NSSF urged to lift equity allocation cap to 60%

Industry experts say a proposal by a member of China’s top advisory body to allow the state retirement fund to invest more in equities should be extended to overseas stock purchases as well.
NSSF urged to lift equity allocation cap to 60%

A proposal to increase the equity investment limit of China’s National Social Security Fund (NSSF) to 60% from 40% has received a thumbs-up from industry experts, who believe it will offer the fund the opportunity to generate higher returns.

Jiang Yang, a member of the Chinese People's Political Consultative Conference (CPPCC), presented the proposal at a CPPCC meeting on economic affairs on March 5 in Beijing. He said the move would encourage longer-term funds to flow into China’s capital market, thereby ensuring greater stability.

In addition, the NSSF should also be allowed to invest in risk management tools such as equity index futures and options, he was quoted as saying, according to a report by the China Securities Journal.

Jiang is also the former vice chairman of the China Securities Regulatory Commission (CSRC). The CPPCC is China's top political advisory body.

The NSSF, the reserve fund that supports the pension pay-outs of China’s 23 provinces and some other special regions, had Rmb2.22 trillion ($319.6 billion) in total assets at the end of 2017. It is managed by the National Council for Social Security Fund, which also manages provincial public pension fund (PPF) mandates.

Stuart Leckie, a Hong Kong-based independent specialist who has previously advised the Chinese administration on its pension system, said the recommendation for higher equity exposure is welcome, even though the intent of the proposal is not necessarily to improve NSSF’s investment return.

“NSSF started off [being] very conservative. They just put money in government bonds and bank deposits,” Leckie explained. 

Stuart Leckie

The NSSF has to invest at least 50% of its funds in bank deposits and government bonds.

The fund can afford to take on more investment risk, which can generate higher returns over the long term.

However, the 20 percentage-point proposed increase should not be limited to local equities, but should be extended to overseas equity investments as well, Leckie added.

Of course, the managing council will need to take several factors into account before making any decision, Leckie noted.

“What type of equities should it [NSSF] get into? Should it be Chinese, international or even private equity? What kind of fees should it consider? What will be the benchmarks [if external mandates are given out]?”

China’s A-share market, while brimming with much potential, is currently considered highly underdeveloped, dominated by sentiment-driven retail investors who pay little attention to fundamentals.

Local authorities have been trying in recent years to encourage more institutional investor participation in a bid to make the market deeper and more liquid.

Heavy retail participation makes Chinese equities highly volatile and state-owned entities like Central Huijin and China Securities Finance Corporation (CSFC), dubbed the “national team”, often have to step in and inject stability by buying stocks when the market fluctuates violently.


At the March 5 meeting, Jiang also proposed workers should be permitted to choose their own investment plans under enterprise annuities (EAs) schemes.

The benefits of that, however, are debatable, according to pension industry specialists.

EAs come under the ‘second pillar’ pension insurance schemes that supplement China’s social security fund. Under this pillar, employees and employers contribute voluntarily to personal retirement accounts.

China Merchants Securities estimated that EA schemes collectively had Rmb1.35 trillion in assets at the end of June 2018.

Currently, the employer mainly decides on the investment plan under an EA scheme that is eventually adopted by all employees in the company.

Under Jiang’s proposal, individuals will be able to make their own investment choices. That is similar to the Mandatory Provident Fund (MPF) scheme in Hong Kong, Zhang Howhow, partner at KPMG China, told AsianInvestor.

“This is definitely something positive….in the past, all staff used the same investment portfolio no matter how old they were [and how much savings they have]. This certainly has to change,” he said.

Under EA rules released by the Ministry of Human Resources and Social Security last year, employers and employees negotiate on the terms of the annuity plans that the company adopts, including how much money each side should contribute (the cap on both sides is 12% of an employee’s salary), investing the pension contributions and managing pay-outs.

Leckie, however, is less enthusiastic about the idea, given that financial literacy levels in China are very low.

“China is not ready for that [having people make individual investment choices on their pension plans]. Even in Hong Kong, we can’t do that properly...people need to be educated for a while [before they become financially aware],” he said.

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