PROJECT M
 
PROJECT M
Li Keping

Preparing for China’s peak aging

China created the National Social Security Fund (NSSF) in 2000 to develop a long-term strategic reserve to finance social security expenses. Li Keping discusses future plans

© Eric Gregory Powell

Preparing for China’s peak aging

China created the National Social Security Fund (NSSF) in 2000 to develop a long-term strategic reserve to finance social security expenses. Li Keping discusses future plans


PROJECT M

How does the NSSF, which is now over $120 billion, fit into China’s social security system?

Li Keping

Strictly speaking, the NSSF does not fall into any of the five types of mandatory social insurance defined within the social security system, nor is it part of the contribution and payment system of social insurance. But broadly speaking, the NSSF is indeed a component of China’s social security, as it serves as a support and reserve fund.

PROJECT M

What does the NSSF mean in calling itself a “strategic reserve fund”?

Li Keping

To understand the nature of the NSSF, you need to appreciate: one, that it is a “long-term” fund not used for social security payments in the current year; two, that it is an “extraordinary” fund to be used only when there is salient need or when major difficulties occur because of structural changes to social security; and three, that it is a “reserve” fund that serves as a cushion and stabilizer. In addition, the NSSF is a “national” fund, that is, it serves the entire country and not just one or two provinces or municipalities.

PROJECT M

What is the goal in terms of the annual rate of accumulation?

Li Keping

In 2010, the goal was set that the Fund should reach 1.5 trillion RMB ($227 billion) by the end of 2015. It is expected that by the end of 2010, the Fund will grow to 800 billion RMB ($121 billion). At this rate, we hope the Fund can have a compound annual growth rate of 13% in the coming five years.*

PROJECT M

How much of that do you expect to earn from investments versus government allocation?

Li Keping

Among the total assets over the past 10 years, 55% has come from government allocation and 45% from investment proceeds. The Fund has registered a good annual rate of return of 9.7% over the past 10 years. Given the future trend of economic growth and market development, as well as growth of the Fund, the rate of return might drop to some extent. In order to achieve the accumulation rate of 13%, the government allocation needs to assume a bigger portion.

PROJECT M

The NSSF is a ‘national’ fund, that is, it serves the entire country and not just one or two provinces

How does the government determine its annual allocation?

Li Keping

There are three main sources of government funding. The first is from the central budget and based on the overall consideration of annual government revenue and expenditure. There is a baseline, but it is not stable. Before 2009, this was the largest source. In 2009, the government recommenced the transfer of shares of state-owned enterprises to the Fund. This is now the major source of funding. The third is an automatic annual transfer of a proportion of public lottery proceeds into the NSSF. By the end of 2009, among all government funding, the central budget comprised 43%, the transfer of state-owned shares was 41.1% and public lotteries 15.9%. For years the NCSSF and some experts have recommended that the government add more funding channels, such as transferring other kinds of state-owned assets or resources. We will do more such lobbying in the future.

PROJECT M

The NSSF has studied reserve funds in other countries. What did you learn?

Li Keping

First: funding. In the long-term interest of the nation and society, the central government needs to raise more funds for the NSSF and ensure the continuous and steady inflow of funds through legislative means. Second: liability. The nature of NSSF as a social security reserve, in particular for old-age pensions, determines the long-term investment objective of the Fund. During its accumulation period, the Fund could take relatively high risk to an extent so as to avoid short-term disruption and achieve higher investment returns. Third is the independent and professional operation of the Fund. Government reserve fund management institutions are often created with an inadequacy in terms of governance. There should be some redesign to allow the governance structure of the NCSSF to transform itself into a special asset management institution to maximize the interest of the Fund.

PROJECT M

What are the principles underlying investment policies in terms of domestic and foreign investment?

Li Keping

As a long-term reserve, the NSSF takes China’s future demographic trend and potential payment needs as the foundation when drawing long-term strategic objectives. As a result, the investment horizon is 15 to 20 years and the long-term yield set to be 200 basis points higher than inflation. This is the basis of our strategic asset allocation (SAA) and other investment decisions. Of course, in practice, we also need to take into account the regulations about the scope and proportional limit of certain asset classes, as well as the investment room provided by the market.

PROJECT M

How do you determine the allocation to fixed-income investments, such as bank deposits and treasury bills, versus equities? How do you determine what portion to allocate to investment overseas?

Li Keping

Our regulators have set proportional limits for both fixed-income and equity investment. Based on analysis of the risk and return of various asset classes, we work out a five-year rolling SAA plans in line with the need to steadily realize the long-term yield objective. As for sub-classes, such as bank deposit and treasury bills, we allocate these based on a consideration of factors such as return and liquidity. According to regulations, investments overseas should be no more than 20%. While drawing the SAA plan, overseas investment is allocated, taking into account diversification, regional market features and an asset’s particular characteristics.

PROJECT M

Are you satisfied with the results from domestic and foreign mandate investment?

Li Keping

In general, domestic external managers have performed well. Over the past seven years, since outsourcing of domestic investment commenced, the yield objective has been met and even exceeded with significant alpha. Foreign investment outsourcing started three years ago, so the time frame is too short to properly assess the performance of foreign external managers, especially as the global financial crisis had an impact. Up to now, performances have varied immensely – some managers are better than others. We are considering how to improve the style of managers and the structure of products. We are also adding passive products for optimization reasons.

PROJECT M

One of the biggest challenges for the NSSF is how to realize fast fund accumulation

How was investment performance during the financial crisis?

Li Keping

Prior to the crisis, based on the analysis of fundamentals and for risk control, we had significantly lowered the equity position through SAA and rebalancing. Despite this, the NSSF encountered a loss of 6.79% in 2008. After the crisis, we undertook countermeasures by adhering to investment disciplines and strict rebalancing, which produced good results. One lesson we learned is to keep a degree of flexibility in asset allocation and portfolio management, so as to make dynamic adjustments based on the analysis of fundamentals.

PROJECT M

What do you think are the biggest challenges of the NSSF?

Li Keping

I am of the view that one of the biggest challenges for the NSSF is how to realize fast fund accumulation. Thanks to continuous fund raising and accumulation of investment proceeds, it is expected to grow to 800 billion RMB ($121 billion) by the end of 2010. However, the circumstances remain pressing: the size and growth rate of the Fund still lags far behind the pension needs of the population at the aging peak. We still have a long way to go to achieve that. In addition, we need to turn the NCSSF into a real fund asset management institution with a professional governance structure, talent recruitment and operation.

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