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SSF to Manage Guangdong Pension Fund Worth 100 Billion Yuan

03-27 15:16 Caijing
Inflation in China has hovered between 3-6 percent in recent years, prompting pension holders to look for new investment channels to prevent the value of their pension funds from shrinking.

By staff reporters Mo Li and Zuo Lin

After months of speculation, the dust has finally settled as to where Guangdong Province will invest 100 billion yuan of its pension fund.

Upon approval of the State Council, Guangdong Province signed an agreement with the National Council for Social Security Fund (SSF) on March 19 in Beijing, entrusting 100 billion yuan of its pension fund to the SSF. The agreement, initially for two years, will allocate a large percentage of the capital to fixed income products to prevent the value of the pension fund from shrinking. The funds will be put in place in stages.

This is the first time Guangdong Province has entrusted part of its pension fund for investment; it is also the largest amount of a local pension fund that has ever been entrusted to national fund operating agencies. Previously, the average return on the pension fund balance was just 2-3 percent, which is below the current inflation rate. As a result, calls for raising investment returns on pension funds have become louder in recent years.

Caijing learned that the preparations for the establishment of a national pension fund manager led by the Ministry of Human Resources and Social Security (MOHRSS) have been postponed, though not suspended altogether, due to the complex nature of the national pension system. However, the fact that Guangdong entrusted 100 billion yuan of its pension fund to the SSF indicates that the fund manager led by the MOHRSS will not be local pension funds' only option.

The SSF issued a bidding invitation on March 13, and all 18 organizations qualified to operate pension funds have replied by each offering more than two products, including fixed income products and equity products.

Statistics show that the SSF currently manages around 900 billion yuan in assets. Thus after the agreement with Guangdong is implemented, the funds managed by the SSF would exceed 1 trillion yuan.

In 2010, the annual balance of urban workers' basic endowment insurance in eight provinces including Guangdong and Jiangsu exceeded 10 billion yuan. Among the eight provinces, Guangdong ranked first nationwide.

An SSF spokesperson stated that a large percentage of Guangdong's entrusted funds would be allocated to fixed income products including government loans, bank deposits, corporate bonds, and financial bonds, which would generate a return rate no lower than the interest rate of time deposits during the same period.

A source close to the SSF said that the statement basically confirms the investment channels and minimum return rate of the funds. Though neither the SSF nor Guangdong had revealed specific investment return rates, it can be estimated that annual return rate would be around 6 percent, with a guaranteed minimum return rate of about 3.5 percent, added the source.

However, one industry veteran stated it is difficult for fixed-income products to generate a 6 percent return rate on a two-year term basis; hence a small percentage of the funds would be invested in highly leveraged stock products.

The source added that the SSF would decide on the allocation of capital to major categories of assets. Currently, the SSF simply picks out of existing social security fund managers. After all the application materials are submitted to the SSF, a panel of experts will assess the materials and come up with a list of finalists. Then, there will be a question and answer session with an emphasis on investment and risk control. The whole selection process will last about two months. Guangdong Province will inject the funds gradually, with a start-up capital of about 30 billion yuan. In the end, six to eight investment portfolios will likely be created.

In the past decade, the interest rates for one-year time deposits averaged a mere 2.88 percent; meanwhile, the inflation rate has remained at 3-6 percent in recent years, prompting pension holders to look for new investment channels to prevent the value of their pension funds from shrinking. This situation has made pension funds' entrance into the capital market inevitable, though the exact timing has yet to be decided.

China's endowment insurance system in which a social pooling account and personal accounts coexist is flawed. For historical reasons, funds in personal pension accounts have typically been diverted by local governments to make current pension payments, resulting in empty accounts. Since 2001, local governments throughout the country tried to make up for the holes by injecting capital into these accounts. Since personal accounts are set aside for long-term payments, there is a strong need to maintain and increase the value of their funds through accumulation over a long period of time.

Some industry insiders are worried the SSF may fail to realize its target return rate, which is no lower than the interest rate for time deposits in the bank over the same period. The SSF has invested in a wide variety of products, including equity products, PE products, fixed income products, and stocks. Last year, 70 percent of the SSF's total investment income came from equity investment and PE investment, which enabled the SSF to get a 5.58 percent return rate when the secondary market fell sharply as a whole.

1 yuan = 15 U.S. cents

Full article in Chinese: http://magazine.caijing.com.cn/2012-03-25/111774234.html

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