China Pension System Report | Demographic Pressure Cooker, 2012

Now is the time to start shedding conventional assumptions about investment management in China’s pension system: restricted access to pension assets and limited investment options. Up until now, managers have relied on a slim selection of NCSSF mandates to tap into the RMB7.4tr worth of pension capital. However, demographic trends and growing deficits are pushing regulators into action. The investment scope for pension assets is expanding; equity investment is being encouraged, especially into alternative assets such as private equity. In addition, insurance and enterprise annuities are also seeking to increase investment returns, presenting more sources of cash for investment managers to draw on. With participation rates increasing and a greater sense of urgency among policy makers, we expect the pension system to balloon to RMB28tr by 2020. In this report, we analyze the inflows and outflows of each pension segment, their present and future asset allocation and how the industry will grow over the next ten years. We will also touch on the regulatory landscape and what implications it has for entering the market.

The RMB7.4tr System
By the end of 2011 we estimate that China’s pension system will have a total of RMB7.4tr in AUM, with insurance assets accounting for approximately 55% of all assets and public pension funds accounting for about RMB2tr. Both segments of the industry, as well as EAs and NCSSF, have their capital sitting in underachieving investment products – mostly fixed-income – struggling to keep up with inflation.

Demographics and Deficits
The number of Chinese over the age of 60 will swell from today’s 178m to 221m by 2015. With more than RMB1.3tr in deficits existing in individual pension accounts, regulators are well aware that without reforms, deficits will increase RMB100bn annually. By 2020, the deficit could be as big as RMB6.2tr if contribution rates and investment returns do not rise. 

Reforms Underway
Regulators are already widening the pension system’s investment scope. NCSSF is looking more to alternative assets, and insurers and EAs are moving away from their riskless bank deposit and bond investments. More importantly, the opportunities for mandates are increasing in all segments for both joint venture and foreign FMCs alike. EA licenses are being handed out, insurers are beginning to look beyond insurance AMCs and NCSSF is receiving more capital than it can manage.

Accessing Pension Assets
To realize increased investment returns, assets will be outsourced to investment managers with expertise in private equity, equity or overseas markets. Interested parties need to weigh the benefits of directly applying for mandates from NCSSF or establishing a JV, such as a FMC, brokerage or trust, where they can obtain an EA license. Setting up an insurance AMC will be the optimal strategy to creating an investment portfolio that will cater to insurance AMCs’ risk appetite.

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