China seeks to expand commercial pension insurance #Oriental Outlook#-Sino-US

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China seeks to expand commercial pension insurance #Oriental Outlook#
China has 241 million people aged 60 or above by the end of 2017, which accounts for 17.3 percent of the total population, according to the Office of the National Working Commission on Aging.
As the country with the largest population of elderly people, an important task for the Chinese government is how to secure and improve the quality of these people’s life in retirement.
Since the 1990s, the country has established a basic pension system to cover most of the population, but the quickly increasing aging population is still creating a high burden on the pension payment. 
To make the country’s pension system more sustainable and diversified to meet the people’s needs, the government is encouraging commercial pension insurance to play a bigger role. 
In the sixth issue of 2018, the Oriental Outlook magazine under the Xinhua News Agency ran a cover story on the country’s efforts to build a sound pension system and the current commercial pension insurance practices.
Below is an excerpt of the article.
As China has entered an aging society, any matter related to aging people are drawing public attention.
Around the New Year’s Day, Henan, Shanxi, Shandong and Hubei provinces, as well as Inner Mongolia autonomous region have issued their documents on accelerating the development of commercial pension insurance.
These are the latest moves from local governments to fulfill the country’s target of building a sustainable multi-tiered social security system to cover the entire population.
In the report to the 19th CPC National Congress, Xi Jinping has said that “the wellbeing of the people is the fundamental goal of development. We must do more to improve the lives and address the concerns of the people...”
“...we work to develop a sustainable multi-tiered social security system that covers the entire population in both urban and rural areas, with clearly defined rights and responsibilities, and support that hits the right level,” Xi said.
The multi-tiered social security system was government-dominated, with the market playing an active role, linking up with social insurance, supplementary insurance and commercial insurance.
The World Bank has outlined three pension formats in a three-pillar system: a state-run basic pension system, enterprise annuity and private-funded plans, such as commercial insurance.
China started to set up a basic pension system covering employees in the 1990s, and it now covers more than 85 percent of the population. While the system was designed to achieve full coverage, the second and third formats lagged behind.
With the enterprise annuity having a high threshold and small coverage, the commercial pension insurance has become a major necessity to secure people’s sense of safety, benefit and happiness in seeking for a better life.
But the third format has not developed to a large scale because there were few supporting policies in the past and Chinese people have no notion of private pension plans. 
Data from the China Insurance Regulatory Commission (CIRC) showed that personal insurance premium on pension-related products reached 860 billion yuan in 2016, of which 150 billion yuan was the pension insurance that payers could get in installments after retirement.
There were only about 17.07 million people bought the pension insurance, comparing to the whole population of 1.37 billion, only 1.3 percent of Chinese bought the pension insurance.
To develop the third pillar format’s capability and build up the pension system with Chinese characteristics, the State Council in June last year issued a guideline to speed up the development of commercial pension insurance.
Meanwhile, the government is also considering preferential tax policies to encourage people to buy the pension insurance that they could get money in installments.
One optimistic change was that under the preferential policies, some insurance companies also started to offer low-profit products to secure people’s pension needs.
Chinese characteristics
Western countries started to reform social security system because of financial crisis in the 1980s, hoping to relieve the government’s financial burden through market means. The pension system reform brought outstanding results.
Different countries have diversified pension plans due to their situations, but a combined pension system of the three formats of the three-pillar system has become a trend. 
Zheng Bingwen, chief expert at the Insurance Association of China, said that China could not follow the northern European countries with high social welfare, which would cause heavy burden on the government finance.
China should learn from Germany and the United States to lower the first pillar’s proportion in the pension system, having a combined pension system, Zheng said.
“We should clearly know the basic situation that the country’s pension system faces,” said Huang Hong, vice-chairman of the China Insurance Regulatory Commission.
He said that the pension needs have increased quickly since China has excessive growth of aging people; the country is getting old before it became rich and the unbalanced and inadequate development of the pension system.
China’s basic pension system covered the whole population and its expenditure increased quickly and the enterprise annuity covered only about 7 percent of enterprise employees, Huang said.
Though the concept of developing commercial pension insurance has been raised for many years, it developed slowly due to a lack of supporting financial policies, he said.
In recent years, the top authorities have issued guidance to present clear requirements on developing the pension system with Chinese characteristics, quickly developing the commercial pension insurance.
In order to add the pension sources, the State Council released a guideline in June last year to speed up the development of commercial pension insurance, including insurance products and services.
“The government needs the commercial pension insurance sector to play a role, and the whole industry is facing the situation of ‘I want to develop’ to ‘I am asked to develop,’” said Zhu Jinyuan, president of the Insurance Association of China.
For a long period, the private pension system has not been paid enough attention, and only some commercial insurance institutions spontaneously launched some pension insurance products with less security function.
“Due to a lack of guiding policies, Chinese people have little awareness about buying commercial pension insurance, and a lot of people consider it as an investment tool and consumer good,” said He Feibo, a manager of China Pacific Insurance (Group) Co, one of the country's largest insurance groups.
Some commercial institutions promoted their pension products as wealth management products, and the buyers could not get life-long payment after retirement but only in five or ten years.
The CIRC regulated the institutions to rectify some products and in a notice in May last year, the regulatory body supported insurance companies to provide life-long pension products.
Starting from July 1, 2014, Beijing, Shanghai, Guangzhou and Wuhan were the pilot cities for a house-for-pension program for elderly people, according to an announcement of the CIRC.
The program aimed to provide citizens with secure and stable incomes after their retirement based on the equity in their homes.
In March 2015, the Happy Life Insurance issued the first reverse mortgage product, and people would get a pension until their death from properties based on contracts.
By the end of 2017, 117 elderly people from 83 families have bought the product of Happy Life Insurance, and they could get monthly pension from 5,000 yuan to more than 30,000 yuan.
Except for the pension the elderly people get every month, they could also rent out their homes for rent. One home could let a couple to get the pension and even when one died, the other could still get the pension.
Li Chuanxue, chairman of Happy Life Insurance, said that the insurance company and the policyholders could select a real estate evaluation agency together to get the assessment report on the home value.
When the policyholders pass away but there is leftover value in the home, the successors or legatees appointed by the policyholders could get the leftover value, Li said.
“When we calculated the pension the elderly people should get, we have counted the possible added value of the homes over a period, and the elderly people could get the added value in advance,” Li said.
The decline of the home value in the future will also not influence the pension the elderly people get.
Tax extension-type insurance
The guideline issued by the State Council in June requires the pilot work on tax extension type pension insurance. 
The tax extension type insurance means that the buyers could list the money they used to buy the insurance before they pay tax, and when get the pension after retirement they pay the personal income tax.
Many developed countries have promoted this type of insurance and individuals could get some tax preferential policies when buying the insurance. But this type of insurance has not developed smoothly in China.
As early as 2007, the Tianjin Binhai New Area has been listed as a pilot area for this type of insurance, and buyers could list about 30 percent of their income not to be taxed for buying insurance. But various factors have stiffled the progress of the pilot.
Though the guideline in June asked the pilot work on the tax extension-type insurance to be started by the end of 2017 and the CRIC and some insurance companies have said they were ready for the work, no such product has been issued so far.
Zhu Minglai, a medical care researcher at Nankai University in Tianjin, said that the difficulty in promoting this type of insurance in China was that insurance companies worried about the risks, and the rate of income listed for buying insurance was low, while the process was also complicated. 
Many insurance companies have expressed that they have eyed the pension insurance products as an important field the companies could explore, and will make good preparations for sales and services. But whether the product can succeed or not depends on tax incentives.
“The tax extension-type insurance is complicated in operation, since it is related to the tax deduction tens of years in the future,” Zhu said. If the tax incentives were not enough, people would not buy.
The pension reserve index of Chinese employees in large and medium-sized cities (2017) showed that about 60 percent of the people surveyed said they would think about buying this type pension insurance.
High payment pressure and less tax favorable policies were the two key reasons why people did not buy the products, according to the report.
According to industry insiders, the tax extension-type pension plans reported to the authorities have much higher tax incentives. The CRIC and tax authorities have clarified the tax deduction process, and asked insurance companies to simplify the procedures.
“The government offered tax preferential policies for the commercial pension insurance to promote the society to form a new old-age security habit, to let the third pillar play a role,” He Feibo said.
He said the insurance companies should improve their actuarial ability, and if the products could bring about 3 to 6 percent investment returns, there would be more people buying the products.

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