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Pension Funds May Expand Investment Channels

China is likely to allow financial institutions to invest individual pension funds in more fields with market risks, including securities fund products, in a bid to increase their value, a Ministry of Labour and Social Security (MLSS) official has revealed.

The authorities have completed the procedure of soliciting public opinions and will submit a draft to the State Council soon, said Chen Liang, a MLSS department director.

The government will extend the scope of investment with individual pension accounts by allowing managers of the fund to buy fund products and financial bonds, he said.

At present, the individual pension account fund is mainly invested in low-risk bank deposits and national bonds.

The scheme will stipulate a decision-making and risk-control mechanism to preserve and increase the value of the individual pension accounts, said Chen, adding that it would set a minimum custodian fee to avoid vicious competitions among managers, said the sources.

Chen Liang said the scheme is aimed at reducing the pension fund deficit.

The provincial governments will be responsible for hiring financial institutions to manage the pension funds and organize a panel of experts to decide investment strategies and distribution of proceeds, he said, adding that the proceeds would be publicized on a regular basis.

He did not say what would happen if the investments fail to be profitable.

China's pension system is still in transition. The basic structure of the revised system is a mandatory two-pillar pension comprising a "social pension" financed by employers plus "individual accounts" funded by both employer and employee contributions.

Before China began its pension reform in the 1990s, people depended on the state to contribute to their pension accounts which in fact was paid by working population.

Experts predict the fund will swell by 100 billion yuan (US$13.3 billion) a year with the deepening of China's pension reform.

However, according to the MLSS, the nation's pension funds were suffering a deficit of 900 billion yuan by the end of 2006 so the proceeds from the new policy are unlikely to solve China's pension problems particularly as the country is under mounting inflationary pressure and the population is growing older.

(Xinhua News Agency October 26, 2007)

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