Investment of flagging pension fund too risky for some

(Ecns.cn)--Repeated calls for the national pension fund to be invested in the stock market have become a topic of heated discussion among deputies to the National People's Congress (NPC) and members of the Chinese People's Political Consultative Conference (CPPCC). Surveys before the two sessions reveal that the issue is also a major concern for the public.

Many have questioned the wisdom of investing in the stock market considering its poor performance in the past, reports China Daily, pointing out that by the end of 2011 the Shanghai Composite Index had fallen to less than its value a decade ago.

Investing the pension fund in the stock market would be akin to "falling into water," the newspaper quotes Ye Tan, a well-known economic commentator.

Ye added that China's stock market has been embroiled in various scandals and is not likely to yield good results, so the pension fund must not be invested now.

Yet Guo Shuqing, head of the China Securities Regulatory Commission, publicly stated that such an investment would be "beneficial to the country, the capital market and every citizen."

Since the pension fund is supposedly "lifesaving money" for the elderly, it is reasonable for the public to be concerned. But what the public doesn't realize is that the current pension system has already resulted in a huge loss, and that loss is growing larger every day, points out China Daily.

Currently, China's national pension fund is only allowed to be deposited in banks or used to purchase treasury bonds, and the interest earned is comparatively low. After subtracting the inflation rate, average interest rates on personal-account funds invested in one-year bank deposits, three-year bank deposits and three-year treasury bonds are -0.11 percent, 0.73 percent and 1.25 percent respectively.

Zheng Bingwen, head of the Global Pension Fund Research Center at the Chinese Academy of Social Sciences, revealed to China Daily that the average rate of return for the pension fund has been less than 2 percent in the past 12 years, even lower than the average CPI over the same period, which means the fund has devalued day by day.

According to Zheng's calculations, the total loss from 1997 to 2010 was more than 600 billion yuan (US$95 billion), making reforms of the pension fund's investment channels an urgent matter.

"Nearly all pension funds in the world invest in the stock market. I think it is acceptable to allocate part of the pension funds managed by local governments to buy stocks. This will help preserve and increase the value of the funds," Dai Xianglong, chairman of the National Council for the Social Security Fund (NCSSF), said at the International Social Securities Forum held in Beijing in December last year.

Local pension funds could invest less than 40 percent of assets into the stock market, Dai advised, as the proportions in foreign countries usually range from 20 to 50 percent.

But he also warned that the investments should be long-term and value-oriented, as short-term speculation is usually quite risky.

China Daily cites an article by Warrent Buffet, who studied related statistics from almost 100 years that led him to the conclusion that the U.S. stock market's long-term rate of return is 6-7 percent a year.

The pension fund is a long-term fund, which can overcome the stock market's short-term volatility, analyzes the newspaper, adding that China's social security fund has attained an annual rate of return as high as 9.17 percent in the past 11 years, mainly due to its successful operation in the stock market.

Statistics reveal that the national social security fund, which has various choices in investment, had achieved a total return on investment of 244.8 billion yuan (US$39 billion) as of 2010, while only 31.8 billion yuan (US$5 billion) in pension fund assets had been invested in securities by then, yielding less than 2 percent a year.

Chen Liang, with the Ministry of Human Resources and Social Securities (or MHRSS, the department in charge of the pension fund)， pointed out that the operation of China's pension fund should absorb experiences in managing the national social security fund to increase investment income and avoid devaluation.

Yet the ministry added that there are no timetables for the pension fund to enter the capital market, since even if the public accepts the idea, operation of the fund still faces many obstacles.

In China, little is done to manage the country's pension fund. Once contributions have been made, basically no one is responsible for ensuring that returns even exceed the inflation rate; and there are no central government agencies designated to operate the fund.

An all-round management regulation of the pension fund should be introduced based on an agreement between all five parties involved, namely the Ministry of Finance, the MHRSS, the NCSSF, the China Securities Regulatory Commission and local governments. However, different standpoints and interests make the policymaking procedure complicated, says China Daily.

Guo Shuqing called on China's investment banks to design products that would benefit pension fund investment in the securities market.

Hua Jianmin, vice-chairman of the Standing Committee of the 11th National People's Congress, told China Daily that the nation should give its pension fund priority in selecting investment opportunities to ensure the fund's safety.

"Attention should be given to helping the pension fund retain value. When we see good investment opportunities, we should first consider the pension fund," he noted.

Guo also proposed a specialized institution to manage local security funds, with efforts focused on encouraging the promotion of venture capital and private equity investment to target long-term returns.