The Ageing Effect Ep. 1: 'You could argue that pay-as-you-go is " pray-as-you-go"'
Pension systems in China and Europe, with CSRC's Dr. Hu Yuwei and Baroness Ros Altmann
Pension systems are vital to an economy's health, since they are both major institutional investors and the lifeline of a country's senior citizens. And although there is a surprising amount of standardization in form and function when comparing systems internationally – as Baroness Ros Altmann, former pension minister and member of the House of Lords explains –, China's institutions seem to be woefully underprepared, at least for now. Talking more about this is Dr. Hu Yuwei, Department Head of International Finance at China Institute of Finance and Capital Market, CSRC, China's regulatory finance body.
Our key takeaways
Both European and Chinese pension systems exhibit a three pillar structure that may be very familiar to Swiss and Western Europeans. This structure consists of state pensions, either fixed by contribution or payout, employer-linked pension funds, and private investments or products. Both the Chinese, and the British systems, in particular, are faced with the prospect of becoming unviable in the near future due to pay-outs vastly outstripping contributions, which is caused by demographic change. The UK government has already decided on a plan to increase the retirement age incrementally over the next decades. The strain on the Chinese system, as it currently stands, will necessitate similar measures.
In addition, the East Asian giant's pension funds are currently struggling with low returns, which may be due to the investment policies in place. Moreover, pension recipients in China are mostly city-dwellers, while an insufficient number of people living in towns and the countryside are actually covered. Senior citizens outside of metropolitan areas have to supplement their income by way of working, or are otherwise heavily reliant on the financial support of family members.
In light of these issues, China will have to increase coverage, while also increasing investment volume and yield. The state pension pillar has already seen a massive influx of liquidity for that matter. Pillar three private investments are still a very new phenomenon within China's pension system, and it will take some time to see how they pan out.
Finally, there is an argument to be made for pension funds to act as financial catalysts for change by investing in ways that benefit society and the environment.
Baroness Ros Altmann is a leading authority on later life issues, including pensions, social care and retirement policy. Numerous major awards have recognised her work to demystify finance and make pensions work better for people. She was the UK Pensions Minister from 2015 – 16 and is a member of the House of Lords where she sits as Baroness Altmann of Tottenham. Ros started her career as an academic at University College London, London School of Economics and at Harvard University, researching and publishing on UK pension policy, occupational pensions and retirement. After this, Ros managed institutional investment portfolios for 15 years, including pension funds, insurance funds and mutual funds, as well as advising central banks and private client fund managers.
Hu Yuwei – PhD in Economics, is currently Department Head of International Finance at China Institute of Finance and Capital Market, CSRC. Prior to that, Dr. Hu was Deputy Director of Macro Research Department at Chongyang Institute for Financial Studies (RDCY), China Representative of the BBVA bank, Economist at the OECD, respectively, as well as visiting fellow and consultant to European Commission, World Bank, IMF. Meanwhile, he is also associate fellow at Renmin University of China, China Academy of Social Sciences, Shanghai University of International Business and Economics, and China Ageing Finance Forum 50.