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A winning strategy for the pension market in China

A new report outlines the commercial reforms needed by China’s three-pillar pension system to meet the needs of an aging population.

Retirement models are being challenged as China accelerates toward an aging population and a low birthrate. In 1991, China established a three-pillar pension system to manage elderly care. The first pillar consists of a public pension that currently serves most workers in China, though the income-replacement ratio remains at less than 50 percent. The second pillar is a voluntary pension for government and state owned–enterprise employees, and the third is still nascent but in theory offers a path to supplementary private retirement savings with government tax benefits.

The commercial reform of China’s pension system is imminent, and the second and third pillars are in urgent need of balanced development. In a new report, we offer an overview of various types of global pension systems and the future of China’s commercial pension market, as well as a perspective on a winning strategy for financial institutions in China.

An overview of pension systems around the world

Across the globe, countries show significant differences in pension structure, market efficiency, level of policy support, and governance. Advanced markets have three types of pension systems: commodity market, government benefit, and multimonopoly. The United States, Germany, and South Korea, respectively, are typical examples of each model, providing a reference framework for Chinese regulators and pension companies.

  • The United States: Commodity-market pension system. After a century of development, the US pension system is dominated by the second and third pillars as a result of government incentive policies. Individuals have the freedom to select products, whether they choose a 401(k), which is the second pillar, or an individual retirement plan, the third. As the US capital market gradually matures, fund-type asset managers have used their rich product mix, professional investment-management skills, and bull markets to generate high returns on investment, thereby successfully overtaking banks and insurers to become the leaders in the second- and third-pillar pension markets in the United States.
  • Germany: Government-benefit pension system. Germany was the first country in the world to establish a social-security system. However, as a result of a slowing economy, accelerated aging, and a rising social-dependency ratio, its government pension gap is widening year by year. This development has prompted a shift of pension responsibilities toward the private sector. Insurance giants dominate the commercial insurance sector: the top five insurers account for more than half of the market.
  • South Korea: Multimonopoly pension system. In the 1960s, South Korea set out to develop its multitier, three-pillar pension system with comprehensive coverage. The system is less than perfect and still improving. Currently, the government-led first pillar remains a major force, with more than 50 percent of pension assets. Large banks and insurance giants dominate the second and third pillars, respectively.

When we compare the development of each nation’s pension system, we see no single ideal model. China is at the crossroads of pension reform. Given the country’s circumstances and global market-development trends, we offer the following observations on its pension market:

  • The unbalanced development of commercial pensions must be addressed urgently.
  • The relative lack of pension products offers a bright future for product innovation.
  • Insurance giants enjoy huge advantages and ought to shoulder more social responsibility.
  • Regional development is unbalanced, but advanced regions, such as the Yangtze Delta, are expected to enter the US-style industry landscape.

An outlook for China’s commercial pension market

The overall second pillar’s annuity market is enjoying stable development. However, annuity products are rather undifferentiated in features, and the employee-participation ratio is relatively low. Currently, the overall profitability of the annuity business is also low, and competition mainly focuses on price, investment returns, and sales relationships. In the middle to long run, annuities can be a hook for insurers and banks to build long-term relationships with midsize and large enterprises that have big workforces with stable incomes.

Meanwhile, the third pillar—personal commercial pensions—has explosive growth potential. China is experiencing an alarming gap in social retirement savings, as well as huge demand for the expansion of the third pillar. With China’s fast-growing economy, the development of medical technologies, and longer average life expectancy, the first generation of the middle class expects more from retirement, so there are more comprehensive commercial retirement products. Last year was a milestone in the development of China’s commercial pension market, with the introduction of multiple policies and pilots that laid a solid foundation for the long-term healthy growth of the third pillar.

Public policies will set the direction for the personal pension industry. China needs to learn from global experience while considering its own specific circumstances to enhance the system’s design, guide open innovation, and establish a strong risk-prevention system. Foreign insurers have entered the market to support the fast development of China’s third-pillar personal pension market. These insurers are confident about the Chinese pension market’s potential, and their innovations and investment-management experience will help China’s pension market to grow more quickly.

Financial institutions’ winning strategy in the commercial pension market

Commercial pensions go hand in hand with commercial institutions, all types of which are entering the commercial pension market in different ways. The major players in China’s pension market are insurers, banks, and funds (exhibit).

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Insurers have strong first-mover advantages to become end-to-end service providers in commercial pension insurance. They should focus on five areas to win in the Chinese pension market: honing basic investment skills, reaching diverse customer groups, diversifying products through innovation, establishing data-driven customer service, and controlling longevity risk.

While not everyone has insurance, almost everyone has a bank account. Banks have become China’s leading wealth-management service providers. They should consider building out their pension-planning and -management capabilities to break down barriers between account systems and data and to become one-stop, integrated financial-services providers.

Funds are investment experts in the pension industry. Just as supermarket shoppers like a full array of products, consumers are no longer satisfied with standard pension products. Compared with insurers, funds typically have higher returns on investment, more flexible designs, and the ability to cater effectively to consumers who are becoming more sophisticated about investments and finance. Funds should fully leverage these advantages and their experience in investment management to establish diversified investment capabilities.


In coming years, insurers, banks, and funds will be joined by other relevant enterprises in the emerging health-and-retirement finance and service ecosystem. In the coming years, the commercial pension market will take a leap forward, and the leading insurance companies, banks, and funds will embrace a historic opportunity for development.

Download The winning strategy for the pension market in China, the full report on which this article is based (PDF–5MB).

About the author(s)

Arthur Bi is a partner in McKinsey’s Beijing office; Hongming Chen is an associate partner in the Hong Kong office, where Joe Ngai and John Qu are senior partners; and Zheng Sun and Sisi Zhang are consultants in the Shanghai office.

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