Stirling Finance chairman Stuart Leckie has stressed the need for China to set up a pensions regulator as well as train a new generation of social security officials in capital markets investment.

“The human resources and social security ministry is dealing with everything including the state social pension pool, state individual pension accounts, the new rural pension system plus enterprise annuities,” says Leckie of Stirling Finance, a Hong Kong-based pensions and investments adviser.

“It is unusual for a ministry to have so many responsibilities. There should be a pension regulator.”

AsianInvestor contacted Leckie to ask his view after local media reported this week that Beijing had moved to liberalise its entrenched system by allowing the National Social Security Fund (NSSF) to manage some provincial public pension assets.

Leckie is an authority on this topic, having written Pension Funds in China, a look at China’s pension reform journey from 1949 to 2004, as well as Investment Funds in China.

According to the reports, an unspecified province in southern China (speculated to be Guangdong) received permission to allocate Rmb100 billion ($15.8 billion) of its state individual account pension money into the NSSF for investment management.

Shanghai-based consultancy Z-Ben advisors noted that Guangdong had the country’s largest public pension balance of Rmb227.6bn in 2010, making it a logical choice. It expects wealthy provinces such as Jiangsu and Zhejiang to follow suit if the trial proves successful. 

Finding an experienced investment manager for public pension funds has become a priority for China, given that average returns for mandatory individual accounts within the public pension funds system stands at a disappointing 2-2.5% per annum.

Largely that can be put down to the fact that local social security bureaus in China are restricted in their investment options to bank deposits and government treasuries.

“In the short run, NSSF is the best solution to improve returns,” Leckie tells AsianInvestor. “If you look at the provinces, officials at social security bureaus don’t understand the stock market and are not well equipped to hire asset managers.

“So in the longer term you’ve got to train a whole cadre of officials who will be equipped with investment knowledge to hire and fire managers and improve returns.”

Z-Ben is of the view that NSSF’s investment performance, strategy and experience make it one of the most suitable choices to receive mandates from regional pension funds.

“It has a similar risk appetite to many regional social security bureaus, maintaining high exposure to bond products such as financial and corporate bonds,” Z-Ben writes.

NSSF would enhance returns by gradually increasing public pension funds’ exposure to stocks and mutual funds, suggests Z-Ben, pointing out that the social security fund already invests 30-40% of its own assets into equity products.

But it’s not yet clear how NSSF would manage the Rmb100 billion, or whether there would be any restrictions imposed.

Leckie notes that if the mandate is managed as a segregated account, the portfolio would most likely be invested purely domestically. However, if it is added into the main NSSF asset pool, this is currently 7% exposed to overseas investments in line with NSSF's present portfolio allocation.

He is of the view that the government is timing the initiative to boost sentiment for the A-share market. “What is happening here is partly to solve the pension problem and partly to boost the stock market,” Leckie adds. “The need for better pension fund returns has been clear for years now. What is new is the State Council worrying about the stock market’s poor performance.”

On January 17 when news of the Rmb100 billion NSSF injection was reported in local media, the A-share market rallied 4.18% during the trading day – its strongest one-day rebound in more than two years.