China’s private pension push marred by weak financial literacy, as ‘people still have no idea’

The voluntary personal pension fund, which has been in place for decades in many advanced economies, is still being trialed in just 36 Chinese cities. But it is expected to be extended nationwide this year as the country attempts to cope with unprecedented demographic challenges, including a rapidly ageing population.

However, like Pan, many people have remained hesitant to participate, and experts say this is owing largely to the product’s lack of attractiveness in economically difficult times, or because of consumers’ poor financial literacy.

‘Enthusiasm is not high’: China’s private pensions struggle to lure investors

With about 210 million people – more than 15 per cent of the population – aged 65 and above as of last year, China is looking to supplement its state pension fund that has become increasingly strained in recent years.

And Premier Li Qiang’s government work report in March indicated that the private pension fund, which was first offered in trial cities in November 2022, could be rolled out for all Chinese people this year.

Heavily promoted by government authorities in the past couple of years, personal pension accounts swelled to 50 million by the end of 2023, according to the Ministry of Human Resources and Social Security.

Participants can invest in financial products that differ among banks, including deposits, stocks and wealth-management tools.

However, only about one-fifth of those retirement accounts were actually receiving contributions. And the average contribution among citizens covered by the basic national pension scheme was just one-sixth of the annual upper limit of 12,000 yuan (US$1,655) that can be deducted from their taxable income.

Besides a low level of flexibility, as noted by Pan, people are still cautious because of weak expectations for the pension’s long-term value preservation and appreciation, according to Suo Lingyan, a professor specialising in social security with the School of Economics at Peking University.

“The primary reason a consumer is willing to sacrifice liquidity to purchase pension products with a long closed period is the product’s ability to maintain and increase its value,” she said in an article published in the Economic Daily earlier this month.

But interest rate cuts in the past year have weakened expectations, she said.

Professor Wu Fei, from the Shanghai Advanced Institute of Finance under Shanghai Jiao Tong University, said Chinese consumers generally lack awareness of long-term financial planning and the ability to choose the right pension products, which is largely due to their low financial literacy.

Chinese people achieved an overall average financial literacy score of 68.7 out of 100 points – with big discrepancies and imbalances across different ages, regions, educational backgrounds and income levels – according to the results of a survey that polled more than 10,000 people across the country, with the findings jointly released this month by Wu’s institute and financial services provider Charles Schwab.

China also needs to keep optimising incentives to persuade more people to start contributing to the personal pension early, said Thomas Pixley, general manager of Charles Schwab’s Shanghai office.

While such a retirement programme was adopted as early as in the 1970s in the United States, tax incentives have been continually adjusted to encourage sign-ups over the past half-century, he said.

“Things in China are still at an early stage, and many people still have no idea what the advantage of a personal pension plan is, and they don’t know about the tax benefits,” Pixley said.

‘Enthusiasm is not high’: China’s private pensions struggle to lure investors

Another survey on retirement preparation, with findings released last year by the Insurance Asset Management Association of China, showed that about 40 per cent of respondents had heard of the personal pension fund but did not understand it, and 12 per cent had never heard about it until being asked in the survey.

The government’s decision to extend the pilot scheme nationwide means that “relevant policies are to be continuously optimised during the national implementation”, former finance minister Lou Jiwei said at a forum on the senior care industry on Thursday.

He stressed the urgency of expanding the plan amid China’s deepening demographic shift.

Citing a government think tank report on the financial sustainability of China’s basic pension system, Lou warned that if the current payment rate remains unchanged, the state pension fund for urban enterprise employees will be exhausted by 2035.