China pension fund reforms to boost alts investments

China’s pension investment reforms are likely to lead to new mandates being issued to domestic mutual fund managers alongside an expansion into alternatives, say analysts.

The Chinese government this week outlined reforms to the country’s public pension fund (PPF) including plans to expand its investment scope in order to boost the fund’s value.

The new policies are likely to help the government fulfil spending commitments such as infrastructure funding, after years of conservative investment policies at the $500 billion state pension fund.

Yin Weimin, minister of human resources and social security (MoHRSS), on Wednesday said his office would submit proposals for a new PPF Investment Management Approach to the State Council in the second half.

Market observers said the new investment strategy would unveil detailed regulations for PPF investments, including their scope, eligible managers and risk management requirements.

Under current rules, the PPF can only put its funds into government bonds and deposits, while offshore investment is not permitted; Shanghai-based consultancy Z-Ben Advisors described this as an “extremely conservative portfolio”.

At the annual meeting of the National People's Congress in Beijing last week, Yin said the investment strategy was having a corrosive effect on the pension capital.

“The advantage is safety, but it cannot enhance value,” he said. “[PPF’s] investment returns are lower than inflation, which means its value is depreciating [in real terms].”

MoHRSS, which supervises the PPF, plans to include equities in the investment scope, as well as so-called ‘investment projects’, which includes infrastructure development. Yin said the MoHRSS will design the investment policies and hand out mandates to investment managers in order to minimise risks and better select investment targets. He stressed that the strategy’s goals were diversification and safety.

Constance Tan, an analyst at Z-Ben, said domestic mutual fund managers were likely to receive mandates from MoHRSS to manage the PPF’s money.

Z-Ben said that the potential investment scope would be similar to those of enterprise annuities (EA) schemes, the National Social Security Fund and insurers’ onshore investments.

The consultancy said it expected alternative assets to be a target for PPF investments after the reforms because Beijing had wanted to encourage investment in the real economy to help develop the country’s infrastructure.

There are currently three major asset owners in China’s pension system – the PPF, EA schemes and commercial private plans.

The PPF scheme managed assets worth a total of Rmb3.06 trillion ($488.8 billion), covering 840 million pension contributors, at the end of 2014. MoHRSS has not disclosed the fund’s investment return at a national level, which is made more difficult to calculate by the fact that the PPF is managed by provincial governments.

Government employees’ pensions are set to be brought into line with the private sector’s requirements, which marks a steps towards Beijing’s goal of centralising the PPF’s operations, as reported in January.