New NCSSF chairman facing major challenges
The new chairman of China’s state retirement fund will need all of his considerable investment and leadership experience, given the daunting tasks ahead. These include helping oversee public pension reform (PPF) in the world’s most populous country and delivering an acceptable return amid notoriously high expectations.
Lou Jiwei has left his role as Chinese finance minister to become chairman of the National Council for Social Security Fund (NCSSF), with Rmb1.9 trillion ($276 billion) under management. He reportedly started in the role on November 10, three days after stepping down as finance minister. He replaces Xie Xuren, 69, who is thought to be retiring.
Lou’s background as the first chairman at China Investment Corporation, the $814 billion sovereign wealth fund, should help him supervise the NCSSF, despite his lack of pension-specific experience, said Stuart Leckie, chairman at Stirling Finance, an independent consulting firm in Hong Kong.
The Rmb1.5 trillion National Social Security Fund (NSSF), run by the NCSSF, is looking more and more like a sovereign wealth fund, noted Leckie. It is unusual among pension funds in China in that it can invest offshore and in private equity, he added.
Challenges mounting
This flexibility should prove invaluable for Lou as he seeks to boost returns. NSSF has generated annualised performance of 8% over the last 15 years – decent by most standards, especially in recent years. But that is not considered sufficient in China, where salary inflation was about 12% over the same period, said Leckie.
Admittedly, the NSSF generated an annual return of 15.19% in 2015, largely driven by its exposure to direct stock investments and private equity funds. But other state investors, including Singapore’s GIC and Australia’s Future Fund, have said that yield will be harder to come by in the coming years.
A further challenge for Lou is that at least 10 provinces and/or cities are expected to hand PPF investment mandates to the NCSSF, noted Leckie.
The NCSSF oversees a total of Rmb1.9 trillion ($276 billion), including NSSF and mandates from two wealthy provinces, Guangdong and Shandong. Wealthy provinces such as Jiangsu, Shanxi, Sichuan and Zhenjiang, and cities including Beijing and Shanghai, are likely to be next to give portfolios to NCSSF with a mandate to boost returns.
The NCSSF will outsource these PPF assets to external firms. It started inviting domestic fund managers to pitch mandates in late October and aims to decide on the recipients by the end of this year.
The outspoken and reform-minded Lou’s move came a year earlier than expected, as his appointment was anticipated to last four years. But may be no coincidence that the switch came as China’s PPF enters a crucial stage, as provincial pension mandates are being decided on.
Lou, 65, is NCSSF’s fifth chairman since it was set up in 2000. This rotation is something of a tradition, part of the government’s ongoing cabinet reshuffle. Three former chairmen who headed the council since 2013, including Xie, had been finance minister before heading the state pension.