Local governments in China are very likely to entrust more pension assets into hands of the National Social Security Fund (NSSF) after provincial assets managed by the latter more than doubled last year, according to industry experts.

The move is probably lead NSSF to farm out some of these additional assets to local third-party asset managers, which will drive their pension coverage businesses.

Many of China’s 34 provincial-level administrative units keep a large part of their pension assets in low-returning bank deposits, and just 17 allocate some of their assets to NSSF. This will not help to meet the retirement needs of China’s rapidly aging population, said Stuart Leckie, a Hong Kong-based independent specialist who has previously advised the Chinese administration on its pension system, told AsianInvestor.

Provincial pension funds can only invest in these deposits or local bonds. NSSF, however, can also invest funds in the local equity market. That extra flexibility, plus NSSF's higher investment expertise, is likely to lead more provinces to give some of their pension assets to NSSF for better investment returns, he predicted.

The NSSF’s basic pension insurance fund, into which provincial assets are placed, has already benefited from this trend. It had assets of Rmb703.28 billion ($98.2 billion) as of end 2018, a big jump from the Rmb315.52 billion it reported at the end of the previous year, according to the annual report of the National Council of Social Security Fund (NCSSF), which manages the pension fund.

The increase in assets was likely due to more provinces handing assets over for management. In August last year, Shanghai and Sichuan provinces engaged in talks with NSSF about transferring more assets.

By the end of 2018, 17 provinces, regions, or municipalities had agreed to transfer Rmb858 billion in assets to the state pension fund for a five-year period. Of this total, Rmb605 billion has already been booked in NSSF’s account, according to NCSSF’s annual report about entrusted funds released last week.

The NCSSF offers the provincial funds an unspecified minimum guaranteed investment return over the five-year period. To ensure it can meet this it has set a specific target of a 95% probability of positive investment returns for the provincial pension fund scheme, its allocation to relatively risky equity investments is low.

It's stipulated that NSSF can only allocate up to 30% of provincial pension assets to equity, and it can allocated a maximum of 14% of external mandates into the asset class. 

The provincial pension assets are separately managed from NSSF’s Rmb2.24 trillion reserve pension fund and are independently audited. The reserve fund will be used a supplement or adjustment for social security when the problem of aging population peaks, official documents show. It’s not clear whether the reserve fund has been used since being set up in 2000.

FOR EXTERNAL MANAGERS

Leckie noted that China’s provincial governments prefer to entrust the pension assets to NSSF instead of appointing third-party asset managers, because most lack the competence to select and oversee them.

Local governments also do not want to be blamed or take the responsibility if external managers cannot meet the target returns, he said. In contrast, NSSF outsourced 65.08% of the provincial pension assets to external managers as of 2018, while the rest were direct investments, its annual report shows. 

The upshot of the NSSF continuing to receive more provincial fund assets is that it will likely allocate more to external asset managers. However, the proportion of outsourced investments for such assets dropped from 70.38% in 2017 to 65.08% last year.

 

2017

2018

Direct investment

29.62%

34.92%

Outsourced investment

70.38%

65.08%

Investment asset (Rmb, bn)

315.52

703.28

Despite this drop, Leckie said he didn’t believe that NSSF has yet begun to actively embark on additional asset insourcing. Janet Li, Mercer’s wealth business leader for Asia, also noted that the decision to insource or outsource is not easy to make.

Asset owners have to consider whether they have the expertise and resource to manage investments when determining whether to insource or outsource. Possessing the right expertise is especially important in the private markets space, which requires more specialised expertise to identify investment opportunities, Li told AsianInvestor.

Investors interested in the strategies of China’s asset owners can learn more at AsianInvestor's sixth Institutional Investment Forum China on September 18 in Beijing. Please click here for more details.