China's new retirement rules to set a rocket under FOFs

China's latest consultation paper regarding the rules surrounding pension products looks set to heavily promote fund-of-funds as a key structure for such voluntary funds.
China's new retirement rules to set a rocket under FOFs

China’s newly-released draft rules on pension products focus on fast-tracking closed-end funds-of-funds as a key retirement vehicle, which is likely to ramp up investments into these products, say market experts.

The draft rules were released by the China Securities Regulatory Commission (CSRC) on November 3. A key goal of the proposed regulations is for investors to maintain investments for extended periods via closed ended retirement funds that only open periodically or with minimum holding periods.

Notably, these new types of product are likeliy to be fund of funds (FoFs), a stipulation that will likely embolden this new product.

The paper only specifically mentioned FoFs as a potential retirement vehicle, and it extensively discussed specifications of the underlying funds of an FoF. That’s a heavy hint the CSRC wants FoFs to spearhead the development of the third pillar of China’s retirement industry. 

The draft rules did not make clear whether FoFs would be the only authorised investment vehicle for retirement funds, or a preferred structure. Either way, the imminent new rules are set to lead funds to flow from bank deposits into the mutual fund industry via FoFs, Hao Kang, chief investment officer of ICBC Credit Suisse Asset Management, told AsianInvestor.

"Many fund managers, including us, are developing [FoFs]. We established a team focusing on FoFs last year...will add more manpower when we see a lot of demand," he said.

This is not the first time the CSRC has shown its interest in promoting pension products. In May the regulator released a similar set of draft rules, which considered FoFs and vanilla mutual funds as appropriate investment vehicles for retirement vehicles. Those rules were never finalised.

Third pillar needed

The CSRC's desire to push a third pillar of volantary private saving funds makes a lot of sense, given the country's aging population and inadequate saving levels for retirement

Unlike the country's first pillar, which consists of social security, or the second, in which employers help employees save for retirement, the third pillar is comprised of individuals choosing to place money into pension funds for their eventual retirement. But relatively little has been saved here.

“Demand from the society is huge, because the two pillars are not enough and there is a need for the third pillar. But there are not a lot of products for investments for the third pillar.” Wu Haichuan, head of retirement in China at investment consultancy firm Willis Towers Watson, told AsianInvestor.

“It [the draft rules] breaks an opening for [eating into] the market. For sure they [asset managers] welcome it.”

If implemented well, FoFs could be used to diversify the risk within retirement funds. Small investors can gain exposure to a variety of assets in different funds with fewer risks. Several funds are managed professionally to achieve broad diversification and appropriate asset allocation, the type of expertise that average investors may not have. 

“Mutual funds in general do not involve the [strategy] of asset allocation, but there must be asset allocation in FoFs. So from a regulatory point of view, funds for pension purposes must follow the idea of asset allocation,” Rachel Wang, director of Chinese fund manager research at investment research firm Morningstar, told AsianInvestor.

The upshot of this is that FoFs will, if the rules are enacted, see a surge in demand, and lead to a great deal more product creation. “The impetus [for FoFs] will for sure be better [when the rules are implemented],” said Hao.

FoFs upsurge

The CSRC has already been eager to encourage funds of funds creation. Six asset managers received regulatory approvals to issue FoFs in September, to a decent market reception.

China Southern is the first fund house to roll out a FoF in China and raised Rmb3.3 billion ($496.97 million) in October. Subscription period was closed 10 days earlier because it was over-subscribed. The other five asset managers have also launched their FoF products.

Wu argued that these rollouts mean the market is starting to understand FoFs, which should encourage more investments. He added that the CSRC is trying to control risks and protect investors’ interests by setting high standards on the underlying funds, such as specific requirements on their scales and investment performance

FoF product producers are quick to extol the benefits of investing via the products. “These products [pension funds] have longer operations and FoFs can better ensure consistencies in the investment styles of the funds and guarantee steady value growth,” a spokeswoman for Chinese asset manager Harvest said in an emailed reply to questions from AsianInvestor. 

She added that Harvest believes the new rules will benefit the development of FoFs in the short run, and that it is researching the types target date funds and target risk funds mentioned in the consultation paper to consider products.

However, some market observers say FoFs are facing obstacles to realise their growth potential in China, among which is a lack of investment professionals conversant with FoFs. Most retail fund managers operating on the mainland tend to concentrate on certain types of asset classes. But FoFs need to be able to correctly allocate assets across multiple asset strategies. 

Additionally, they might not prove to be the only long-term solution to China’s need to save more for retirement.

As the pension fund industry gradually becomes more mature in the future, other sophisticated asset allocation strategies may emerge and mean the development of pension products other than FoFs, the Harvest spokeswoman said.

The public is invited to submit their opinions before the consultation ends on November 18. CSRC did not reply to AsianInvestor’s email query on the fastest possible time to implement the new rules.


1. Closed-ended funds, open periodically
Pension products should be closed-end funds but are open to investors on a periodic basis. The length of the closing period depends on the proportion of equity in the fund. The higher the equity proportion, the longer the closing period.

2. Standard of underlying funds
Pension products are proposed to operate in the form of FoFs. The underlying funds should have been operating for at least three years and the quarter-end net asset value on average for the last three years cannot be lower than Rmb300 million. They should also perform better than their benchmark during the period.

3. Eligibility of fund management companies
The fund managers should be established for at least two years, have a minimum of 20 staff, and have at least three portfolio managers who are specialised in pension products (with a minimum five years of related experience each).

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