SHANGHAI, March 21 (Reuters) - Global asset managers are lobbying Beijing to offer tax benefits and other incentives to entice China's aging population to invest in mutual funds for their retirement, as funds eye a multi-trillion dollar opportunity in commercial pensions.
Their hopes for a bigger role in China's pension market and its reform process received a boost this month when regulators published guidelines for the introduction of Western-style pension target funds.
Although such fund-of-fund (FoF) pension products are popular in mature markets like the United States, they will have a hard time getting off the ground in China without supportive policies that are now lacking, such as preferable tax treatment, fund managers say.
"The guideline is a very important piece of China's entire pension reform jigsaw ... but tax benefits - another eagerly anticipated reform measure - have not come out yet," said Calvin Chiu, Asia head of pension development at Manulife, the Canadian financial services group.
Manulife is sharing its expertise with Chinese regulators through a pension committee under the China Securities Regulatory Commission (CSRC), hoping that the government will eventually grant tax benefits to a broad range of investment products, Chiu said.
But he conceded that desired policy changes could be slow, as China's pension reform involves coordination between several government agencies.
Nevertheless, fund managers are racing to be the first to roll out pension target funds in China. They include the Chinese mutual fund ventures of Manulife, Blackrock, BNP Paribas and Eurizon Capital SGR.
Unlike in markets such as the United States, where the burden of social security is shared between the government, employers and individuals in a three-pillar system, China's pension coverage is heavily reliant on state funding.
To meet the challenges of a rapidly-aging population, Beijing kicked off a programme in February to build a commercial private pension market that gives individuals more responsibility for their old-age protection, though it has not announced a timeframe for implementation.
"The commercial pension business will be a huge opportunity for asset managers," said Ivan Shi, head of research at Z-Ben Advisors, predicting the business could account for 40 percent of China's total mutual fund assets in 10 years, reaching $4.8 trillion.
Such optimism sounds outlandish for a market that has not yet taken root, but is not baseless.
In the U.S. pension market, 48 percent of assets in Individual Retirement Accounts (IRAs), or $4.1 trillion, was invested in mutual funds in 2017, according to the Investment Company Institute (ICI).
But obstacles abound.
Mutual fund managers are competing for a place in China's commercial pension program with insurers, who are also lobbying for tax benefits.
"It remains to be seen how the commercial pension program will be designed ... and which kinds of financial institutions can participate," Shi said.
Another daunting challenge is the need to build a new distribution channel, and educate China's often fickle fund investors on the need for retirement planning.
Ren Cheng, founder of Fidelity Freedom Funds, and nicknamed father of target date funds (TDF) - the popular pension tool in the United States - said the right policies are key to underpinning investments that could span over decades.
"It's a huge, huge mistake to treat retirement protection as an investment issue," the Boston-based senior consultant at Fidelity Investments said during a recent trip to China, where he advises securities regulators on pension market development.
"Rather, it's about setting up a legal framework and mechanism to address weakness in human nature, such as inertia, and short-sightedness," he said, adding that trial and error in the U.S. pension system - now probably the world's best - had many lessons to offer China.
Ren attributed success in the U.S. of the employer-sponsored pension plan 401(K) partly to a government-backed default investment mechanism that enables automatic enrollment, and protects employers from fiduciary liability in case of investment loss.
"Without the right system, money doesn't stay long. China's financial market is flush with liquidity, but where is the system (to make it stay)?"
The CSRC's chief accountant Jia Wenqin told local media earlier this month that China should explore applying a default investment mechanism, as well as tax benefits, to pension products.
Fidelity International, which doesn't yet have a mutual fund license in China, is angling for a seat at the table.
"For us, our ultimate goal is to participate in the pension market in China," Fidelity's China Country Head Jackson Lee said, adding that in the short term, its main focus in China is investor education.
"By sharing our experience and insights on global pension market, we are eager to be an active player in the journey of pension reform in China." (Reporting by Samuel Shen and John Ruwitch; Editing by Kim Coghill)