Allowing pension fund to buy stocks is not for supporting the stock market
Recently, pension fund obtains public attention due to the draft regulations posted on the Ministry of Finance’s website. According to the draft, China will allow up to 30% of the basic endowment pension fund’s net value to be invested in stocks, funds and stock-related pension products. By the end of 2104, the basic endowment pension fund has3.59 trillion yuan.
Thus, market participants thought that once huge amount of pension fund is invested in the market, the current slump of the stock market will be reversed fundamentally. Under the current bear market, investment from pension money will surely help stabilize the stock market. However, in the long run, the object of pension investment is definitely not to stabilize the stock market; instead, it is for maintaining and adding the value of the pension funds.
The importance of the above-mentioned object of the pension funds can be seen from the earnings of the various types of pension funds in China. By far, Chinese pension funds fall into three categories:
First, national social security fund (NSSF), working as strategic reserve for pension, which is managed by National Council for National Social Security Fund; the reserve is used for the pay crisis occurring at the peak of aged population and is entrusted to qualified institutions for investment. Such fund money can invest in bonds, stocks, industrial investment funds, corporate bonds, etc. Currently the NSSF exceeds 1000 billion yuan with the annual return rate of 8.36%.
Second, enterprise annuity as one of supplementary pension programs, which is entrusted to a qualified pension fund institution by an enterprise; the investing object of enterprise annuity are similar to those of national social security fund. Since 2007, the average annual return rate of 7.87%, the enterprise annuity will also exceeds 1000 billion yuan by the end of this year.
Third, the basic endowment pension fund referred to in the draft; under the current system, the government-provided social security is divided into “social pooling” and “individual account”. The money of “social pooling” is used for the payment of pension of currently retired workers under the pay-as-you-go system. The individual account is owned by individuals in name and is actually managed by social security departments of cities and provinces. Restricted by the policy, this portion of funds can be only invested in treasuries and bank deposit, etc., nearly having zero return.
As shown above, a significant factor for the low return of basic endowment pension fund in individual accounts is lacking of laws for investment management. Though the pension fund system has been running for over a decade, and individual accounts in many provinces accumulated huge money, the related investment regulations made no changes. Further, local administrations of social security fund were stimulated to make no investment tries by the Shanghai social security fund scandal in 2006. As huge money of individual accounts were kept in banks with low yields, related authorities haven’t failed to do their job; while the investment try failed, those responsible officials will be punished.
This draft, however, not only eliminates legal barriers for social security fund investment, but establishes a legal framework for social security fund investment management, consisting of client, entrusted institution, trustee agency and investment management institution, and clarifies the reliabilities and rights of the involved institutions.
Under such framework, local government at each level is the client; administration and financial departments of social security fund at a provincial level undertakes specific affairs. Currently the only entrusted institution is National Council for National Social Security Fund, without eliminating the possibility of more institutions to gain the qualification. The trustee agencies are banks with relative qualifications. The investment management institution is professional institutions with pension investment and operation experiences.
In other words, if the social security fund of individual accounts is to enter the stock market, it should be first entrusted to National Council for National Social Security Fund; National Council for National Social Security Fund will choose a professional investment management institution, and the fund should be in the account of the trustee bank. It can be said that such design can fundamentally eliminate the possibility for misappropriation of social security funds revealed in various places. And with National Council for National Social Security Fund as the only trustee, the idea corresponds to the investment system that “local government entrust operations and central government concentrate on investment” suggested by many people.
However, it may be inappropriate that National Council for National Social Security Fund is the only trustee, for letting National Council for National Social Security Fund manage all the individual accounts of each province actually concentrates risks rather than lowering risks. National Council for National Social Security Fund will have a particular preference in choosing investment management institution; it is not good for all the national investment funds to hold such preference. More importantly, though National Council for National Social Security Fund has been working well in the past decade, it does not mean that the same earnings can be maintained in the future. Moreover, trustee diversification will bring competition and spread risks.
Meanwhile, it is also inappropriate to control all the investment inside the country. If the domestic stock market displays a trend in the coming years like that in the past years, holding all the investment inside the country is not favorable for value maintenance and appreciation either. Global investment is another way to spread risks. By far, China may lack experiences of global investment. But it should not be a reason to close the gate of global investment.
Last but not least, allowing China’s pension fund to buy stocks is not to support the shaky market, but for the maintenance and appreciation of asset value. A healthy stock market depends on economic fundamentals and good legal environment.
Published in Tencent News | 2015-6-30
