Licensing Regulation and the Supervisory Structure of Private Pensions

China started to overhaul its old pay-as-you-go system in 1997, by implementing a multi-pillar model. Up until 2004 the government‘s efforts were mainly focused on reforming public pension arrangements. Since then, more attention has been paid to private pensions, which in China mainly take the form of voluntary occupational arrangements (known as Enterprise Annuities, or EA in short). This paper evaluates two aspects of the EA system, the licensing regime and the supervisory structure. The current EA market adopts a licensing approach, i.e. a license issued by the Ministry of Human Resources and Social Security (MOHRSS) is required before financial institutions start their EA business in China. In this regard, four different pension licenses are relevant, those issued to trustees, custodians, administrators and asset managers, with different qualifying criteria applying to each type. All mainstream financial institutions can apply for the four licenses, although custodian and asset manager cannot be the same legal entity.

Such a licensing arrangement – requiring four separate approvals - is unique to China. International experience shows that in most OECD and non-OECD countries where licensing is applied to the pension system, only one license is required – i.e. the license granted to a dedicated, independent financial institution focused on trusteeship or equivalent business (the other financial institutions involved in the pension industry being covered by their main business regulation). The institutions in charge of pension funds are often specialised pension fund management companies, as in many Latin American and European countries. The complicated – and consequently sometimes opaque – licensing process may be one of the structural issues which are hampering the development of the EA market in China.

In terms of the supervisory structure, the main pension regulator and supervisor in China is the
Ministry of Human Resources and Social Security (MOHRSS), which, in addition to issuing pension legislation and granting licenses, also conducts on-site and off-site supervision and inspection on an ongoing basis, as well as overseeing the public pension system. Though similar arrangements can be found in other OECD countries, the mixing of such diverse functions in one institution may be causing confusion and overload. The international trend is towards an autonomous pensions supervisor, separate from the main regulatory ministry – though whether financial sector supervision should be integrated or separated along sectoral lines remains open to debate.

In addition, given the diversified financial regulatory structure in China three specialised financial
authorities also play an important role in supervising pensions. The China Insurance Regulatory
Commission (CIRC) oversees insurance companies acting as trustees, whilst the China Banking
Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC) oversee banks and securities companies with pension related licenses. Another two governmental agencies - the Ministry of Finance and the State Taxation Administration - are also involved, in that they set tax policies, which are of significant importance to the development of private pension markets. Though the sharing of supervisory responsibilities of the pension industry among authorities is not unique to China, a lack of coordination – or even competition – between agencies does seem to be posing a greater challenge than in other countries.

In this paper, we, firstly, conduct a detailed literature review with a focus on comparing private
pension licensing regimes and supervisory structures in selected countries. Second, bearing in mind the specific conditions and circumstances in relation to the present pension supervisory structure and regulatory framework in China, practical policy recommendations are proposed concerning how to improve the current structure.

The remaining part of the paper is structured as follows. Section 2 presents the main arguments in
favour of and against the integrated supervisory approach, which is largely drawn from current literature.

In Section 3 a number of selected economies are examined to demonstrate how the pension supervisory structure and regulatory framework are arranged (i.e. Australia, Chile, Hong Kong China, Poland, Turkey, the United Kingdom and the United States). Section 4 provides a detailed and comprehensive overview of the pension supervisory structure in China, where issues and challenges associated with the current system are identified. Given the analysis and findings in the earlier sections, Section 5 focuses on the policy implications of international experiences for China. Section 6 concludes. The annex in Section 7 provides more detailed information about the regulatory and supervisory approach in the selected seven economies.