China’s National Council for Social Security Fund is in talks with the authorities in Shanghai and Sichuan province about transferring more pension assets to it in order to help improve returns as the ageing country edges towards funding its pension system on a more sustainable basis.

Whether some of that money ends up being managed externally, however, remains unclear. 

Shanghai plans to increase its entrusted assets with the state pension fund administrator by Rmb30 billion ($4.4 billion), while Sichuan province is preparing to entrust it with Rmb100 billion for the first time. 

In a press briefing on Monday, Lu Aihong, a spokesman for the Ministry of Human Resources and Social Security (MoHRSS), said the National Council for Social Security Fund (NCSSF) and Shanghai and Sichuan provinces were now preparing to sign off the relevant investment mandates.

As of end of June, a total of 14 provinces, regions, or municipalities* had entrusted NCSSF with a total of Rmb585 billion, of which Rmb 371.65 billion was entered into NCSSF's accounts and invested. The investment yield generated on these assets last year was 5.23%.

Provincial pension assets come under China's public pension fund (PPF) scheme and are drawn from compulsory direct contributions made by individuals. They form part of the first pillar of China’s multi-layered pension system.

The bulk is managed internally but the NCSSF has previously awarded four external PPF mandates.

Previously, each province managed all PPF assets themselves. However, as of last year 13 local governments, covering almost a third of the Chinese population, were reported to be unable to fully cover their pension expenses just from worker contributions.

To boost PPF investment returns, some retirement assets were brought under the aegis of the NCSSF and their investment scope widened to include listed company shares, with a 30% allocation cap. Until then they could only invest in bank deposits and bonds.

Investments in these assets are still restricted to onshore markets and external PPF mandates have an equity weighting of just 14%. (NCSSF has a 95% probability target for positive investment returns from PPF schemes, which helps to explain this low allocation to relatively riskier equity investments.)

That stands in contrast with the National Social Security Fund (NSSF), the reserve pension fund also managed by NCSSF, which has about Rmb1.9 trillion in assets under management (AUM) and can invest overseas as well as allocate up to 40% of its assets in listed company shares.

NCSSF picked four domestic fund managers for its first PPF equity mandates in August last year.

NEW CENTRALISED FUND

The MoHRSS, separately, is expected soon to release detailed implementation rules covering a new centralised adjustment fund that will seek to smooth out any contribution discrepancies among the urban employed in each province, Lu said.

The new fund was outlined in a State Council announcement published last month. China's various provinces, regions and municipalities will contribute to the fund, with payments based on the average salary and number of workers in each. Payments from the fund will then be distributed according to the number of retirees in each area.

The system, officially launched on July 1, aims to reduce the overall shortfall risk in retirement funds and is a first step towards the establishment of a national pension insurance system, the Chinese government said.

The fund will be managed via a segregated account under the central social security fund. Money will be contributed and distributed each quarter, with the accounts cleared and settled together at the end of each year, it said. 

MoHRSS is now mapping out specific implementation rules based on the State Council’s requirements. These are due to be released soon so each of the provinces taking part can make their first contribution in the third quarter, Lu said. 

This pool of capital will unlikely involve any investment activity, Shanghai-based Wu Haichuan, head of retirement business for Greater China at Willis Towers Watson, told AsianInvestor.

The adjustment system being contemplated is not a panacea for the pension-funding challenges facing China due to the uneven contributions being made across the country, seeing as young people are constantly moving to the big cities in search of better job opportunities, Wu warned.

A nationalised pension system is the ultimate solution but it is unlikely happen any time soon because each territory has its own management platform and contribution requirements, he said.

Under the new plans, any underfunded provincial governments will receive support from the centralised adjustment fund before having to lean on their fiscal budgets. The NSSF will be the last resort for pension payments.

*The 14 provinces, regions, or municipalities comprise Beijing, Shanxi, Shanghai, Jiangsu, Zhejiang, Anhui, Henan, Hubei, Guangxi, Chongqing, Yunnan, Tibet, Shaanxi and Gansu.

For more insights on investing in China, AsianInvestor is hosting its 5th China Global Investment Forum in Beijing on September 13. For more details, visit the website or contact us on +852 2122 5262.