May 02, 2017 08:19 PM

China Pension Funds Take Baby Steps Into Stock Market

(Beijing) — China’s national social security fund has started pouring some of the country’s vast pool of pension money into more-risky investments such as stocks, corporate bonds and other fixed-income securities to boost returns and help fill a widening deficit.

Seven provincial and municipal governments, including Beijing and Shanghai, have signed contracts to entrust a total 360 billion yuan ($52.1 billion) from their pension funds to be managed by the National Council for Social Security Fund (NCSSF). As of March 31, 137 billion yuan had been received and is now being invested, the Ministry of Human Resources and Social Security (MOHRSS) said last week.

The government is seeking ways to defuse a pensions time-bomb that’s ticking ever louder as the world’s most-populous nation faces a rapidly aging society and a lack of resources to pay a basic retirement income to tens of millions of people. The decision to allow pension funds to invest in riskier assets to generate higher returns is part of a multipronged strategy to tackle the problem.

“The pension-fund system is facing increasing risks due to the aging crisis of the Chinese population, with an increasing number of people reaching their retirement age and starting to draw money from it and fewer people contributing to it,” said Yang Yansui, head of Tsinghua University’s Social Security Research Center. The center published a report in April that highlighted the deteriorating sustainability of the pension fund system and its growing dependence on fiscal subsidies from the central government.

Traditionally, funds contributed by urban workers and their employers into the state pension plan have been collected and managed by local governments. Given the lack of investment expertise at the local level and to minimize the risk of losses, they are allowed to invest the money only in bank savings deposits and government bonds, but that has also led to lower returns. In the decade through 2014, the average rate of return of the state pension fund was only around 2%, lower than the rate of inflation, the MOHRSS said in an August 2015 report. The return was 2.32% in 2015, the latest year for which figures are available.

In contrast, the National Social Security Fund (NSSF), the strategic reserve fund used to supplement the social security spending of local governments, recorded a 15% return on investment in 2015, 11.4% in 2014 and 6.2% in 2013. From 2000, when the fund was set up, until 2015, the annual average rate of return was 8.82%, 6.74 percentage points higher than the official annual average inflation rate over the period, government data show.

The higher returns are partly due to the fund’s ability to put its money into a much broader range of investments, including listed and nonlisted equities, fixed-income securities and overseas assets. The NSSF is funded in a variety of ways, including fiscal allocations from the government, the transfer of state-owned capital such as shareholdings in state-owned enterprises (SOEs), and dividends paid by SOEs.

The government has been cautious in its approach to allowing local governments to invest pension funds in more-risky assets. It started with a pilot program in 2012, under which Guangdong province became the first to entrust some of its pension pot to the NCSSF, followed by Shandong province in 2015 and Guangxi province in January.

In August 2015, the State Council, China’s cabinet, issued a regulation allowing all provincial-level governments that had a surplus in their pension funds to transfer part of the excess to the NCSSF to manage. It also gave the go-ahead for the money to be invested in riskier assets with potentially higher returns such as listed and nonlisted equities, government and corporate bonds, negotiable certificates of deposit, futures, asset-backed securities and major infrastructure projects.

Given the stock market collapse in the summer of 2015, the bond market rout late last year and the increasing number of bond defaults, the risks involved in these types of investments are a concern, but the MOHRSS offered reassuring words last week.

“Pensions are a lifesaver for a vast number of retirees,” ministry spokesperson Lu Aihong said at a briefing. “As we invest, we will give top priority to security of the funds and safeguard against risks.”

Increasing returns on the investment of pension funds is just one of a series of changes the government is contemplating to deal with the growing pressure on its finances from the country’s aging population.

Under China’s social insurance system, all urban workers and their employers must make monthly payments into a pension fund that is managed by their respective local governments. In addition to suffering from poor returns, these funds are now obligated to pay out more than they are receiving in contributions. In 2015, revenue from pension contributions grew by 12.6% while payments rose by 18.7%. In 2014, the funds collectively recorded their first deficit, which amounted to 132 billion yuan, and the gap widened to 280 billion in 2015, according to MOHRSS data.

The shortfall was made up by subsidies from central and local governments, who added 355 billion yuan to the pool of funds in 2014 and a further 472 billion yuan in 2015. Yang from Tsinghua University estimated that 70% to 80% of the money came from the central government.

“The situation will get worse as the aging problem becomes increasingly serious,” said Fang Lianquan, a researcher who specializes in social security systems at the Chinese Academy of Social Sciences (CASS). “The dependence on fiscal aid will intensify, especially for poorer provinces that cannot cover their pension obligations with the revenue from contributions.”

By the end of 2020, the country will have 255 million people at least 60 years old, accounting for more than 17.8% of the total population, an increase of 1.7 percentage points from 2015, when the number was around 222 million, official data show.

The aging of the population will accelerate in the next decade and by 2030, 25% of the estimated total population of 1.45 billion, or about 360 million people, will be 60 or older, according to the National Demographic Development Plan 2016-2030, published by the State Council in January. That’s more than the entire population of the United States.

In an effort to slow the impact of the demographic changes and ease the burden on public finances, the government had loosened its decades-old one-child policy, abandoning it completely in October 2015 by allowing all couples to have two children as of the following January.

At the other end of the spectrum, the government is proposing to raise the official retirement age that urban workers become eligible to start collecting their state pensions. That currently stands at 50 for female factory workers, 55 for female public-sector workers, and 60 for men.

The plan is to raise the retirement age by a few months each year as of 2022 so that eventually, women will have to wait until they are 60 and men until they are 65 before they can start to receive their state pensions

Yin Weimin, the minister in charge of the MOHRSS, said at a briefing in March 2015 that detailed plans of the new policy would be unveiled in 2017, but not implemented until 2022 after a transition period. However, at a news conference in March this year during the annual session of the National People’s Congress, Yin said only that the government would be “very prudent” in formulating the policy and did not give any new details.

There has been opposition to the proposals. A survey conducted by the Chinese Academy of Social Sciences in 2016, which sampled 24,000 people across 38 Chinese cities, showed that 39% of respondents disagreed with the plan, while 30% supported it and 31% said they were unsure.

The government also needs to do more to encourage people to save more for their retirement to ease the burden on the state system.

“Companies should be encouraged to build enterprise annuity funds as a complement to the public pension fund, and individuals should also save up for their retirement,” Tsinghua University’s Yang said.

The enterprise annuity system, a voluntary occupational pension system, was introduced in 2004. But the initiative has made little progress over the past decade partly because of the government’s refusal to offer tax relief to employees on their contributions and because investment income and payments are taxed.

The government introduced a similar occupational pension program for civil servants and employees in the public sector back in 2015, partly due to increasing public discontent that they were being subsidized by the private sector. Public sector workers did not contribute to the main state pension fund but were drawing more-generous retirement benefits.

One of the most difficult problems facing the government is how to deal with the growing regional imbalance in the pension system.

Six provinces had pension fund deficits in 2015, when they paid out more than they received in contributions, according to the 2015 China Social Security Development Report compiled by the MOHRSS. Three of those — Heilongjiang, Liaoning and Jilin — were in the northeast region, known as the rust belt, which has been hit hardest by economic slowdown and the decline in heavy industries such as steel manufacturing and coal mining. The lack of job opportunities has led millions of workers to move to more prosperous regions, especially the southern coastal provinces.

Official data show that there was a net outflow of labor from Heilongjiang of about 346,000 from 2011 to 2015, which has contributed to the strain on the pension system, according to a social development report on Heilongjiang published by the Social Sciences Academic Press in 2017.

By contrast, Guangdong, the country’s main export hub and the biggest province in terms of gross domestic product, had built up a surplus of 615.8 billion yuan in its public pension fund by the end of 2015, official data show.

But because pension funds are under the management of provincial governments, the central government can’t take money from the funds of provinces running a surplus to give to those with a deficit.

“We should set up a pension management system under central government direct control to deal with the fund deficits in some provinces,” Tsinghua University’s Yang said. This would allow the central government to transfer the surplus of rich provinces to the most needed poor regions. But such a proposal is likely to encounter opposition, especially from wealthier provinces.

“The rich provinces will be reluctant to make contributions to poor regions at the cost of their local interests,” said Fang from CASS. “This won’t bring any benefits for them and may even force them to raise their contribution thresholds for local workers.”

Allowing local authorities to invest part of their retirement funds in riskier assets to boost returns brings the management of pensions into line with international practice. But it represents just one small part of the complex overhaul needed to avert a pensions crisis.

Contact reporter Pan Che (

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