New investment channels opened for pension funds

Updated: 2012-03-22 13:41


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BEIJING - Speculation over investment plans for China's fast-depreciating pension funds settled on Tuesday after the National Council for Social Security Fund (NCSSF) said it has been entrusted by south China's Guangdong province to manage 100 billion yuan ($15.8 billion) of the funds.

The move marks the first step in the country's efforts to preserve and increase the value of its vast, locally-managed pension funds, which were previously parked in banks or used to purchase treasury bills with low returns.

Statistics showed that as of the end of 2011, basic pension funds managed by local governments neared 2 trillion yuan.

However, the massive funds have seen their value eroded significantly by inflation over the last decade.

Based on the one-year interest rate, the annual yield on deposits averaged at around 2.88 percent over the last decade, while the consumer price index (CPI), a main gauge of inflation, grew between 3 percent to 6 percent over the last few years, resulting in huge losses for the funds.

Opening new investment channels for pension funds is a must for China, as it faces a huge challenge in caring for its increasingly large elderly population, experts said.

"Pushing for the investment and operation of pension funds is a natural trend. The NCSSF has rich experience in this area," said Huang Zemin, director of the Institute of International Finance at East China Normal University.

Statistics from the NCSSF, which manages the country's fiscal allocation of security funds, showed that it has managed to garner an average annual return of 8.41 percent since its establishment in 2000.

China's stock market received a lift on the news, as investors believe the NCSSF will put some of the money into the market. The benchmark Shanghai Composite Index opened 0.33 percent higher on Wednesday to reach 2,384.71.

To ease public concerns regarding stock market risks, the NCSSF said it will allocate most of the money to fixed-income products over the coming two years in a "prudent manner."

It did not say whether it will put money in the capital market.

Analysts said even if the NCSSF uses the money to buy stocks, the proportion will likely be very low.

China's pension program consists of three separate funding sources: the national social security fund, supplementary pension funds supplied by enterprises and self-paid funds under the management of local governments.

The former two allow investment and operation under certain regulations. For example, the ratio of bank deposits and treasure bill purchases to other forms of investment should not be lower than 50 percent for national social security funds; the ceiling for stock investment is 40 percent.

Huang said the government should come up with a similar investment framework for locally-managed pension funds as well.

"The regulation should specify a ratio for pension funds allowed for investment and that allowed for financial assets investment. We should learn from and make timely adjustments to Guangdong's pilot program," he said.

Dai Xianglong, chairman of the NCSSF, said the management of the pension funds should proceed step-by-step.

He said investment in stocks should be "long-term, value-oriented and responsible."