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China’s pension sector set to ‘balloon’
Read: 2275 Publish: 2012/5/22 15:16:55

China, as commentators have been saying for some time, will grow old before it grows rich. This demographic time bomb has even been referred to as China’s Achilles heel. But Howhow Zhang, head of research at Z-Ben Advisors, a Shanghai-based consultancy, sees it as a huge opportunity for both foreign and domestic fund managers.

In a report last month, Z-Ben forecast that assets under management in China’s pension system will “balloon” from Rmb7.4tn ($1.2tn) at the end of 2012 to Rmb28tn by 2020.

It sees growing opportunities for foreign managers from each of China’s three broad sectors of the pensions industry: the National Social Security Fund (NSSF), enterprise annuities (EA), and the insurance industry.

China’s state pension promise, such as it is, kicks in surprisingly early. Retirement ages are currently set at 55 for women and 60 for men – although there are proposals to raise these ages to 60 and 65 respectively. Responding to that promise and the diktats of a rapidly ageing population and high inflation, the government set up the NSSF in 2000 as a “strategic reserve fund” to underwrite public pension funds and established a council to administer it (the NCSSF).

The NCSSF has been awarding mandates to foreign managers for overseas investment every two years since 2006, and has been the most lucrative source of pensions business for foreign managers so far. It already makes significant investments in overseas markets with probably 60 per cent of its overseas allocation in the US and perhaps 20 per cent in Europe. Although its onshore mandates have been won by domestic fund management companies such as China AMC, Bosera and E Fund, foreign managers have won nearly all international ones. More mandates are expected to be announced later this year.

While NCSSF is the largest current source of pensions business for foreign managers it also promises to be a growing future source too. The NCSSF last month embarked on a pilot scheme to handle Rmb100bn in pension investment for the Guangdong provincial government. This is quite a sensitive issue in China as it is the first time a local pension fund has handed over management of pension assets to a central government body, although the NCSSF has already been acting as an adviser to many provincial governments.

Mr Zhang says the investments will be handled extremely cautiously. “I believe all of the Rmb100bn will be invested in the home market,” he says. “It will be critical for the NCSSF not to lose any of the principal.”

However, if the investment goes well, it could open the market to further mandate transfers and potential opportunities for foreign managers.

Outside the NCSSF foreign managers are also expected to gain from attempts to boost the enterprise annuity and insurance markets.

EA schemes are sponsored by companies and have been going for less than 10 years (set up in 2004). Similar to defined contribution schemes such as US 401k plans, they have been slow to take off, partly because the government has provided little tax incentive for participating employers, Mr Zhang says. But more EA licences are being issued and foreign joint venture fund management companies already number on the list of mandate winners to date – bringing the promise of more opportunities for foreign managers.

While the vast majority of China’s pension assets are invested in China there is likely to be a growing demand for diversification. At the moment EA schemes are required to invest at least 70 per cent in bonds and none of the schemes have any overseas exposure, but Mr Zhang expects this situation to change.

The insurance industry, which has been offering private retirement products for 20 years, is not subject to such tight regulation, but there is still a great deal of caution surrounding the topic of overseas investment following the huge losses suffered by Ping An through its investment in Belgium’s Fortis.

“The terror was shared,” Mr Zhang says, and insurance companies remain wary of investing overseas.

Nonetheless insurance companies too are expected to be a rich future source of mandates for foreign managers, and are already talking to overseas fund managers such as Fidelity.

“The insurance companies recognise the benefits of diversification and look forward to being able to invest [more] overseas,” says Chris McNickle, head of global institutional business at Fidelity Worldwide Investment.

Fidelity is no stranger to the Chinese market. The group was one of the foreign managers awarded a mandate for overseas investment by the NCSSF when its last round were given out in 2010 and Mr McNickle says Fidelity has been doing business in China for nearly two decades. But he, like Z-Ben, is expecting huge growth in opportunities for foreign managers in the near future.

He says regulators are acutely aware of the urgent need to create retirement savings vehicles now for a population that is going to age rapidly over the next two decades.

“They are taking a lot of interest in overseas experience,” he says. “They are reaching for the expertise asset managers have managing pension money around the world.”


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