Lou Jiwei, an outspoken and reform-minded politician in China, has stepped down as the chairman of National Council of Social Security Fund (NCSSF), just two years after taking up the role to help upgrade China’s pension system.

Liu Wei

The 68-year old is succeeded by Liu Wei, previously vice minister of finance, a source familiar with the situation confirmed to AsianInvestor. He is the NCSSF’s fifth chairman since it was set up in 2000. 

Rumours about the replacement circulated last week within financial circles amid speculation over the causes of his surprise exit. Some said it was because of his age, others cited his outspoken characterAsianInvestor cannot confirm either reason.

What is clear, though, is that Lou is well regarded by some within the investment industry.

“He (Lou) is among the smartest people that I have ever seen,” an institutional sales head at a global asset manager, told AsianInvestor on condition of anonymity.

At the time of his appointment, it was also suggested that he would be in the role for four years.

Lou Jiwei

Noting how Lou was previously with sovereign wealth fund China Investment Corporation (CIC) and then at the finance ministry, the sales head said he had brought a more forward-looking approach to the National Social Security Fund (NSSF) and had helped to improve its investment performance.

The state pension manager oversees the central NSSF, which had total assets of Rmb2.22 trillion ($331 billion) as of end 2017, as well as provincial pension assets of Rmb315.52 billion. NSSF has enjoyed an 8.44% annualised investment yield since 2000.

The three former chairmen who headed NCSSF before Lou, as well as new chairman Liu, were also at the country's ministry of finance before heading to the state pension manager. Liu, 58 years old, became the deputy finance minister in early 2017.

“I think there will be a policy continuation at NCSSF, in line with reform and opening up,” the institutional sales head said.

Lou was named one of AsianInvestor's top-20 pension executives in 2018.

GRAVE CHALLENGE

The reserve NSSF and provincial pension assets form the first, state-run pillar of China's multi-pillared pension system. It's a social security system under growing strain due to the country's rapidly ageing population.

The National Academy of Economic Strategy estimated that the funding gap in the pension system reached Rmb600 billion ($87.7 billion) in 2018 and will widen to Rmb890 billion by 2020.

Meanwhile, Liang Hong, chief economist at China International Capital Corporation, estimates the present value of the accumulated funding gap between 2018 and 2050 at Rmb56.6 trillion – or 68.4% of Chinese GDP in 2017.

As such, the pension fund is under pressure to raise its investment returns and has been urged to lift its equity allocation cap from 40% to 60%. In 2017, NSSF made Rmb184.61 billion in equity investments, earning an investment yield of 9.68%. Nine provinces, in addition to those whose pension assets it already manages, will also start handing over investment mandates this year to NCSSF to help improve their returns. 

To further help plug the shortfall, China has initiated an ambitious plan to shift stakes in its state-owned enterprises (SOE) to the NSSF. The idea was previously touted by Lou when at the ministry of finance.

But progress to date in that respect has been slow, spurring Lou to repeatedly call for faster transfers of such state-owned assets. Most recently, in December 2018 and January this year, 10% stakes in People's Insurance Company of China (PICC) and China Taiping Insurance were transferred, respectively, by the ministry to the NCSSF.

China’s pension insurance system is also “highly fragmented” and “unsustainable” and the already huge fiscal expense required to plug the funding shortfall will get even larger if the problem is not fixed, Lou said late last year.

Financial subsidies used to support insurance pension funds for the urban employed and rural populations and to provide basic medical cover amounted to Rmb495.51 billion, Rmb231.92 billion and Rmb491.87 billion, respectively, as of end 2017, the government has said.

By "fragmented', Lou was referring to the decentralised management of the comprehensive social security system, as responsibility for it is shared by 32 different administrative units.

To bring more order and consistency to the system, the State Council in July created a new centralised adjustment fund, which takes more funds from provinces with contribution surpluses and gives them to those with more retirees.

But the degree of fragmentation runs deep, with different pension systems in different provinces and different levels of pension protection for different people – for example, employees in private corporations versus civil servants, Lu Quan, secretary general of China Association of Social Security (CASS), has told AsianInvestor.