Pilot programs for reforming the investment system have been adopted over the past 10 years, but they had to be abandoned halfway because of public opinion. Pension funds investment is a difficult issue in social security reform. But if the two ministries' draft is implemented, China can use "Pay As You Go" market-oriented and diversified pension investment reforms and accumulate funds second only to that of Japan.
According to the draft, provinces will act as clients of pension funds investment, and the National Council for the Social Security Fund will be the trustee. The council will sign contracts with different investment managers that will invest in equity assets. The draft also fixes the maximum proportion of investment in equity assets at 30 percent of the net assets, the same as the investment for enterprises' supplementary pension funds but less than that of the National Security Fund (maximum 40 percent).
The overall pension fund is 3.56 trillion yuan, so the maximum funds for investment would be about 3 trillion yuan after reserving a part for pension payments. But in reality only about two-thirds could be turned over to the central authorities, which is about 2 trillion yuan. To reduce its impact on local social and financial development, hundreds of billions yuan are expected to be invested in the early stage, and the rest invested in parts every year. Moreover, after the pension insurance reform of government organizations and institutions, a payment balance of about 500 billion yuan would remain every year, which will go directly to the central trustee the same year.
As the central trustee, the National Council for the Social Security Fund will invest the pension funds, and the hundreds of billions of yuan to be invested are expected to flow into the market every year. But given the different nature of the pension funds, the NCSSF should establish a new risk control and investment management system. Since investing the pension funds is a new challenge for the trustees as well as the external investment managers, there should also be a new management system for the financial market and a new working mechanism for investment managers, the trustee and the provincial clients.
At present, the NCSSF has 18 external investment managers - 16 fund management companies and two security traders. But another 20 external investment managers will be needed after the entrusted pension funds cross the 1 trillion yuan mark.
The author is director of the Center for International Social Security Studies, affiliated to the Chinese Academy of Social Sciences.