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Pension Fund Inches into the Capital Market amid Heated Debate

01-04 11:48 Caijing
The biggest obstacle confronting the pension fund’s injection into the capital market is that the fund is currently scattered in numerous accounts and held by over 2,000 organizations.

By staff reporters Zuo Lin, Mo Li, and Wang Xiaolu

After years of brewing, a portion of China’s national pension fund is now on the verge of being injected into the capital market.

Caijing learned that the current debate surrounding the issue focuses on “who the investor will be.” High-level officials at the central government are more inclined to set up a national investing arm under the State Council. The new entity would be a quasi-commercial organization similar to China Investment Corporation (CIC), the nation’s sovereign wealth fund. An investment management team would be formed to invest and manage the funds injected, to prevent the pension fund’s value from shrinking. A trust system would be applied in the programme, similar to the system adopted in the management and investment of corporate annuities.

Under this programme, the Ministry of Human Resources and Social Security (MOHRSS) would mainly be responsible for monitoring the capital, drawing up the investment and management programme, and supervising the implementation of detailed rules on issues such as risk management and information disclosure. In addition, the MOHRSS, the Ministry of Finance, and local governments will form a management board or council to participate in investor management.

Industry insiders contend that the local pension fund’s new investment model would be similar to that of the National Council for Social Security Fund (SSF), with some key differences. If the investor of the local pension fund turns out to be a commercial organization which has no access to certain investment channels, it is possible the investment manager selection could be expanded.

The investor and operator of the fund have not been determined, nor has the investment programme. Nonetheless, since the news became public, asset management agencies have been making active preparations. Agencies have taken the initiative to communicate with various departments in the MOHRSS and stay updated about policy trends and the fund’s progress, to pave the road for winning the right to operate the fund. A few agencies have even held discussions with the MOHRSS on possible investment programmes.

The Social Security Fund Investment and Management System designed primarily by the MOHRSS includes the capital in individual pension accounts. It also involves an over 1 trillion yuan balance in the social pooling account, as well as surpluses in four types of social insurance accounts, namely work-related injury, unemployment, medical, and maternity insurance. The system is expected to cover a total of about 2 trillion yuan.

However, many scholars contend that since China’s social pooling account adopts a PAYGO system, i.e. an unfunded system in which current contributors to the system pay the expenses for the current recipients, the capital in the account may be used to make pension payments at any time; in addition, given an increasingly aging population, the funds would soon be exhausted. Hence, it is difficult to use these funds to make long-term investments. Therefore, in the short run, only part of the 200 billion yuan in pension funds already deposited in individual accounts would truly enter the capital market.

In light of the current preliminary scheme put forward by potential investors, the biggest obstacle confronting the pension fund’s injection into the capital market is that the fund is currently scattered in numerous accounts and held by over 2,000 organizations. Integrating the capital into one account and bringing it under the management of a single national investment agency will prove difficult.

One industry insider stated that even if the government accomplishes the task through wielding its administrative power, trouble may still loom over the distribution of the unified account’s proceeds in the future, because the balances in individual pension accounts differ by region. Local governments suffering deficits in local pension funds are willing to hand over the funds; while local governments enjoying surpluses are hesitant to do so. Policymakers in China need to take all these factors into consideration, said the source.

Caijing learned that China’s securities regulator hopes that the pension fund’s entrance into the capital market will build up financial capital in the market and foster several high-quality institutional investors, so as to weaken industrial capital’s dominance and let the market play a better role in allocating resources.

The capital market did rise slightly with the news of the pension fund’s injection. Still, it is not enough to reverse the overall trend. After climbing 2 percent on Dec. 16, the Shanghai Composite Index dropped to new lows unseen in the past year.

1 yuan = 15 U.S. cents

Full article in Chinese: http://magazine.caijing.com.cn/2012-01-03/111587773.html

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