China’s Shandong province has handed a Rmb100 billion ($16 billion) mandate to the $230 billion social security investment fund, in a bid to boost returns.
Shandong’s move makes it only the second province, after Guangdong, to entrust the national retirement fund with its pension pot.
It comes amid ongoing national attempts to reform China’s pension fund management, which includes considering alternatives and handing out overseas mandates.
Shandong and the National Council for Social Security Fund (NCSSF) reached agreement on its mandate in January, and the first transfer of Rmb10 billion has been made. A Shandong government official confirmed the mandate to AsianInvestor, while the NCSSF declined to comment.
According to the Dazhong Daily, Shandong’s official newspaper, the province applied to the State Council for permission to issue the mandate in July 2013. The province received approval in June 2014, and Shandong and the NCSSF signed the agreement in January this year.
“This is a five-year mandate, but NCSSF will not charge any management fee during the period,” Zhang Baishun, a senior pension official in the Shandong government, was reported as saying by Dazhong Daily. “We repeatedly emphasise safety and both parties made agreements on principle capital protection. NCSSF has made a guarantee on the investment return rate.” However, the report did not reveal the mandate’s guaranteed return rate.
Jin Song, an analyst at Shanghai-based Z-Ben Advisors, said that cities in the province had been competing over the proportion of the Rmb100 billion which they will contribute. Cities will receive a share of the investment returns based on their contribution, and it is believed allocated proportions had now been settled.
The first province to hand over a mandate to the NCSSF was Guangdong. In February 2012, the Guangdong government gave a Rmb100 billion two-year mandate to NCSSF. Both Shandong and Guangdong have agreed on a guaranteed return rate with NCSSF. In Guangdong’s mandate the rate is required to be above forecast inflation.
China’s assets in the provincial public pension fund (PPF) schemes are only allowed to invest in bank deposits and government bonds. Such investments have returned 2.5% on average over the past five years, while the average inflation rate is 3.4%, according to the Ministry of Human Resources and Social Security (MoHRSS). This compares with the National Social Security Fund’s (NSSF) 8.36% average annual return since 2000 and the Guangdong mandate’s 7% average annual return over the past three years.
Chinese media has speculated on the possibility of the Shandong mandate since October last year, after various NCSSF officials visited the province in the second half. Guo Shuqing, Shandong’s governor, made the mandate one of the province’s goals earlier this year.
Z-Ben’s Jin said that Shandong had been chosen for the mandate because it had both the second-largest provincial pension surplus and also a strong willingness to reform its public finances. This reform drive has been evident since Guo Shuqing became Shandong governor in 2013.
Another recent reform in Shandong has been its establishment of the first Council for Social Security Fund (CSSF) at a provincial level. On March 19, a spokesperson for Shandong’s state-owned assets supervision and administration commission (Sasac) said the provincial government planned to transfer 30% of state-owned assets into the new local social security fund. The Shandong Sasac and CSSF will manage these assets in an attempt to reform state-owned enterprises and boost returns.
The accumulated assets of Shandong’s PPF reached Rmb193 billion at the end of 2014, after Guangdong, Jiangsu and Zhejiang. Z-Ben believes the next provinces to hand out mandates will be those which have the highest accumulated surplus in PPF, making Jiangsu and Zhejiang the prime candidates. However, no concrete details have emerged beyond speculation.
China’s national PPF’s assets reached Rmb3.1trillion at the end of 2013, while the MoHRSS has not yet released data for 2014.
The NCSSF managed a total of Rmb1.45 trillion in AUM at the end of last year, up 21.6% from Rmb1.2 trillion at the end of 2013. The NSSF’s assets hit Rmb1.24 trillion at the end of 2014, an increase of 24.9% from Rmb989 billion at the end of 2013.
In a speech last week, Xie Xuren, chairman of the NCSSF, said the NSSF has increased its exposure to alternatives, including four direct equity investment schemes and two venture capital funds. The fund also appointed eight overseas mandates in 2014. The NSSF has been issuing global mandates since 2006, and total AUM in its overseas mandates reached $14.2 billion at the end of 2014, representing 7% of its portfolio.