In the case of insufficient tax incentives, how to establish some long-term savings mechanisms?
On February 25th, Wan Qun, chairman of Hengan Standard Pension Insurance Co., Ltd., participated in the “Fifth Global Wealth Management Forum – Wealth in Economic Restructuring” co-sponsored by Caijing Magazine, Caijing Think Tank and Caitonghui. Governance landscape” on the challenges facing the pension system.
Wan Qun, Chairman of Hengan Standard Pension Insurance Co., Ltd.
Starting from the UK pension crisis in September 2022, Wan Qun analyzed the occurrence of this crisis and the experience and lessons we can learn from it. Due to the fact that many pension plans under the British DB model have deficits in the environment of declining interest rates and rising longevity risks, they have focused on asset-liability matching and preventing interest rate declines as the main management objectives in the past 20 years, and invested mainly in government bonds. To increase yields, investment strategies such as allocating derivatives and increasing leverage were adopted. Finally, when interest rates rose and bond prices plummeted last year, the pension system was in an extremely unsafe situation. Therefore, the pension as a long-term savings must give top priority to ensuring “safety”, and risk control is very important. Pension is an important guarantee for people’s later life, and it is also a very long-term investment activity. In this multi-decade investment, pensions can face many challenges. Therefore, we must ensure systematic prevention and control of various risks in terms of mechanism, avoid adopting aggressive strategies that do not conform to long-term investment concepts in pursuit of short-term gains, and avoid major losses.
In addition, during the discussion, Wanqun also had in-depth discussions with the guests on topics such as the automatic pension enrollment mechanism, pension investment consultants, investor education, and breaking down the barriers of the second and third pillars of the pension system.
In terms of the automatic enrollment mechanism for pensions, Wan Qun said that although preferential tax policies have positively promoted the development of individual pensions, relying solely on preferential taxes may not be enough. For example, in the UK’s second-pillar occupational annuity market, preferential tax policies have been implemented for many years, but the effect is mediocre. However, when the UK implemented the automatic enrollment mechanism for occupational pensions in 2012, we saw a qualitative improvement in the coverage of the second pillar, from more than 50% before the implementation of the automatic enrollment mechanism to more than 90% now. This reflects the importance of policy coercion in improving pension coverage and residents’ participation in pensions.
In terms of pension investment consultants, Wan Qun said that pension investment is a long-term and professional matter, so investment consultants play an essential role in pension investment. Qualified pension investment consultants can help people develop pension plans and assets Allocation can also use professional capabilities to help investors avoid market risks. At present, my country’s investment consulting business has just started, and it is necessary to make up for the shortcomings in this area as soon as possible in the future to promote the development of personal pensions.
In terms of investor education, Wan Qun believes that we should improve the effect of investor education from a more systematic perspective, rather than confining the work form to traditional preaching. First of all, we must fully realize the weakness of human nature. In other words, ordinary people generally have resistance and inertia when facing complex and unfamiliar things like pension investment, which makes it difficult to increase participation in pension investment. To this end, we use scientific and technological means to lower the threshold for people’s knowledge acquisition and investment participation, and narrow the distance between professional pension investment and ordinary people. For example, we can learn from international experience, vigorously develop robo-advisory technology, and provide inclusive pension financial services for domestic people. We can also take the lead in establishing a pension information platform that spans the first, second, and third pillars, so that the public can clearly understand Understand your own retirement savings and help awaken residents’ awareness of retirement savings.
Wan Qun also said that from the perspective of global practice, pensions mainly include two parts-the basic national pension and the private pension that assumes the responsibility of the main body of old-age security. Therefore, Wan Qun suggested that we can try to explore the connection between the second and third pillars, which can also further help the prosperity and development of the third pillar.
Wan Qun emphasized, “When we are working on personal pensions, we must do careful thinking and research at the macro level, at the system level, and at the micro market level to form a relatively complete system that can promote each other and coexist. The system is very important.”
The following is the transcript of the speech
Wan Qun: Thank you, the host, and Caijing for the invitation.
Hengan Standard Pension is the first professional pension insurance financial institution in China with foreign capital background, so I would like to start with overseas experience.
The British pension market is a relatively mature market in the world, but the pension crisis in the UK in September last year has attracted widespread attention. I would like to start with this crisis and see some of the challenges they face in the personal pension system, and what experience and lessons they can provide when developing our country’s personal pension system.
Everyone knows that the British pension crisis in September last year was caused by the collapse of the price of British government bonds caused by the mini-budget of the previous British government-the 45 billion pound bond financing tax cut plan. Why does the collapse of a national bond price trigger a huge crisis in the pension market of more than 3 trillion yuan? This has something to do with the UK pension scheme model.
Over the past 20 to 30 years, the management model of mainstream pension plans in the UK has undergone a transformation from a defined benefit (DB) plan to a defined contribution (DC) plan, and then to a hybrid plan. Under the DB model, the employer assumes the rigid payment obligation for employees’ retirement benefits, and the employer is responsible for raising funds and bearing longevity risks. This plan is on the scale of 1.7-1.8 trillion pounds.
Over the past two decades, the DB program has faced great risks and challenges. Due to the downturn in the interest rate market, the rate of return in the capital market has continued to decline, superimposed inflation risks, and the rigid debt burden has caused many companies that implemented the DB plan to even go bankrupt.
In this case, the LDI strategy appears, that is, the debt-driven strategy. Essentially, the direct cause of the current round of UK pension crisis is that the pension DB plan under the LDI management strategy has been negatively impacted by financial market fluctuations. This strategy is simply three points:
First, buy a large amount of treasury bonds. Because national debt is relatively stable, the fluctuation is relatively small. We have seen a data that by the end of 2021, the proportion of British pension funds buying British government bonds reached 72%, while it was only about 30% at the end of 2006, and the proportion of buying government bonds has risen sharply.
Second, a large number of derivative transactions are adopted. Although the national debt is stable, the yield is relatively low and cannot meet the needs of pension customers. Therefore, a large number of derivative transactions including interest rate swaps, bond repurchases, and inflation-linked bonds have been used to increase the yield.
Third, higher derivative leverage is used, some as high as 7 times. A large number of derivatives transactions have released a lot of cash, so that this cash can be invested in high-yield corporate bonds or stock markets to increase the rate of return.
When the price of treasury bonds plummeted, a large number of derivatives transactions using treasury bonds as collateral needed to replenish margins. In order to replenish liquidity, pension funds began to sell treasury bonds, and finally even sold high-grade corporate bonds and stocks together. The entire capital market was shocked. Faced with great systemic risk. According to local media, the collapse of the British capital market is only hours away.
Why is there such a crisis? I think it has a lot to do with the long-term decline in capital market interest rates and the rapid longevity and aging. In an era of falling interest rates and increasingly significant inflation, how to meet the rigid debt demand, many pension funds have adopted some high-risk investment strategies to ensure the payment of this rigid debt.
The UK pension crisis raises three questions for us:
First, why has pension investment represented by long-term savings become an investment institution that increasingly pays attention to short-term debt and risks?
Second, under the scenario of rigid debt, institutional investor providers of pension funds pay more attention to the matching of debt and assets rather than the gradual improvement of asset return.
Third, a very aggressive derivatives investment strategy coupled with the lack of supervision, how to prevent this risk when the market is in an extreme situation? How to balance the investment ratio of liquid and illiquid assets?
Last year was the first year of personal pension in China, and everyone was very excited, but at the same time, we need to pay more attention and think about how to improve the two goals of pension investment rate of return and investment security, so as to cover the needs of customers throughout their life cycle.
Products that enter the personal pension platform need to have a screening standard. For example, if we buy a 2035 target fund now, after three years, the fund will not be able to be completed, or the performance will be very poor. What should we do? Especially in the early stage of the launch of China’s personal pension, some standards and mechanisms are needed for the selection and launch of products. The risk control mechanism of the pension must be emphasized, because it is related to everyone’s money in the next few decades, so we must be very careful.
When it comes to the issue of default, we can’t simply default. Everyone’s risk appetite is different. In public funds, some default fund allocations can be made. For example, the risk and return are relatively in the middle, and everyone can make allocations according to their age, and it is possible to enter an account with relatively low risk when they are close to retirement. However, as the average life expectancy is getting longer and longer, pension funds should also change with the times instead of simply acquiescing. For example, in the past, I started to invest in accounts with a lot of bond allocation in my 50s, but everyone lives to be 80 or 90 years old. Entering into an account with such a low return at such an early age is a big challenge for retirement.
The second issue is that we must strengthen the role of investment advisors. Judging from overseas experience, investment consultants have played a very important role in ensuring the smooth operation of pension funds and promoting education in pension investment.
In the UK pension crisis last year, pension assets fell sharply, and customers were in great pain. The role of asset allocation became more and more important. Asset allocation is related to the issue of liquidity and illiquidity. If you want high returns, you have to allocate more to illiquid assets. However, in the extreme situation last year, you can’t get the money out. If you want liquidity, you have to allocate more stocks and bonds, and the return will be lower than that of alternative assets. Asset allocation and investment strategies must have a balance of returns and risks, so investment advisors are very important. We want to provide investment consulting services to customers, so that he can choose products that meet the needs of customers for retirement.
In addition, there is the issue of pension information. Every company needs to provide such information, but the government can also consider setting up a pension panel platform similar to that in the UK. Everyone’s pension information can be seen on this panel, how much money each person has, and what it is like Can the income of the government cover the burden of providing for the elderly in the next few decades? This requires the government to come forward to coordinate and make it easy for everyone to understand the status of personal pension planning at a very low cost, simply and conveniently, so as to better prepare for the future.
I did a survey and asked some young people if they would like to save their money for 20 or 30 years, and basically the answer was no. This is also a big problem now. I especially agree with what Professor Hu said just now, the government needs to exert more power to provide some financial subsidies. But we can’t simply think that personal pensions can achieve smooth development simply relying on the support of the state’s call and preferential tax policies.
Before the start of the automatic registration system in 2012, the United Kingdom implemented tax incentives for many years, but the effect was not satisfactory. So, I want to talk about this matter from another angle. In addition to some incentive mechanisms such as preferential taxation, we also need to work hard on the design of other systems to enhance everyone’s awareness and habit of establishing long-term savings.
In terms of policy system design, some theories and practices of behavioral economics can be referred to. Since pension investment is still a new thing in my country and has high professional requirements for investors, the enthusiasm of Chinese people to participate in pension investment has not been high. With the assistance of investment consultants, the public can more efficiently and conveniently understand pension investment concepts and knowledge tools, and promote residents to actively embrace pension investment. In addition, with the development of technology, robo-advisor has become a market hotspot in recent years. Robo-advisors can break the limitations of human consultants in terms of professional coverage and energy, and can provide residents with professional, timely and affordable pension consulting services at a lower cost. In the future, we can provide policy support for qualified professional institutions, encourage market institutions to vigorously develop robo-advisory technology, lower the threshold for pension investment, and practice the concept of inclusive financial development with practical actions.
I think the giant ship of personal pension is to let everyone get on board first. After boarding, he will see the benefits of long-term savings and will stay. At the same time, it will attract more people to board. So I think the first step is how to get everyone on board first. This is the first question.
The second question, long-term saving is very uncomfortable, why? The market is ups and downs. Even if the state subsidizes it again, when encountering a capital market like last year, ordinary people in developed capital markets have to raise their pensions when the market is low. This is a problem against human nature.
I think in this regard, a mandatory system is needed, and the second and third pillar accounts need to be opened up. If personal pensions are only defined as the third pillar, I think the development of personal pensions in China is still limited. The second and third pillars are connected, and everyone has their own account. The second pillar can consider mandatory participation in the pilot, and the third pillar has more product choices. At present, the gap between the tens of millions of people who can participate in tax-advantaged pensions and our 1.4 billion population is too great. It is indeed a big challenge to expand the three pillars and establish an inclusive personal pension.
Third, market institutions must do a good job in controlling the benefits and risks of existing products. If the existing ones can’t be done well, some people may think that it’s better to put the money in the bank or manage the money by themselves, why should I leave it to a professional organization.
Therefore, we need to use institutional power to promote people’s active participation in pension investment and improve the effect of pension investment education. The advantage of the system is that it can provide mandatory impetus and supportive policies for people to participate in pension investment. The reform of the second-pillar occupational pension automatic enrollment mechanism implemented by the United Kingdom in 2012 provides us with a case. With the combination of mandatory system and flexibility, the coverage rate of the two pillars in the UK has reached more than 90%.
The topic we are talking about today is about the virtuous circle of the development of the macro economy, the capital market and personal pensions. When we are working on personal pensions, we must do careful thinking and research at the macro level, at the system level, and at the market level. It is very important to form a relatively complete system that can promote each other and coexist and coexist.
Pensions are basically divided into public pensions and private pensions. Public pension is the first pillar, what is the goal of the first pillar? It is to ensure the basics and fairness. Our current first pillar has a great responsibility, but it is getting more and more difficult. Now the average life expectancy in China is about 78.2 years, which has surpassed that of the United States. This is a huge achievement of our economic development. But what follows is, low birth rate, rapid aging and longevity, how to establish a sustainable pension system? I think we must return to the market, return to business, and reasonably share the pension responsibilities among the government, enterprises and individuals.
The rapid development of the three pillars of the United States and Japan is actually related to the connection of its second and third pillars. The rapid growth of the three pillars in the United States was realized after the implementation of the two-pillar 401K plan.
In the process of establishing the three pillars, there must be a lot of social consultation and communication, because it involves everyone, and it is very important to achieve consensus.
How to establish a personal pension that benefits the public as soon as possible really needs to explore more possibilities. For example, the financial subsidy method proposed by Hu Jiao just now. At the same time, is there any other way. For example, in recent years there have been many discussions on how to use provident funds more effectively. It is a pity that a large amount of provident fund is idle because the annual interest rate is very low. In fact, we can find a way to use it. Is it possible to discuss and explore a way to transfer part of it to the pension? Because the provident fund and personal pension are both money in personal accounts and belong to the individual, the income can be increased and turned into long-term savings through market-oriented operations. The money transferred from the provident fund to the pension account can still be used if you need to buy a house or use it for other provident fund purposes. Give the provident fund owner the right to choose, so that the original use of the provident fund will not be affected, and the funds can be used efficiently.
The personal pension account system is a complex and long-term system that affects everyone. The most important thing is to let it start first, build it first, and then gradually seek experience to continuously enrich and improve it. Therefore, I believe that more systematic planning and coordination should be made at all levels of the pension system, and a complete and reasonable mechanism should be designed to attract more people to board the ship and prepare for their retirement life as soon as possible.
(Editor: Wen Jing)
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