China pensions starved of alternatives to stabilise returns

The country's pension funds are lagging behind their Asian peers for sustainable returns, leading to calls for Beijing to let them invest in more alternative assets.
China pensions starved of alternatives to stabilise returns

Experts warn that Beijing must take even speedier action to help its rapidly aging population save enough for retirement. In particular, the country’s regulators need to diversify the range of assets available for local pension funds into more alternative assets, to help them ensure more consistently high annual investment returns.

Janet Li, Mercer

Pension experts say the government and regulators do not lack for areas they need to improve. The nation is expected to see a Rmb8 trillion to Rmb10 trillion ($1.13 trillion to 1.4 trillion) pension gap emerge over the next five to 10 years and it will widen even further over time, the China Insurance Industry Association stated in January. 

“An effective pension system is supported by several pillars. China’s system has desirable features but there are also areas for enhancements, in order to improve the efficacy and sustainability,” Janet Li, Mercer’s Asia wealth business leader, told AsianInvestor.

She noted that policy measures like increasing the state pension age over time would be helpful. In addition, Li said that it would be helpful for China’s pension funds to be given more flexibility in the assets they can invest into, to enhance risk-adjusted returns from an overall portfolio basis. 

Currently, China's pension funds are only allowed to buy public traded assets and government bonds, or a selection of local fund products that provide a sustainable return. They have been waiting for permission to invest into private assets such as private equities and private credit for a long time.  



China faces particularly acute challenges for its retirement system, given both the size of its greying population and the deficit in savings, and how to secure a long-term satisfied return based on current inconsist track record.  

The country's National Security Pension Fund (NSSF), which is effectively its reserve pension fund with Rmb2.63 trillion ($389 billion) in assets under management, reported an impressive return on investments of 9.03% last year, according to Ministry of Human Resources and Social Security data. That was far higher than the annual returns of 5.23% and 2.56% respectively recorded in 2017 and 2018.


However, many other markets also have a mixture of aging populations, low interest rates and a lack of necessary focus on how best to improve alpha returns.

The longlasting low or negative interest rate environment means that there are no simple solutions, according to Caroline Higgins, head of Hong Kong, Macau and Taiwan, at Northern Trust.

Caroline Higgins,
Northern Trust

She notes that many Asian asset owners, including pensions, have strict guidelines on investment strategy, which means they struggle to get their portfolios to encompass a more varied set of assets, echoing Li’s views.

China in particular has struggled to maintain strong and consistent pension investment returns due to a mixture of a conservative asset allocation approach and the central government having imposed complicated investment guidelines. 

Higgins believes the simplest solution in the shorter term is for pension funds in China and other nations to be allowed to use more alternative asset strategies, including a mixture of property, private equity, infrastructure and other illiquid assets.


“ESG and alternative strategies have been largely considered and researched by both asset owners and asset managers to deliver better returns. Other trends among asset managers are that they are turning more hybrid in portfolio building,” according to Higgins.

The rising focus on private assets is already becoming more prevalent among other regional asset owners. Sovereign wealth fund Korea Investment Corporation told AsianInvestor in January that it plans to increase its allocation to alternatives in the coming six years to at least 25% of its portfolio. It intends to do so to reap the benefits of an illiquidity premium and the asset class’ low correlation with traditional instruments, said chief investment officer David Park.


The need for NSSF in particular to receive less investment restrictions might seem a little surprising, given the strong results reported in 2020. But even during this bumper year it has lagged its direct public pension fund peers.

For example, South Korea’s public pension fund National Pension Service posted an annual return rate of 9.6% last year, marking the second-highest record in a decade. Meanwhile, the Government Pension Investment Fund of Japan reported a record return of 25.15% for its fiscal year that ended in March, a dramatic rebound from a 5.2% loss in fiscal 2019.

ALSO READ: Can GPIF maintain its groundbreaking 25% return?

Separately, Taiwan pension funds overseen by the Bureau of Labor Funds (BLF) also post a return in excess of 11% in 2019, the latest available annual figure. 

China’s regulators are seeking ways to improve the ability of local pensions to raise their returns, or ensure retirees have more reliable levels of return.

Most recently, on June 29, China’s Ministry of Human Resources and Social Security announced its 14th five-year work plan. The plan outlaid how the government intends to further expand the coverage of the basic state pension insurance system, which is managed by provincial-level governments. It also aims to encourage the growth of the occupational pension and private pension sectors and delay the legal retirement age.

Previously, in May, the China Banking and Insurance Regulatory Commission announced a pilot programme to foster endowment plans that offer individuals stable returns for 10 years after retirement.

Prior to that Beijing announced a plan in March to create a new state-backed pension firm. Experts see this step as a "necessary and reasonable" move that will help cut administrative costs and support the development of individual pension schemes.

ALSO READ: China’s new pilot scheme insufficient to meet pension shortfall

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