Chinese enterprise and occupational annuities funds have been permitted to invest up to 40% of their investment portfolio into equity assets and invest into Hong Kong-based assets, according to new rules released by the Ministry of Human Resources and Social Security (MOHRSS) in China, effective January 1.

The rules change means the annuities funds, which form part of the country's retirement system, can increase their allocations from a current upper ceiling of 30%. In addition, the MOHRSS reform will let them invest into Hong Kong-listed preferred shares, asset-backed securities and interbank deposit certificates, among others.

The new rules are part of the Chinese government’s ambition to reform its pension system, in order to ensure it provides higher investment returns. It is an increasingly urgent goal.

As of mid-2020, enterprise and occupational annuities funds in China had Rmb1.98 trillion ($306.58 billion) and Rmb800 billion in assets, respectively, according to MOHRSS’s second quarterly report for last year. Of these, invested enterprise annuities recorded a 3.9% gain for the previous 12 months.

The relatively low rate of return was likely due in part to the domination of fixed income annuities over equity-focused funds. China possessed 358 fixed income funds with almost Rmb1 trillion in invested assets as of June 30, versus 170 equity-focused annuities with a combined Rmb94.4 billion in assets, according to the report.

Equities have of late provided far better returns. The Shanghai Stock Exchange Composite Index rose 27% in 2020 and the SZSE Component Index climbed more than 40%, whereas the FTSE Chinese government bond index’s three- to five-year category offered a 2.9% yield in November.

SLOW ADOPTION

Despite the potentially higher returns on offer in equities, experts believe it will take some time for the annuities funds to fully adopt them.

Liu Shichen,
Z-Ben Advisors

"We might need some time to see significant equity allocation increasing, since the pension system is following a conservative and lower risk tolerance investment mode,” Liu Shichen, head of research at Z-Ben Advisors, told AsianInvestor.

“The increase in such asset will be gradual. A rush into one single class of asset is never healthy,” he added.

It will also take time for the annuities funds to shift assets into Hong Kong. However, investment experts say the decision to let them do so makes sense given the ongoing and increasing links between the mainland and Hong Kong financial markets.

“Cross-border investing will be one of the main topics in the following years, no matter which area, “Janet Li, wealth business leader for Asia at Mercer, told AsianInvestor.

En Xuehai, chief investment officer of global asset allocation and retirement investment at China International Fund Management (CIFM), added that investing into Hong Kong equities will increase the annuities funds’ portfolio diversification, and that it sets the stage for a potential broader global diversification of the retirement assets of the funds.

He noted that individual savers and companies might also be tempted to put more money into China’s annuities retirement funds if Beijing offers them “higher, more significant tax benefits for individuals and corporates, systematic retirement account management and diversified investments”.

EARLY FOR FURTHER EXPANSION

Several investment executives believe the liberalisation should be followed by further expansion of the focus of Chinese retirement funds.

Wu Haichuan, head of retirement for China at Willis Towers Watson, believes the annuities funds should be allowed to invest into other markets as well, with an array of investment options provided to the end-contributors, similar to Mandatory Provident Fund schemes on offer in Hong Kong.

Currently, companies that offer annuities funds to their employees in China appoint a third-party asset manager to do so, and these tend to only provide a very small number of choices.  

Expanding the investment options available would better meet the needs of contributors, depending on their risk appetite and their age. However, it would also require better investor education, professional financial planning knowledge and foreign currency exchange reform, Wu noted.

Janet Li, Mercer

That is unlikely to happen overnight, but it is possible that the Chinese government could come up with separate and special-designed policies designed to support a broader array of overseas investment products in its pension pool, said Li from Mercer.

She echoed that the new rules are expected to provide more flexibility and diversification, but that merely expanding it into one more market still leaves the funds exposed to sizeable geographic risk.

“Especially under the aging population pressure, when contributors in China are about to take all annuities out from their own market when they get retired, [geographic asset] diversification is the most important thing,” she said.

Li echoed Wu’s views that investor education will be a pre-requisite before the government gives a broader array of investment options for annuity contributors their own investment decisions. Fail to do so, and retail investors could ramp up their level of market risk without considering the dangers, which could hurt their level of savings and cause negative market effects too, she noted. 

En Xuehai, CIFM AM

“A relatively conservative investment strategy and multiple restrictions in investment practice are mainly because the regulator is still trying to protect contributors from huge loss for their retirement money,” agreed Wu at Willis Towers Watson. “Obviously, [limiting investment options means contributors] also missed out on higher returns."

He believes that, in longer term, the MOHRSS needs to remember that the priority of the pension system will be to ensure good levels of investment return, and not hew to a conservative strategies that barely beat inflation.

 “Equity and fixed income investments should be around a 60:40 proportion in longer term, ideally,” Wu added.

The annuities funds are part of the second pillar of China’s retirement system. The first pillar consists of the national social security fund (NSSF) and provincial public pension funds; while the third covers individual pension schemes.

The NSSF is currently the largest of the pillars by assets, possessing Rmb2.63 trillion as of the end of 2019 and offered a 14% return on equity investments for the same year. It had 90% of its assets invested onshore, and 10% in offshore markets, according to its 2019 annual report.

Story updated to clarify job title of En Xuehai of China International Fund Management.