New system needed to invest pension fund

By Zheng Bingwen

China Daily, July 15, 2015

Monday was the deadline for the pension fund investment plan to solicit public opinion. On June 29, the Ministry of Human Resources and Social Security and the Ministry of Finance jointly issued a draft guideline for managing the basic pension fund and solicited public opinion.

In 2013, the Third Plenum of the 18th Central Committee of the Communist Party of China decided to strengthen the management and supervision of the social insurance fund investment, and facilitate the marketization and diversification of their operations.

Since the State Council advocated deeper reforms of employees' basic pension funds in 1995, China has established a basic pension insurance system. In the first 10 years from 1995, the accumulated fund was limited and, hence, there was not much pressure to increase its value.

The investment system requires pension funds to be deposited in banks or to be used to purchase national debts. But with the gradual increase in the coverage of basic pension insurance and financial subsidies, the consolidation of personal accounts and the introduction of rural and urban social pension insurance systems in the past decade, the scale of urban and rural basic pension insurance funds has increased tenfold, from 326 billion yuan ($52.5 billion), 297.5 billion yuan in urban employees' pension insurance funds and 28.5 billion yuan in rural social pension insurance funds in 2004 to 3.56 trillion yuan, 3.18 trillion yuan in urban employees' pension insurance funds, and 380 billion yuan in urban and rural resident social pension insurance funds in 2014.

The demands of the new era can no longer be met by just depositing the pension funds in banks. The less than 2 percent rate of returns of the banks means more than a 100-billion-yuan loss considering the growth rate of the consumer price index (about 4.8 percent since 1993). Compared with the rate of return of enterprises' supplementary pension funds, 7.87 percent since 2007, the potential loss is more than 300 billion yuan. And compared with the rate of return of the National Social Security Fund (8.38 percent since 2001), the potential loss is over 540 billion yuan. Therefore, to increase the pension funds' value, a diversified and market-oriented investment system is needed.