Mercer’s latest research into China’s retirement planning shows continuing improvements in the regulatory framework and social security coverage. Lack of sound policy and proper tax incentives remain key challenges.
China’s retirement system has made small gains since 2011 according to the Melbourne Mercer Global Pension Index, where its value has increased to 45.4 from 42.5. On the other hand, this research, conducted by Mercer and the Australian Centre for Financial Studies, showed China to be the only country that has no tax incentives for employee contributions. China’s system has been making on-going improvements in the regulatory framework and social security coverage, but while the sub-index value of adequacy has increased, the system’s sustainability and integrity have slipped slightly. In fact, among the 18 countries surveyed this year, China scored the second lowest in the integrity ranking, with the main reasons being the lack of a central regulatory framework and lack of control to protect plan participants from mismanagement.
The Index, now in its fourth year, covers over half of the world’s population. It looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. Each country is given a score between 0 and 100 based on more than 40 indicators grouped into three sub-indices. The overall index value represents the weighted average of the three: adequacy - 40%; sustainability - 35%; and integrity - 25%.
Countries that do well in adequacy have an above average base pension to relieve poverty, a good net replacement rate for the median income earner, a system that requires the benefits to be taken as an income stream and other desirable features. For sustainability to score highly countries must have good pension coverage – normally through some form of compulsion or auto-enrolment, a high level of pension fund assets compared to GDP, a level of mandatory contributions and a relatively low level of government debt. Several countries do well with integrity due to the presence of comprehensive regulations ensuring good governance and the provision of strong communication to members.
Jessica Chen, Principal with Mercer, asserted,“We continue to see slow progress in addressing China’s emerging ageing population issues…However, there is some good news on the horizon with expected Shanghai pilot of individual savings products that will include the first tax incentives for individuals. However, the decentralisation of fiscal and regulatory policy implementation will remain challenges.”
Paul Arkwright
Publisher
