China's IRA guidelines aim to plant long-term mindset

The guidelines China's regulators announced this month for private "third-pillar" retirement plans could provide a boost in fostering long-term investment habits in a mainland market better known for its punters.

The China Securities Regulatory Commission guidelines, released March 1, require savers to accept minimum holding periods of one, three or five years for the target-date and target-risk fund-of-funds offerings set to become the backbone of a new class of individual retirement accounts.

The guidelines urge managers of those products to offer lower fees for longer lockup periods, while allowing higher ceilings for allocations to equities and other risk assets for products with longer holding periods.

The CSRC announcement said a fund of funds under the third-pillar system will be able to invest up to 30% in risk assets for a strategy with a one-year lockup, 60% for three years and 80% for five years.

Those individual retirement plans are expected to complement the national and provincial public pension funds that make up the first pillar of China's retirement safety net and the second pillar enterprise annuities that big corporations offer to their employees.

Executives with money management firms welcomed that regulatory push to encourage investors to think long term, even as they ​ acknowledged lockup periods could prove difficult for many mainland savers to embrace.

Regulations that encourage long-term savings and investments are key to building strong retirement systems, but lockup provisions could prove less effective in that regard than steps such as automatic enrollment or automatic escalation, said Wina Appleton, Hong Kong-based Asia-Pacific retirement strategist with J.P. Morgan Asset Management, in an email.

Minimum holding periods could discourage individuals from contributing to those savings plans or raise the odds of withdrawing assets when the lockup period ends, she said.

The lockups, if somewhat "crude," make it clear China's regulators recognize the "key issue is that the mindset of investors is too focused on the short term," said an executive with one Shanghai-based money manager working now to develop fund-of-funds strategies for the program, who declined to be named.

A number of investors will resist losing access to their money, said the executive, predicting that the five-year lockup option will prove to be "a step too far." Three years is probably "the best we can get," he said.

Shichen Liu, a product and distribution specialist with Z-Ben Advisors, a Shanghai-based financial markets consultant, said resistance to lockups in the broader market on the mainland might be easing now — at least for the strongest managers, capable of attracting large sums of money.

"Portfolio managers with a good reputation, the best performance and risk controls can gather more lockup money," as a growing number of investors consider the merits of investing for the long term, agreed Rachel Wang, director of manager research, China, with Morningstar Asia Ltd.

In January, for example, Aegon Industrial Fund Management Co. attracted 32 billion renminbi ($5.1 billion) for a new mutual fund with a two-year lockup, a spokesman for the Shanghai-based 49%-51% joint venture between The Hague-based life insurance and pension giant Aegon NV and China's Industrial Securities Co., confirmed.

Greater acceptance of lockups doesn't necessarily mean mandatory holding periods are fit for purpose.

The lockup guidelines, as proposed, could make it difficult for Chinese savers to adopt the best practices of overseas private pension programs, which are focused on encouraging steady, monthly contributions, said Z-Ben's Mr. Liu.

Meanwhile, details about another important piece of China's third-pillar retirement puzzle — tax incentives to accelerate contributions, under the auspices of the country's finance ministry — have yet to be announced.

Preferential tax treatment "will play a big role in determining the success of these products," said the executive with the Shanghai firm working on fund-of-funds products.

Others disagree. Only 100 million mainlanders pay income tax so the impact of tax benefits in driving the growth of China's third-pillar system shouldn't be overstated, said Thomas Cheong, Principal Financial Group's Hong Kong-based president of North Asia. PFG's joint venture with China Construction Bank, Beijing-based CCB Principal Asset Management, is preparing to pursue third-pillar business on the mainland.

The Shanghai-based executive said that 100 million figure might be true today, but tax reform in China inevitably will extend the reach of the country's tax collection efforts. It might take a few years, but tax incentives will prove crucial to driving retirement savings into those fund-of-funds products, he said.

Calvin Chiu, Hong Kong-based head of pensions development with Manulife Asia, predicted a considerable effort ahead to educate local savers about the benefits of investing for the long term, by manufacturers, such as Manulife TEDA Fund Management Co. — Manulife's 49%-51% Shanghai-based joint venture with Tianjin TEDA Investment Holding Co. — and their distributors alike.

Still, the CSRC guidelines represent a "giant step forward" by China's government, with Manulife TEDA working now to bring out a target-date and a target-risk strategy and be among the first class of products to come to market, he said.

Managers and analysts predicted the third-pillar program could be ready to launch in late 2018 or 2019.

A number of analysts predict China's third pillar will be an important market opportunity, but not an immediate one.

"It will be a long process," with distributors who more often than not have built their business on churning as many products as possible facing the same need to adopt more long-term thinking as their clients, said a Shanghai-based money management executive who declined to be named. "We need to build the whole chain," he said.