【China Labor Security News】Improving Tax Preferential Policies and Enriching Product Supply - Analysis of the Current Situation of Personal Pension and Suggestions for Further Improvement

Source: China Labor Security News, 3rd edition, July 12, 2024

Xue Huiyuan, Wu Xinyun

The personal pension system has been implemented for over a year. At present, more than 60 million people have opened personal pension accounts, but there are also problems such as "participating but not paying" and "participating but paying less".

This year's Government Work Report proposes to "implement a personal pension system nationwide and actively develop the third pillar pension insurance." In order to promote the comprehensive implementation of the personal pension system, it is necessary to conduct in-depth analysis of the current phenomenon of individual pension participation but non payment, identify constraints and existing problems, and focus on top-level design, improving financial services, and guiding social public opinion.

Large market fluctuations affect the quality of account opening

Fund products are prone to losses, and market sentiment has shifted from "hot" to "cold". Personal pension emphasizes "individuality": individuals can decide whether to participate, to what extent, and how to invest based on their own wishes and needs. The primary factor that affects an individual's willingness and level of participation is investment returns. The design of incentive mechanisms for individual pension participation is mainly aimed at the middle-income group, aged between 30 and 45, and those who have awareness of retirement and investment. The core demand of this group is to increase security and financial appreciation, with fund products being the preferred choice. Although the proportion of accounts investing in fund products is not high, the per capita purchase amount is relatively high, which is a barometer of whether the personal pension market is prosperous. At present, due to the severe fluctuations in the capital market, purchasing personal pension fund products can easily lead to book losses, while other types of products maintain overall stability. This has conveyed some negative emotions to the market and also posed challenges to the promotion of the new system.

Unreasonable tax preferential policy design and excessively long funding lock up periods do not match actual needs. One of the prominent issues is that the tax incentives policy is unreasonable and does not have a widespread incentive effect. The current system adopted is the EET model (tax exemption in the payment and investment income stages, and tax payment in the collection stage) and an annual limit of 12000 yuan. High income individuals may feel that the limit is too low, and there are many alternative ways to preserve their funds, so there is no need to waste time and energy participating. Middle income individuals may feel that tax savings have limited effectiveness and occupy long-term funds, affecting their consumption or investment in other areas such as housing, education, and healthcare. The participation motivation of low-income groups is basically non-existent, because they cannot enjoy the dividends of current tax policies, but also have to bear the obligation of paying taxes when they receive them in the future, which actually increases the tax burden pressure of the entire life cycle.

In addition, the excessively long lock up period and high threshold for receiving funds do not match the actual needs. The lock up period of personal pension can last for up to 20-30 years, and the excessively long capital closure period means uncertainty in future risks and returns, leading to increased capital occupation costs, prolonged risk exposure time, and increased decision-making difficulty. Investors need to weigh the situation of cross period fund transfers. If there is not enough high return, they often tend to choose investment projects with shorter cycles and more flexible deposits and withdrawals.

Institutions prioritize account opening over actual payment, resulting in an inflated number of account holders. In the assessment of financial institutions, the number of personal pension account openings is an important indicator, which may lead to the "deformation" of frontline bank personnel carrying performance pressure in the process of promoting business implementation, using "fancy" methods such as free insurance, wealth management products, or cash red envelopes to pursue the number of account openings, causing many problems.

Firstly, opening an account for the purpose of opening an account did not accurately attract the target customer group. Some customers only open accounts with the mentality of "shearing wool" and are not interested in various seemingly "troublesome" operations in the future, resulting in a large number of "zombie accounts". Some banks have a significantly higher number of account openings than the industry, but beneath the surface are lower deposit rates and product purchase rates, which lack the momentum to improve the level of personal pension financial services. Secondly, the cost of opening an account will also increase the operational pressure on financial institutions, affecting their investment in the quality and innovation of personal pension services. As long as the user does not purchase the product, the cost of changing the account opening bank is very low and migration is easy to occur. In order to maintain existing customers, some banks also need to incur high "customer stabilization costs". Finally, the inflated number of account openings can mislead government departments, potentially leading to deviations in policy formulation and implementation, and affecting decision-making efficiency and effectiveness. Opening an account is certainly important, but without actual contributions and investments, it is difficult for the development of personal pension business to take a substantial step forward.

Improve institutional policies and create a favorable environment

Refine and improve individual pension tax incentives policies, and establish emergency expenditure mechanisms. Firstly, different upper limit standards for different insurance coverage should be opened up to ensure that disadvantaged groups can actively participate in policies and enjoy more benefits. Referring to international experience: firstly, differentiated standards can be set according to different types of plans; Secondly, differentiation standards can be set based on the income level and occupational attributes of individuals, spouses, or families; Thirdly, different upper limit standards can be set based on the distance of retirement age or length of work experience. For young people, long-term payment can accumulate a considerable amount of funds in their accounts, but for those approaching retirement, the amount is slightly insufficient. Therefore, for those approaching retirement, it may be considered to moderately raise the standards. Secondly, we should aim for fairness and incentives, and refine and improve tax preferential policies. One is to achieve substantial full tax exemption policies for low-income groups without changing the EET model. The specific approach can refer to the practices of enterprise annuity and occupational annuity: in the process of receiving benefits, the personal pension received by the individual is included in the comprehensive income, and personal income tax is calculated and paid according to the corresponding tax rate. In this way, it can avoid the problem of low - and middle-income groups not having to pay personal income tax (before reaching the threshold), but having to pay personal income tax at a rate of 3% after participating in the personal pension system. The second is to consider setting a tiered tax rate based on the actual payment and investment duration. For long-term payment and investment, more favorable tax rates should be given to encourage individuals to continuously pay and invest. Thirdly, an emergency expenditure mechanism for personal pension should be established. In the event of special circumstances such as unemployment, education, family member accidents or serious illnesses, it is allowed to withdraw some or all of the funds in advance, mainly for situations where early withdrawal is required before receiving benefits. In order to avoid the abuse of this "flexibility", restrictive clauses such as extraction conditions, extraction ratios, scope of use, minimum exit period, and repayment mechanism need to be formulated. More importantly, punitive measures such as additional payment tax rates, refund of payment subsidies, and refund of tax incentives should be formulated based on the amount, time, and reasons for early withdrawal, in order to avoid the abuse of the goodwill principle of the system.

Encourage further enrichment of the supply pattern of personal pension products and smooth cross bank purchasing channels. Firstly, encourage various institutions to leverage their strengths and develop personal pension products that meet market demand and regulatory requirements, in order to avoid homogeneous competition. One is to develop more products that meet the needs and risk preferences of institutional clients, such as dividend based, index based, and breakeven based, to adapt to changes in market sentiment. The second is to combine financial management with services, and increase the content of elderly care services such as medical insurance, health management, life care, leisure and entertainment to meet the diverse needs of individuals in their old age. The third is to strengthen the connection between the banking system and insurance, fund, wealth management and other institutions, accelerate the launch progress of various products, and avoid other financial institutions being in an unfair position in competition with banks, which may cause imbalances in the development of the personal pension supply market. Secondly, open up cross bank purchasing channels and promote the realization of "supermarket style" product selection. Participants can change their personal pension fund accounts between different commercial banks. However, in current practical operations, the personal pension fund accounts opened in different banks can purchase different wealth management products, and even the interest rates for regular savings vary. Promoting cross bank purchasing and even "supermarket style" product selection not only allows individuals to flexibly and autonomously choose investment strategies based on their risk preferences, expected returns, and asset allocation needs, but also increases competition pressure among pension management institutions, promoting their ability to improve product innovation and service quality.

Strengthen market education and information disclosure to enhance investment confidence in personal pension funds. Firstly, a comprehensive mechanism for promoting and advertising personal pension funds should be established to provide purchasing services that are more in line with user needs. One is to strengthen the popularization of personal pension knowledge, through various channels and forms, to popularize the basic knowledge, preferential policies, operating procedures, expected benefits, etc. of personal pension to the public, improve the public's financial literacy and understanding and attention to personal pension. The second is to provide specialized purchasing guidance, through business consulting, pension planning, and other methods, to provide individuals with more targeted information, helping individuals choose suitable personal pension products based on their own needs and risk preferences, reducing purchasing difficulty and information asymmetry. The third is to optimize after-sales service, by implementing measures such as dedicated personnel follow-up and regular follow-up visits, to continue the high-quality purchasing experience. Secondly, in order to improve market openness and information transparency, a systematic and scientific personal pension evaluation system should be established. Establish evaluation cycles and standards, summarize and analyze the yield and risk indicators of various products, and comprehensively evaluate the operational efficiency and risk control capabilities of management institutions. This can not only enhance the trust of society in personal pension products and their management institutions, but also promote the market supply of personal pension products to achieve survival of the fittest and upgrade in quality.

(Author affiliation: Wuhan University Social Security Research Center)