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Special Report: DC in China

China’s retirement savings challenge seen as doable

Mercer’s Janet Li: ‘We’re not in a situation where things would explode immediately.’

China's quest to get ahead of the demographic tidal wave bearing down on its retirement system amounts to an uphill challenge, but most analysts contend it's not one that's out of reach.

Ongoing reforms — across the country's public pay-as-you-go basic pension, supplementary workplace defined contribution plans and private retirement savings vehicles — are picking up steam. And time, while not exactly on Beijing's side, hasn't run out either, most observers say.

If nothing has changed in five years, there would be an opportunity cost in terms of things like compound growth for retirement assets, but "we're not in a situation where things would explode immediately," said Janet Li, Mercer's Hong Kong-based wealth business leader, Asia.

Such a moment of crisis could come within 10 to 20 years if nothing were done to bolster the system but the measures China is taking or considering now are all "pointing in the right direction," said Ms. Li.

Those reforms are aimed at providing more support for the "absolute leading role" China's main public pension fund — with more than 85% of the country's retirement assets — is playing at present, said Yu Jin Hua, head of macro research and asset allocation with Shenzhen-based China Southern Asset Management Co. Ltd.

Going forward, China's supplementary workplace retirement plans and its private retirement savings pillar should gain momentum, gradually balancing the contributions of all three pillars, he predicted.

That's not to downplay the scale of the challenge facing China's growing army of retirees.

The country has estimated retirement savings now of between 10 trillion yuan and 13 trillion yuan ($1.5 trillion to $1.9 trillion) for a cohort of citizens over 60 years old that's poised to grow to more than 360 million people by 2030 from 230 million today.

And the fixes needed — which will call upon China's citizens to take on greater responsibility in saving for their own retirement — will require painstaking work, analysts said.

For example, especially when it comes to the voluntary third pillar, the task of ensuring individual investors have the information and understanding they'll need to make informed decisions will take some time to carry out, said Miao Hui, Shanghai-based senior analyst with Cerulli Associates Asia Pte. Ltd.

The same challenge of adopting new ways of thinking will face China's government as well, analysts contend.

China's development has relied to a considerable extent on the government's ability to influence bank and insurance company lending decisions, and that model's stellar success could make for headwinds in moving to a system where private markets dominate and retirement pools take on a leading role in allocating capital to companies, noted Chengsen Yeh, Shanghai-based managing partner of ZiAsset Consulting Services Ltd.

Even so, Mr. Yeh said investors shouldn't bet against the government bringing China's retirement challenges under control. "The Chinese government is strong and advised by smart people. If they want to do something, it's still possible in a very quick way to change things," he said.

Josef Pilger, Sydney-based partner and global pension and retirement leader with Ernst & Young, struck a similar note, saying China probably ranks among the top five countries in the world when it comes to the "reform agility" needed to make tough reforms. "When China prioritizes, when it has to happen now, it will happen now," he said.

Some analysts are less sure.

The rush now for money managers to jump in even as key design decisions for the broader retirement system remain in flux leaves the door open for subpar outcomes, said Stuart Leckie, chairman of Hong Kong-based China pension consulting firm Stirling Finance Ltd.

And where other analysts see Beijing moving methodically, Mr. Leckie said there's a good chance that fear of social unrest is also in play. Even obvious decisions — such as raising the current retirement ages of 60 for men, 55 for white-collar women and 50 for blue-collar women — are being put off, he noted.

Meanwhile, observers agree China's retirement savings gap is growing but there's no consensus when it comes to absolute numbers.

The World Economic Council, in a May 2017 report citing research by Mercer, said China's retirement savings gap is set to grow to $119 trillion by 2050 from $11 trillion at the close of 2015 if no additional steps were taken to strengthen the system.

Ernst & Young's Mr. Pilger said that hefty 2050 figure might be on target if all 1.4 billion Chinese lived in Shanghai or Beijing but it's more accurate to see China as "a microcosm of the world," with segments of its population that resemble first-world Singapore and its retirement needs, and segments that resemble Myanmar, where retirement means depending on your extended family.

Arguments could be made for a 2050 retirement savings gap of $30 trillion or $50 trillion, Mr. Pilger said.

"Nobody knows," agreed Anu Sahai, a Singapore-based senior adviser with management consultant McKinsey & Co. It could be $119 trillion, or $50 trillion or $200 trillion, she said. "All we know" for sure is that there'll be a huge demand for pension assets to be managed, she said.