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Creating a more active private retirement system would work to China's best benefit both economically and socially, head of the Principal Financial Group said Friday.
It is likely for China to have a meaningful retirement reform in the near future, Larry Zimpleman told Xinhua in an interview.
A robust retirement system can create better long-term growth for China's economy by allowing for more opportunities in infrastructure development and capital market growth, Zimpleman said, adding that it is of more importance now as China's growth rate is moving down.
"We need greater long-term sources of capital that can be put into the market place and invested for 10, 15, 20, 25, 30 years," he said.
"It is the case we saw in the United States in the 1990s," when the country witnessed the highest economic growth since World War II, Zimpleman said.
Retirement contributions are the long-term capital that fuels economic growth, Zimpleman explained.
"When you look at where the net increase in capital came from in the 1990s, it was all attributable to the growth in 401(k) plans," he said, referring to a defined contribution pension plan in the United States.
Today U.S. retirement market assets have reached nearly 18 trillion U.S. dollars, which represents approximately 80 percent of total U.S. economy, one of the highest asset to economy ratios in the world.
In Zimpleman's opinion, having a private retirement system is important in moving China from an economy driven by exports to one sustained by internal demand. Such a system would also take care of one of the priorities of urbanization and balanced development of China's rural and urban areas.
Given the aging of its population, China needs a more robust and active pension system for retirement security, especially the defined contribution one, because the defined benefit systems are often difficult to manage the cost in a long term and create unsustainable financial obligations on many employers regardless of size, he said.
Pension reform expected in China
Based on a cooperative study by Beijing University and Principal Financial Group, Zimpleman predicted that further pension reform will happen in China.
The World Bank divided the retirement system into three pillars -- the government-provided social security, employer-based retirement plan and individual savings.
Zimpleman said that in the United States, social security benefit roughly provides half of retirement income. The other half comes through savings plus an enterprise annuity. But in China the private pension market is to a large extent underdeveloped.
When talking about the safety of a private retirement system, Zimpleman said a system provided by the government is not always securer.
"What is depended on in the case of enterprise annuity is the two regulators who are involved -- Ministry of Human Resources and Social Security, and China Insurance Regulatory Commission or China Banking Regulatory Commission," he said.
The dual regulatory authority should make sure the assets are invested properly and segregated properly, he said, adding that the most important thing is to have a clear separate accounting of the retirement contributions to avoid having that money mixed in with other sources of revenue.
Low coverage in small businesses
Even the United States, which has a well-developed retirement system, needs to enhance the pension system, Zimpleman said.
"The challenge is how we get more small employers to adopt retirement plans," Zimpleman said.
All the larger employers with over 1,000 employees in the United States have pension plans, and it goes down to roughly 50 to 60 percent for employers with 100 to 1,000 employees. In the small segment, those with fewer than 100, only 25 to 35 percent of employers have a plan, he said.
Some governments make it a mandate for employers to have a plan, which is also in Principal Financial Group's interest because the small- and medium-sized businesses are right the potential pension market, but Zimpleman does not believe China will or needs to follow this path.
Market can work better at this front. As labor shortage becomes more critical and employers have to compete for attracting and retaining quality workers, one of the effective ways is to offer a retirement program.
"What usually happen is that small employers are not able to offer a plan, but as the business grows and they become a larger employer, 25 percent coverage goes to 50 percent coverage," Zimpleman said.
Poor financial literacy also hinders market development. Financial literacy, including how to make a budget, what a credit card is, how home mortgage works, and how to start a savings program for retirement, is often absent in the curriculum of middle and high schools, even in colleges, said Zimpleman.
It is a mutual responsibility of both public and private sectors to create more knowledge around financial literacy, he said.
Larry Zimpleman
Head of the Principal Financial Group
