China takes action to boost pension funds China takes action to boost pension funds

China takes action to boost pension funds
26 Jan 2018

China is to transfer some state assets, including shares of state-owned companies (SOEs) and financial institutions, into the country's social security funds in a bid to strengthen them financially.

Due to an aging society putting pressure on pension payments, the assets will be transferred to both the National Council for Social Security Fund (NCSSF) and wholly state-owned companies, official documents have revealed. The transfer ratio will be 10% of state-owned equity.

The details

  • Under certain circumstances, and subject to approval by the authorities, the NCSSF can set up a pension fund management company to independently operate the transferred assets;
  • The NCSSF, along with local SOEs that receive the equity, can earn dividends from SOE shares and will have the right to dispose of them. But there will be a three-year lock-up period before it is possible to sell the transferred shares. The NCSSF and SOEs will not be involved in companies’ management decisions;
  • Pilot programmes began in 2017 in which shares were transferred to a number of centrally-supervised SOEs and two central financial institutions. In 2018, more centrally supervised companies will be added to the mix, with assets transferred in groups;
  • The programme will only involve a small number of listed SOEs, with most having non-listed central and local SOE equity.

The problem

With more than 200 million people over the age of 60, China has enormous pension obligations, according to English language news website, Xinhua. Moreover, in areas where economic growth is behind the national average such as the old industrial base in the northeast, fewer people have paid contributions but many have retired, resulting in a deficit.

The authorities have been striving to increase pension fund revenues by expanding coverage and raising fiscal investments. Pensions are traditionally held by banks or used to purchase treasury bills but can now be invested in a variety of financial products, including bonds and stocks.

Meanwhile, since the end of 2016, seven provincial-level regions have entrusted their pensions to the NCSSF in the hope of more diverse and higher returns.

According to previous estimates by China International Capital Corporation, a 6% transfer rate of SOE shares to social security funds would result in a one percentage point reduction in basic pension contribution rates for companies.

This move would significantly lower corporate costs and boost the growth of the capital market as social security funds could become large, long-term institutional investors in it.

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

China is to transfer some state assets, including shares of state-owned companies (SOEs) and financial institutions, into the country's social security funds in a bid to strengthen them financially.

Due to an aging society putting pressure on pension payments, the assets will be transferred to both the National Council for Social Security Fund (NCSSF) and wholly state-owned companies, official documents have revealed. The transfer ratio will be 10% of state-owned equity.

The details

  • Under certain circumstances, and subject to approval by the authorities, the NCSSF can set up a pension fund management company to independently operate the transferred assets;
  • The NCSSF, along with local SOEs that receive the equity, can earn dividends from SOE shares and will have the right to dispose of them. But there will be a three-year lock-up period before it is possible to sell the transferred shares. The NCSSF and SOEs will not be involved in companies’ management decisions;
  • Pilot programmes began in 2017 in which shares were transferred to a number of centrally-supervised SOEs and two central financial institutions. In 2018, more centrally supervised companies will be added to the mix, with assets transferred in groups;
  • The programme will only involve a small number of listed SOEs, with most having non-listed central and local SOE equity.

The problem

With more than 200 million people over the age of 60, China has enormous pension obligations, according to English language news website, Xinhua. Moreover, in areas where economic growth is behind the national average such as the old industrial base in the northeast, fewer people have paid contributions but many have retired, resulting in a deficit.

The authorities have been striving to increase pension fund revenues by expanding coverage and raising fiscal investments. Pensions are traditionally held by banks or used to purchase treasury bills but can now be invested in a variety of financial products, including bonds and stocks.

Meanwhile, since the end of 2016, seven provincial-level regions have entrusted their pensions to the NCSSF in the hope of more diverse and higher returns.

According to previous estimates by China International Capital Corporation, a 6% transfer rate of SOE shares to social security funds would result in a one percentage point reduction in basic pension contribution rates for companies.

This move would significantly lower corporate costs and boost the growth of the capital market as social security funds could become large, long-term institutional investors in it.

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

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