China’s Rmb989 billion ($161 billion) state pension fund looks set to boost its offshore and private equity allocations in light of new proposals clarifying its investment scope.
Last week the State Council launched a public consultation on proposed rules governing the National Social Security Fund (NSSF), with submissions permitted until December 26. The regulations were drafted in August 2012, but have been studied and amended over the past two years.
Among other things, the proposals will clarify the fund’s investment scope and relax certain restrictions. At present, NSSF’s overseas allocations can be only funded by sales of shares in mainland stated-owned enterprises to foreign investors.
This could mean the Chinese government would allow NSSF’s domestic assets to be invested overseas, said Ivan Shi, analyst at Shanghai based Z-Ben Advisors.
Details of how this would operate are due to be announced in guidelines that would need to be approved by State Council after the consultation, he added.
“The fund has not decided how much to increase its overseas allocation in 2015, it will need to wait for the final decision from the planning and research department,” said a senior executive at NSSF, who preferred to remain anonymous.
He confirmed separately that the fund would likely add overseas PE allocations in the next few years, pending approval from the finance ministry and the ministry of human resources and social security. But he declined to offer any indication of the target exposure.
At present, NSSF can allocate 20% of its portfolio to foreign assets. It had Rmb100 billion in overseas assets – 10% of its AUM – as at the end of 2013, according to Z-Ben, all through external mandates.
The proposals also clarify that NSSF can expand its allocations to unlisted equity – this has never appeared in past regulations. What’s more, the new rules mention investment safety as a principle objective – as previously – but the objective of liquidity has been omitted. Hence NSSF could be allowed to increase exposure in long-term investments such as private equity and infrastructure projects, said Z-Ben.
NSSF had already added investments in infrastructure projects last year, noted Shi.
Dai Xianglong, ex-chairman of the National Council for Social Security Fund, which manages the NSSF, said the fund allocated to 13 PE and venture capital funds in 2011 and considered investing in up to nine more PE funds in 2012.
NCSSF has 14.17% of its portfolio in fixed assets, which includes PE funds and long-term equity investments in state-owned enterprises, according to its annual report for 2013, published in July this year.
Another objective of the latest proposals is to improve the NSSF’s supervision system, according to a supplementary document. It further clarifies the legal responsibilities of domestic and foreign asset managers and custodians. It also requires the pension fund to disclose its portfolio balance and investments regularly to the public, but it does not suggest a frequency of disclosure.
The proposal to improve supervision comes after the National Audit Office’s report that the fund lost Rmb6.9 billion on its index investments between 2010 and 2013.
NCSSF reported investment returns of 6.2% in 2013 and 7.01% in 2012, and an average return of 8.13% since its inception in 2000, as of the end of last year.
NSSF’s assets increased by Rmb30 billion in the first half to hit Rmb1.02 trillion. The fund’s annualised return since it was set up in 2000 was 7.95% as of end-June this year.
NCSSF is also running personal pension insurance account and mandates from Guangdong Province. NCSSF managed total assets of Rmb1.24 trillion at the end of 2013, which includes the Rmb989 billion in the NSSF and the Guangdong money.