As China's ageing population is increasing rapidly, there should be a well-funded pension system put in place, experts say.

This should be accompanied by parallel legislation and capital market reforms, they said.

China is still a young nation, preoccupied with modernizing its economy, creating jobs and raising living standards, but over the next few decades it will age dramatically, said Richard Jackson, director of the Global Ageing Initiative of the Center for Strategic International Studies (CSIS), a Washington-based think-tank.

However, the country's pension system only covers a fraction of the work force and many elders will have to count on personal savings to finance their retirement, he said at a seminar Tuesday in Beijing.

On Monday, CSIS released in Beijing its report: "The Graying of the Middle Kingdom", a joint effort with Prumerica Financial of the United States, which looks into China's efforts to prepare for the ageing of its population and recent pension reform.

It predicts that China will have an elderly population of about 400 million by 2040, which will be a large burden on the economy if an effective pension system is not established.

China should set up fully-funded pension accounts for individuals to build an old-age safety net in advance, the report said.

Current efforts are not enough, it said.

The Chinese Government, aware that the old pension system in the planned economy could not keep pace with the market economy, started to reform a purely "pay-as-you-go" pension system in 1997 and introduced one that combines a basic pension with personal savings accounts.

The accounts are jointly paid into by employers and employees, as saving to support employees' retirements.

But the new system does not cover those who retired before 1997, leaving a large fund shortfall.

Some local governments have also diverted money in the personal accounts to pay for the deficits in basic pensions and therefore emptied many accounts.

But this activity increases the risk of inadequate funding for future pension payment and should be stopped immediately, said Yvonne Sin, a World Bank specialist.

She said individual accounts should be kept separate and an effective regulatory scheme should be established to ensure the appropriate use of the fund.

Then, to ensure the maintenance and appreciation of the pension pool, more investment tools should be allowed, with sound governance and parallel reform in the financial sector to ensure returns.

"We need to set up a comprehensive legal system for pension funds and pension insurance and create diversified investment channels for such funds to minimize the risks," said Li Keping, director of the investment department of the National Council for Social Security Fund (NCSSF), which controls a 132.5 billion yuan (US$16 billion) strategic reserve fund on behalf of the central government to support China's future social security demands.

So far, the reform of the pension system has only been conducted on an experimental basis. That means that Chinese authorities are still looking for a feasible model to upgrade the old system at the lowest cost, he said.

It has also been trying to find appropriate ways to invest pension funds in the capital market rather than simply putting them in banks or buying treasury bonds.

NCSSF has taken the lead among pension fund operators in authorizing part of its money for investment by professional fund managers insecurities. Also, it recently got the go-ahead to invest overseas.

But there is still much preparation needed, including finding more qualified professionals to conduct investment and management, and building a more standard and mature capital market, said Li.

"As a foreign partner with the Chinese, we hope to assist Chinese companies and government as they develop the capital market," said Douglas Fergusson, President of Prumerica Financial Asia Ltd.

Before the expansion of the pension fund management business and related products, it is crucial first to improve the market fundamentals to give investors greater confidence, he said.

(China Daily April 21, 2004)