China’s National Council for Social Security Fund could be set to increase third-party outsourcing after its assets under management broke the Rmb1 trillion ($163 billion) barrier for the first time.

The council, which released growth and investment figures late last week, saw assets surge 27% to Rmb1.1 trillion – far outpacing 2010 and 2011 growth, notes Shanghai-based consultancy Z-Ben Advisors.

New sources of capital included a Rmb100 billion local pension fund mandate from Guangdong province and Rmb64.7 trillion in realised and unrealised investment returns.

The government, meanwhile, injected Rmb52.6 billion into the fund, a modest 9% year-on-year increase. This was low chiefly because of a suspension in initial public offerings, causing share contributions into the fund from state-owned enterprises to sink 54% from the previous year.

Worryingly for regulators, there is Rmb2.4 trillion in underfunded individual pension accounts. This means NCSSF cannot rely on progress in asset management, but needs government injections to be increased, notes Z-Ben – which will likely happen if public listings get back on track on the mainland.

For 2012 the council managed 59% of the public pension fund’s assets internally, mandating out the remaining Rmb455 billion externally.

It recorded an investment return of 7.01% for 2012. Interest income from bonds and deposits and the positive effects of the year-end rally on fair value change contributed some 70% of total returns, or Rmb32.8 billion.

But while fixed income is a mainstay, alternative investments (particularly private equity) made significant strides, providing Rmb356 million in returns – a 233% year-on-year increase. The council invested in four private equity projects in 2012, and two more year to date – bringing its total to 19.

Further, the fund also diversified its portfolio to include onshore allocations in unlisted companies, infrastructure and social housing, while it also tapped into offshore alternative assets.

“If the fund continues to increase its exposure to onshore and offshore equity and alternative assets, we expect the portion of mandated assets to rise,” notes Z-Ben in a research note. “Moreover, if more provincial pensions warm to the idea of entrusting assets to NCSSF, the fund will look externally to lighten the load.”

This would mean more work shared among external fund houses, including international managers. This could be considered more likely given that the Guangdong pension mandate experiment has been a success, ending in a 6.8% return in the second half of last year.

While no other provinces have stepped in to follow Guandong’s lead, there are plenty of candidates with excess pension funds in need of more efficient deployment.

Z-Ben suggests this won’t happen until regulators hammer out new pension reform, but adds: “This reform will happen sooner rather than later, as recurring low investment returns and mounting liabilities are becoming harder for central policymakers to swallow.”