China launched its first private pension scheme in a bid to reform its public funded pension system, news agency Nikkei Asia reported.

The scheme will be rolled out in 36 cities including Beijing, Shanghai, Shenzhen and Chongqing and it allows residents to invest in mutual funds and other approved offerings.

The program is similar to the individual retirement accounts system which is prevalent in the US. The new plan has been announced as China tries to amend the shortcomings of the two existing pension schemes.

The report by Nikkei said that the private pension system is likely to reach between $258 billion to $501 billion in assets, citing data from the Insurance Association of China. The agency said China faces a 8 trillion to 10 trillion yuan public pension shortfall in the next five to 10 years.

The Chinese government-led nationwide pension scheme covers around 1.03 billion people and has assets worth 6 trillion yuan and is supported by central and local government finances. It is also funded by individual and company contributions.

There is another voluntary second pension system which caters to certain employees at state-owned enterprises and other companies which has 70 million beneficiaries, amounting to 4.5 trillion in assets, Nikkei said citing official data.

However, these two systems are facing hurdles in taking care of the nation’s retirement needs as people quit the workforce and Chinese birth rates fall.

The WHO says that in 20 years China will become one of the world’s most rapidly ageing societies as 28% of China’s population will be over 60 years old, compared to the current 10% now.

The retirement age for the majority of Chinese men and women employees is also lesser compared to other countries.

The China Securities Regulatory Commission data shows that there are about 130 mutual funds products available under the new scheme and qualified fund managers are working closely with banks who are incentivized to find new takers of the new plan.

These products, according to Nikkei, are low-risk bond and fixed-income assets and require investors to lock up their holdings for a set period.

The managers are targeting people between the ages of 35 to 45 years old who will be retiring in the coming years, experts speaking to the news agency said.

There are also tax savings for annual contributions up to 12,000 yuan but those benefits may not be available to all potential investors, limiting take-up to those from higher income brackets.

Investors can only withdraw their money from the scheme only after they hit retirement age or meet certain conditions, such as moving abroad.

China faces a growing wealth gap as average incomes are higher in major cities while workers in smaller cities earn sometimes half of what major cities pay, even though the workers could be doing the same jobs.

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