Development Path of Pillar 3 Personal Pensions in China

Abstract

The old age security system consists of three parts: pensions, endowment insurance and elderly care services. The pension system mainly includes public pensions (pillar 1), occupational pensions (pillar 2) and personal pensions (pillar 3). Among them, the public pensions, part of social endowment insurance, are financed on a pay-as-you-go basis and form the endowment system together with commercial endowment insurance. The occupational pensions and the personal pensions are actually designed for personal retirement savings purposes, which have no risk diversification mechanism among different enrollees, and therefore are not insurance. In China, the basic old age insurance (pillar 1) dominates the pension system, the enterprise (and occupational) annuities (pillar 2) develop slowly, and personal pensions (pillar 3) fail to come into shape. Other than that, China’s pension system is faced with problems such as a severe shortage of national pension assets reserve, imbalanced development of pension system, and enormous financing pressure in the long run. Therefore, it is imminent for China to speed up the establishment of the personal pension account system. In the process of developing pillar 3, we must take China’s national conditions into full consideration, put personal accounts at the core, and construct a mature system framework based on three stages of account opening, operating and cashing. At the same time, supporting mechanisms, including automatic participation, emergency withdrawal, investment consultancy, and the 2nd-pillar and 3rd-pillar account merging mechanisms, should be established to complement personal pensions system. Furthermore, feasible measures should be explored to separate pension pools and individual accounts of the basic pension system, integrate personal accounts into pillar 3, rationalize and optimize the pension system structure so as to promote the sustainable development of the pension system in China.