China to transfer SOE stakes to bolster pension system

After a two-year trial run, the ambitious scheme is being extended nationwide. Investment restrictions and built-in home bias, though, could undermine its effectiveness.
China to transfer SOE stakes to bolster pension system

China is formally pushing ahead with long-awaited plans to use stakes in state-owned enterprises (SOEs) to help plug shortfalls in the country's public retirement system.

Restrictive investment rules, though, could undermine the effectiveness of the move. 

After a two-year trial, authorities are rolling out the scheme countrywide with the release of new regulations governing the transfer of these assets to national and provincial social security funds.

Enterprises owned by the central government have to transfer 10% stakes to the Rmb2.24 trillion ($314.61 billion) reserve National Social Security Fund (NSSF) by the end of 2019, according to a joint release published by five regulatory bodies*.

Businesses experiencing difficulties get a bit more leeway and can do so by the end of next year. The joint statement didn't specify the type of difficulties.

In addition, enterprises owned by local governments have to transfer 10% stakes to provincial pension funds by the end of 2020.

Each provincial government is required to set up a new entity that it solely owns to hold, manage and operate the shifted state-owned assets, or appoint a qualified firm to manage the assets in the form of segregated accounts. 

The move is expected to significantly boost the total assets held in China’s pension system. At the central government level, 59 SOEs are expected to transfer about Rmb660 billion-worth of assets to the NSSF, according to the Ministry of Finance.

The funding gap in China’s pension system is expected to reach Rmb890 billion by 2020, according to the National Academy of Economic Strategy.

“It’s good that they (authorities) are looking at different ways to try to plug the gap,” Wina Appleton, retirement strategist for Asia Pacific at JP Morgan Asset Management, told AsianInvestor.

What this effectively means now is that the social security funds will get one more source of funding, in addition to the employer and worker contribution and pension assets obtained under the central redistribution system.

Provinces with seriously ageing populations (where the pension contributions are thus less than the payouts) are also getting pension assets from provinces that have younger workforces under the system, she added.

Theoretically speaking, this makes sense. People across the whole country are stakeholders in SOEs, while the social security system covers all people too. The shift of SOE stakes provides a strong source of funding to the social security funds, Lu Quan, secretary general of the China Association of Social Security, told AsianInvestor.


The  NSSF and the provincial pension managers will receive the investment returns in the form of dividends and not involve themselves in the operations of the SOEs. They are also banned from selling down the stakes within the first three years of holding the stakes, even if the SOEs in question are listed on public markets during this time, according to the new rules.

In addition, the returns made from these SOE assets can only be invested in bank deposits, treasury bonds issued in the primary market, or securities issued by the SOEs.

To ensure they comply, pension fund managers will have to report the relevant financials to  regulators by the end of June in each year, the rules said.

The investment restrictions are largely the same as the current ones set for provincial pension managers, due to the poor investment capabilities of local governments. Provincial pension funds can only invest in bank deposits or local bonds. NSSF, however, can also invest the funds in the local equity market.

Where a local government has transferred its pension assets to the NSSF for better investment management, NSSF has to meet a 95% probability of positive investment returns for the provincial pension fund scheme, so its allocation to relatively risky equity investments is low. 

NSSF was managing Rmb703.28 billion of provincial pension assets as of end 2018.

The conservative investment management of provincial pension assets is one of the reasons why there is a shortfall in the public pension system, because its return is so low, Appleton said.

“Obviously, if the assets are diversified overseas, or [allowed to invest] into equities, it will help to grow the assets and reduce the gap,” she said.

At present, authorities focus more on safety rather than returns, so only low-risk assets are allowed. However, investments should be diversified over the long run, Quan said.

The investment rules are too restrictive now. They should be relaxed to allow overseas and equity investments, albeit with risk-control measures such as a risk-reserve fund, Quan said.

*The announcement was jointly made by the Ministry of Finance, Ministry of Human Resources and Social Security (MOHRSS), State-owned Assets Supervision and Administration Commission, State Taxation Administration and China Securities Regulatory Commission.

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