Global asset managers are lobbying Beijing to offer tax benefits and other incentives to entice China’s aging population to invest in mutual funds for their retirement, as funds eye a multi-trillion dollar opportunity in commercial pensions.
Their hopes for a bigger role in China’s pension market and its reform process received a boost this month when regulators published guidelines for the introduction of Western-style pension target funds.
Although such fund-of-fund (FoF) pension products are popular in mature markets like the United States, they will have a hard time getting off the ground in China without supportive policies that are now lacking, such as preferable tax treatment, fund managers say.
“The guideline is a very important piece of China’s entire pension reform jigsaw … but tax benefits – another eagerly anticipated reform measure – have not come out yet,” said Calvin Chiu, Asia head of pension development at Manulife, the Canadian financial services group.
Manulife is sharing its expertise with Chinese regulators through a pension committee under the China Securities Regulatory Commission (CSRC), hoping that the government will eventually grant tax benefits to a broad range of investment products, Chiu said.
But he conceded that desired policy changes could be slow, as China’s pension reform involves coordination between several government agencies.
Nevertheless, fund managers are racing to be the first to roll out pension target funds in China. They include the Chinese mutual fund ventures of Manulife, Blackrock, BNP Paribas and Eurizon Capital SGR.
Unlike in markets such as the United States, where the burden of social security is shared between the government, employers and individuals in a three-pillar system, China’s pension coverage is heavily reliant on state funding.
To meet the challenges of a rapidly-aging population, Beijing kicked off a programme in February to build a commercial private pension market that gives individuals more responsibility for their old-age protection, though it has not announced a timeframe for implementation.
“The commercial pension business will be a huge opportunity for asset managers,” said Ivan Shi, head of research at Z-Ben Advisors, predicting the business could account for 40 percent of China’s total mutual fund assets in 10 years, reaching $4.8 trillion.
Such optimism sounds outlandish for a market that has not yet taken root, but is not baseless.
In the U.S. pension market, 48 percent of assets in Individual Retirement Accounts (IRAs), or $4.1 trillion (£2.9 trillion), was invested in mutual funds in 2017, according to the Investment Company Institute (ICI).
Source: Reuters
