Development of an Innovative Regulatory Approach for the Pillar III Pension System Amid Population Aging

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The knowledge and support technical assistance (TA) will provide the China Institute of Finance and Capital Markets (CIFCM) with technical support and institutional capacity to prepare a framework of capital market and investment regulations that will underpin the Pillar III pension scheme in the People's Republic of China (PRC). A pension system requires three pillars. Pillar I is a country's national pension scheme that ensures basic social protection to all citizens. Pillar II provides additional protection for some formally employed citizens, particularly those in the public sector and in urban centers. Pillar III pension plans give individual citizens further protection through more tailored, market-based options. Given the rapid aging of its population, the PRC's Pillar I, first formalized in 1991, will become unsustainable. Pillar II, established in 2008, covers only about 5% of the population. The first two pillars leave a substantial coverage gap, while Pillar III has not yet been established in the PRC. The TA team will therefore help prepare a framework of capital market and investment regulations that is central to the development of Pillar III.An improved pension system is aligned with priority 3---aging society and health security---of the PRC country partnership strategy since it enables broad-based social protection coverage. In addition, by supporting an advanced market-based individual pension scheme and the underlying capital market system, the TA deliverables will also help enhance regional cooperation and integration through knowledge development, regional learning, and investment initiatives. Specifically, the TA's role in helping design market-based pension investment products and a regulatory framework will be illuminating for other developing member countries of the Asian Development Bank (ADB). It will enrich opportunities for cross-regional learning and knowledge sharing, including through platforms such as the Central Asia Regional Economic Cooperation (CAREC) and Greater Mekong Subregion (GMS) programs. Related to this, the introduction of individual pension plan products will increase the depth and breadth of the capital market in the PRC, expanding opportunities for cross-border financial flows between the PRC and regional developing member countries.