China mulls allowing pensions to invest overseas

Faced with the growing task of funding an ageing population, China may allow some retirement funds to invest overseas to spread the investment risks more effectively and enhance returns.

To that end, new investment guidelines could be in the offing, official China news media reported last week, potentially generating more business for fund managers.

The Ministry of Human Resources and Social Security (MoHRSS) is thinking about allowing overseas investments by corporate pension funds, Economic Information Daily under state news agency Xinhua reported on Thursday.

“For the second pillar, investments are only limited to the domestic market. When referencing international experience, starting overseas investment is an effective way to diversify risk and enhance yields", Tang Jisong, director of supervision bureau at the social insurance fund at MoHRSS, said in the news report.

In keeping with World Bank guidelines, China’s retirement system comprises three “pillars”. The first comprises the National Social Security Fund and provincial public pension funds (PPFs); the second is made up of enterprise annuities (EA) and occupational annuities (OA); and the third covers individual pension schemes. 

The voluntary EA scheme is for both state-owned and private companies, while OA is a compulsory retirement scheme for civil servants.

As of end 2017, about 80,400 companies had set up EA schemes, in which over 23.31 million participating staff have accumulated Rmb1.3 trillion ($199 billion). The investment yield was 5% last year, according to the news report.

China has made efforts to promote the development of its second pillar with the new rules implemented earlier this year. The contribution cap in EA schemes was lowered to encourage more companies to participate, among other measures.

Employer contributions are capped at 8% of an employee’s total salary in the previous year, while the total contribution from employers and employees is capped at 12%, according to the new rules.  Previously, corporate contributions were capped at 8.3% of the previous year’s salary, and the total contribution was capped at 16.6%.

However, lowering contribution caps and relaxing rules on overseas investments would only address part of the problem, and arguably not the most important part.

Since most businesses aren't expert when it comes to investing, they should theoretically outsource retirement savings for external management. But Tang said there are no legal rules covering EA and OA investments as yet.

The absence of regulations combined with the lack of tax incentives have dragged on investment returns and made corporates less willing to entrust funds to third parties, Wu said.

Most EA scheme sponsors also have concerns when farming money out to external fund managers due to a lack of clarity on management fees.

All that may explain why, as Wu Haichuan, head of retirement business at Willis Towers Watson (WTW), told AsianInvestor on Monday, most Chinese companies use passive investment strategies for their pension funds.

Based on client feedback, Wu said both companies and pension savers in mainland China wanted more tax incentives, as well as more choice, to select investment plans that could be tailored to individual risk-and-return profiles -- similar to the Mandatory Provident Scheme (MPF) in Hong Kong.

Aware of such concerns, further guidelines were set to be introduced, Guo Jianhua, an official at the social insurance division of the MoHRSS, said in the news report.

FIRST PILLAR TOO

While new rules for the second pillar of pension provision could benefit fund managers, possibly foreign ones too, in the long run, more imminent changes that could lead to more assets under management for onshore managers may happen sooner under the first pillar.

Without citing sources, Economic Information Daily said the Ministry of Finance and MoHRSS could initiate entrusted investments for the Rmb 631.8 billion that is contributed by rural residents as early as this year.

At present, the pension savings of rural residents are managed at the provincial level but most of the money just sits in bank accounts or is put in safe investments with low returns. So the potential reform being signalled via official media would be positive for fund managers, Wu of WTW said. 

That said, other attempts to put China's public pension system on a more sound footing have been moving along at a slow pace. An ambitious plan initiated in November 2017 to shift stakes in state-owned enterprises (SOE) to the country’s public retirement system for the urban employed, for example, has yet to bear any significant fruit.

The transfer of state-owned capital to pension insurance funds has so far been low and slow. Only two provinces and five SOEs are in the pilot schemes and these have still not yet been officially implemented.

Both the scale and speed of the transfer have to be enhanced, Tang said.

The pension fund balance for the urban employed stood at Rmb3.85 trillion as of end-2016, according to the MoHRSS. 

Zhang Yiqun, head researcher at the Jilin Province Department of Finance Scientific Research Academy, said in a media report on June 13 that the SOE transfer could pump at least Rmb10 trillion into China’s pension system.

To offer more insights on investing in China, AsianInvestor is hosting its 5th China Global Investment Forum in Beijing on September 13. For more details contact Minal Khilani via email or on +65 65790103.