare commitments already made to people – was at least US$1.6 trillion. The need to fill this hole represents an opportunity for foreign insurers.
China’s pension system comprises three pillars: mandatory state pensions; voluntary unregulated pensions; and voluntary regulated pensions, known as enterprise annuities. Enterprise annuities are similar to America’s 401K system, which is also employer sponsored and tax-free until the money is withdrawn.
Financial services companies can enter the market as trustees, administrators, custodians and investment managers. Only domestic banks can act as custodians and the other areas are also dominated by local players. The one exception is in the investment management category, where several foreign-invested funds have been awarded mandates.
David Campbell, Asia Pacific insurance practice leader at PricewaterhouseCoopers, believes there is room for more foreign involvement.
“Record keeping is an area where the multinationals can contribute, bringing in sophisticated IT systems. They have experience at managing on a big scale,” he said. “There is also a lot of potential in spin-off products because of heightened awareness of pensions.”
However, it will take some time before the market is fully functioning.
“It is still very much in its infancy,” said Mark Kellock, a Hong Kong-based insurance analyst with Deutsche Bank. “A lot needs to be done in areas such as taxation and they also need to sort out who actually regulates it – the People’s Bank of China, the Ministry of Labor and Social Security of the China Insurance Regulatory Commission.”