On April 21, the general office of the State Council issued the opinions on promoting the development of individual pension (hereinafter referred to as the “opinions”), marking the departure of China’s individual pension system. “Opinions” are not only related to the pension of thousands of households, but also the entry of long-term pension funds into the market plays a vital role in the long-term and healthy development of the capital market. It will also bring new development opportunities to all kinds of financial institutions.
A few days ago, Zheng Renyuan, a senior adviser on investment strategy and business of Fidelity Investment in Greater China, said in an exclusive interview with reporters that fixed investment is the key to pension investment. Super long-term pension investment can smooth market fluctuations and enjoy long-term compound interest dividends. Cong Li, chief representative of Fidelity International Beijing Representative Office, said in an exclusive interview that the “opinion” is only the beginning. The greater significance of the “opinion” is that all parties should do a good job in investor education, let more people start pension investment and prepare for their retirement life.
According to the data, by the end of 2021, fidelity investment accounted for 30% of the 401k market share of the second pillar and about 20% of the IRA market share of the third pillar in the United States.
Although China’s third pillar has just set sail, if we refer to overseas experience, the third pillar will bring broad opportunities to all kinds of investment institutions.
For example, according to the data from the American Association of investment companies (ICI), by the end of 2021, the asset scale of American IRA (personal retirement account corresponding to China’s personal pension) was about $13.9 trillion, accounting for about 35% of the assets of American retirement market, a significant increase from 23% 20 years ago. By the end of September 2021, IRA assets accounted for about 12% of U.S. household financial assets, a significant increase from 8% 20 years ago.
Public funds are the main force of individual pensions in the United States. By the end of 2021, 45% of IRA assets were invested in mutual funds (corresponding to public funds in China). Many researchers believe that an important reason behind the long-term bull market in the U.S. stock market is the support of long-term funds, including pension funds.
By the end of June 2021, 47.7 million American families had IRA accounts, accounting for 36.7% of the total number of American families.
the following is an excerpt from the interview:
China Fund News: the release of “opinions” marks the departure of China’s personal pension system. What do you think of the references to “account opening” and “tax issues”
Cong Li: first of all, the general office of the State Council issued “opinions”. Generally speaking, this arrangement is higher than the joint issuance of documents by multiple ministries and commissions, which shows its authority.
When it comes to taxation and account opening, it is indeed the most concerned arrangement of the individual pension system. Among them, the tax related arrangements will be clarified later.
At present, one possibility is to follow the practice of tax deferred commercial endowment insurance, but it is simpler and easier to understand in expression and practical operation. Finally, it depends on the implementation of the policy. On the opening of capital accounts, the “opinion” refers to commercial banks or other institutions qualified for the sale of financial products. Before the introduction of the policy, there was an opinion that the account may need to be placed in the bank. The expression of “opinions” is more open.
It makes sense to open an account in a bank in China. The third pillar is a new thing in China, and the large customer base has laid the foundation for investor education. However, in addition to commercial banks, the “opinions” also include other institutions that can sell financial products. This means that some large platforms may be qualified.
Zheng Renyuan: according to the arrangement of “opinions”, everyone can only open one account at a time. This is very good.
This is a disadvantage of the United States. The system in the United States is “set as many as you like”. Investors can set up one in banks, one in fund companies such as fidelity and another in insurance companies. Because of tax preference, there is an upper limit on the amount of total investment. Since then, there is little money in each account.
For individuals, chaos is inevitable. The investment structure and products of each account are different. Some accounts he (she) forgot. It is better to allow only one account at a time. If I set up an account in a bank, after two years, I think the products given by the bank are not in place, so I transfer this account to another bank. This arrangement is better.
China Fund News: IRA in the United States has different arrangements on tax preference. Traditional IRA does not deduct tax when depositing, but deducts tax when withdrawing. Later, Ross IRA was introduced to deduct tax on deposit and withdrawal, but it was not deducted when withdrawing. What kind of investors are these two arrangements suitable for
Zheng Renyuan: traditional IRA: for example, I put 5000 yuan in and deducted this part from my taxable income this year. But when I retire, I have to pay income tax on the money I take out. Rose IRA was launched in the mid-1990s Ross IRA is upside down and pays taxes when the money goes in. After tax money is accumulated through compound interest and will not be taxed when it is taken out after retirement. Now Ross IRA is very popular, especially among young people, because young people’s initial income is low and the taxable amount deducted is also low. However, after 30 or 40 years of compound interest and capital growth, the money they take out does not pay tax, and the amount of tax advantage is very large.
China Fund News: in terms of system design, the upper limit of individual deposit per year is 12000 yuan. What do you think of the deposit limit
Zheng Renyuan: because of the tax preference, the design of deposit limit is necessary. At present, the “opinion” has set a unified upper limit, that is, the upper limit of each person’s annual payment is 12000 yuan. It is good to set the upper limit in a simple and clear way at the beginning. The simpler it is, the easier it is to be accepted. The “opinion” also pointed out that the upper limit may rise in the future. In addition, if referring to foreign practices, it is also possible to distinguish different age groups and set different upper limits.
China Fund News: what are the keys to making the third pillar play a role
Zheng Renyuan: one key is the institutional arrangement of fixed investment. Suppose that individuals save their pensions through three pillars. A 30-year-old young man can’t say it’s okay to open an account for 12000. In this case, no matter how compound interest is, it is impossible to ensure his or her retirement living standard. The most important thing is fixed investment. Because the fixed investment can be accumulated, and the accumulated results can be accumulated. Only fixed investment can smooth out the risk of roller coaster up and down in the Chinese market.
But what about fixed investment? This is the current weakness of the third pillar of the United States. There is no default investment in the current arrangement of the third pillar in the United States. Suppose I go to fidelity and open a third pillar account, I need to tell the staff that I need to make a fixed investment to get this arrangement.
If you can design the default fixed investment option, it will greatly improve the efficiency of investment. If the investor does not want the fixed investment by default when opening an account, he or she needs to “tick” on the relevant form, which is a better arrangement.
At present, the second pillar of the United States has a default investment arrangement. It has been implemented since 2006 with good results. However, for historical reasons, it has not been extended to the third pillar.
China Fund News: China’s Internet and e-commerce are very developed. What can this bring to the development of individual pension system
Zheng Renyuan: Internet and e-commerce owned Beijing Vastdata Technology Co.Ltd(603138) . This provides broad possibilities for pension investment. Especially in terms of user portrait and investor education, the role of data will not be too powerful. For example, people aged 20, 30, 40 and 50 can generate user portraits based on data. In this way, it is easier for him or her to understand his or her needs. In addition, people have irrational places. Big data can tell you what kind of person you are.
Investment advisers are very important in the development of the third pillar. The investment consultant also makes investment suggestions based on data. Although personal pension accounts are personal accounts. However, a person’s pension needs may be related to other family members.
Consider this example: Mr. is a surgeon with a high income every year, and his wife works in a local charity with a low salary. However, if they are considered together, the portfolio of my wife’s IRA can bear much higher risks than a low-income person, and the long-term expected return will be much higher. The investment consultant will give personalized opinions according to individual special circumstances.
Cong Li: investigation report on the prospect of elderly care in China, which has been cooperated with ant for 5 years. This year is the fifth year. For example, in the first year of the report, the survey data showed that more than half of young people had no awareness of providing for the aged. However, by the fourth year of last year, this proportion had increased significantly, and more and more young people realized the need to prepare for the elderly.
This is thanks to this digital platform and Internet platform and digitization. According to traditional channels and brands, it is difficult to reach so many enterprises and individuals.
China Fund News: when it comes to pension products, people naturally associate them with “low risk and low return”. What kind of products are suitable for elderly care products
Zheng Renyuan: indeed, people naturally combine old-age care with low risk. But in fact, only “growth” assets can resist inflation and enjoy the dividend of compound interest.
The problem is that when we talk about pension products, we should “protect principal and income”, but “protect principal and income” can not “protect growth”. After the implementation of China’s new regulations on asset management, asset management products broke the rigid confirmation, and capital preservation has become a thing of the past. Moreover, the principle of “protecting principal, income and growth” is in violation of the basic principles of economy. At the beginning of the second and third pillars of the United States, investors also equated pension products with principal guaranteed income. Changing ideas takes time. From the end of the 1970s to the middle of the 1980s, the pension assets of the United States were dominated by banks and insurance, and asset management companies did not have a share. Among them, commercial paper (CD) accounts for a large part. In 1982, I opened my first IRA Account, and I also bought CDs.
The emergence of target date fund is to solve this problem.
In a sense, the target date fund is a middle road between principal guaranteed income and growth. There is a dichotomy in many people’s minds, which is either guaranteed principal and income, or high risk. In the end, the whole army may be destroyed. In fact, even in the worst stock market, the possibility of total military collapse is very low. The design of the target date fund is based on the principle that the risk that individuals can bear is linked to their age. The older you are, the closer you are to retirement, or beyond retirement age, the less risk you can take.
China Fund News: target date fund is a product designed for pension. How can we choose a good pension target fund
zhengrenyuan: 2006, the United States introduced the revolutionary Pension Protection Act. The bill takes the fixed investment in the second pillar as the default option, and the target date fund as the core product of pension investment. At the same time, it expressly stipulates what kind of asset management companies or financial institutions are qualified to provide default products for the second pillar platform of enterprises.
Qualified financial companies must have a certain level of capital, a certain number of years of operation, a certain scale of investment team, and R & D and risk control systems. Only when institutions meet these conditions can they be qualified to make pension products.
Cong Li: China’s Securities Regulatory Commission also has corresponding requirements for the issuance of pension target funds. Specifically, the average scale of non goods in the last three years is more than 20 billion yuan. At present, the fund companies that meet the issuance of pension target fund products are qualified institutions that meet the regulatory requirements. Fund companies of different sizes are working from different levels to provide investors with better and more choices.
Zheng Renyuan: in the case of the United States, the target date fund covers a wide range of stocks in the United States and China, from large, medium and small stocks, growth stocks and value stocks to stocks outside the United States, materials to various government bonds. Corporate bonds and corporate bonds include investable grade and junk bonds. We believe that only large companies with large investment categories are expected to have large enough investment teams. The target date fund market share in the United States also reflects a similar truth. The three leading institutions account for most of the market share.
In short, large institutions with rich pension investment experience and perfect risk control system are expected to provide high-quality target date funds for investors.
China Fund News: at present, the global political economy is facing a lot of uncertainty. Does this bring any challenges to pension investment
Zheng Renyuan: from China’s reform and opening up to now, the Chinese market has faced a lot of uncertainty. Some people say that this year is the turning point of the global political and economic pattern. Even so, for China, this is not our first turning point. We have passed several major turning points. In other words, inflection points are normal. In a complex and highly interconnected system, inflection points must exist. Risk control is the key to deal with the inflection point. Risk control is at the core of pension investment. Pension products without complete risk control mechanism are not pension products. Near the inflection point, the risk is usually very high. A good risk control system can ensure that you can survive.
For a young person, if the assets in the pension account fall now, it can be calculated whether the income of his / her investment can meet the standard when he / she retires. If a fixed investment is set, he or she will buy cheaper after the fall, which may not be a bad thing.
Pension investment is a very long-term thing, and time can fluctuate smoothly. The premise is that a strong risk control system can ensure that investors are not washed out in this process.
China Fund News: what else should we pay attention to about the individual pension system
Cong Li: at present, you may focus more on the policy, the institutional framework itself. We would like to propose a broad concept of the third pillar. According to the classification of the world bank, the third pillar is the individual pension account enjoying tax preference. But even without tax incentives, individual pension investment still needs to be done.
At present, China’s first pillar covers almost 1.03 billion people. If more and more people participate in the broad third pillar among the groups not covered, it will be of great help to the stability of society and the resilience and sustainability of the social security system.
When the implementation of the third pillar policy makes us all rejoice, we hope to see all parties take the implementation of the third pillar policy as an opportunity to carry out investor education in the whole society, so as to enable more people to participate in personal pension investment, better reserve for their own pension, calmly and gracefully. This is a more important significance of the implementation of the whole system.
Zheng Renyuan: when I was in the United States, someone asked me what kind of people needed 401k (the second pillar) and IRA (the third pillar), and my answer was people who would grow old. Pension investment concerns everyone.
