China to select pension fund consultants in May

The Asian Development Bank expects to award two technical assistance (TA) mandates before the end of May to help implement both China's nascent experiment in pension reform in Liaoning Province as well as the new National Council for Social Security Fund, according to Hong Wei, senior financial economist at the ADB's Beijing office.

The mandates have been in the works for over a year, and are being awarded in consultation with the National Council, the Ministry of Finance and the Liaoning provincial government. The winners of the two mandates will be paid a combined $1 million from ADB's technical assistance fund for their work.

Wei declined to name the shortlisted candidates, which include North American fund management companies (FMCs), accounting firms and pension consultants, all of which have had some TA experience with the ADB or the World Bank. Some applicants are bidding for both mandates.

Liaoning Province, a gritty northeast region hard-hit by closing rustbelt enterprises, has been chosen to launch a pilot programme in pension reform in which pensions are organized at the provincial level, instead of at the municipal or county level. The funds are to be isolated from government spending budgets in order to establish a fully funded scheme that will be complemented by corporate plans and private savings.

The consultant's job will be to help set up an information system to administer the scheme, make actuarial analyses, collect contributions and pay benefits.

The National Council was founded in early 2001 to accumulate pension money from various means including privatizations in order to cover shortfalls at the provincial or central level. For now it is only to cover Liaoning but if that pilot succeeds, it will roll out nationally. At present its budget consists only of transfers from the central government's budget. Wei declined to discuss the current asset size, which remains a guess among other market players.

There is, therefore, a need for the National Council to invest its funds, and over time it could well become Asia's biggest institutional investor. For now all its investments are expected to be domestic û bank deposits and loans, equities and government and corporate bonds. Wei says final guidelines on investment will be released soon by the National Council. But it lacks the expertise, particularly for investing in equities.

The consultant's job will be to manage this process: establish prudential regulations, select investment managers, set up a monitoring capability. Up to a third of the National Council's assets will be invested in domestic equities. Investment mandates are most likely to be restricted to local FMCs, although many of them are in talks to sell minority stakes to foreign partners. Other foreign fund managers are also in talks with Chinese securities companies to establish FMC joint ventures.

Although Wei would not speculate on when the pension fund will move offshore, outside fund managers have speculated this could occur within five years. Wei does believe, however, that once a consultant is chosen, it will take about a year to implement its plan for investment management. Nonetheless the National Council may well begin other investments beforehand.