PAA’s Annuity Director Li Lianren: Occupational annuity brings long-term funds to the stock market and exerts minor impact in the short term

Time: Oct.27 2016, Author: Ping An of China [Size：largemedium small]

At the just-concluded Q3 press conference held by the MOHRSS, the spokesman Li Zhong mentioned that the MOHRSS formulated the Interim Management Measures for Occupational Annuity Fund in Q3 to promote the standard management and operation of occupational annuity fund, which would be implemented in the next stage.
The Interim Management Measures for Occupational Annuity Fund was formulated and released by the MOHRSS together with the Ministry of Finance. This document marks the official launch of occupational annuity. The future cumulative amount and investment return of occupational fund will have a direct bearing on the pay levels of retirees in government organizations and institutions. Therefore, it is an inevitable trend to adopt a market-based investment strategy for occupational annuity. In the future, what will be the size of occupational annuity put into the market? What impact will it have on the stock market? Will the investment scope be further expanded? How to control risks?
To realize a long-term maximum return of occupational annuity, a certain ratio of the funds must be invested in the stock market. In case of a stock investment, the return will be inevitably volatile in the short run, but moderate volatility is not necessarily harmful, since there's a positive correlation between risks and returns.
Here are two examples. The first is Hong Kong Mandatory Provident Fund (MPF). MPF has 6 constituent funds, of which, the stock fund has the highest risk, with its 2015 return being -16.8%, being the last one of the 6 funds. However, its average return was 2.1% in the past three years, second only to 2.2% of the hybrid fund. Additionally, since the inception in 2000, its annual average return reached 3.7%, ranking No.1 among all constituent funds. Among the members participating in MPF, the amounts for selecting the stock fund are the biggest, accounting for about 40% of total MPF amounts.
The second is corporate annuity in mainland China. Since 2012, the cumulative return rate of single plans including equities has reached 29.9%, and the cumulative return rate of single plans only investing in fixed-income has been only 22.3%, down 7.6 pps from the former, and down 1.9 pps on average every year. More than 80% of corporate annuity in the market includes equity investments, which also shows that investing in the stock market is a consensus on pension investments.
Currently, the government organizations and institutions have a total of about 40 million staff members in China. The annual occupational annuity payment is expected to be around RMB150 billion in the whole country. In view of the factor of investment returns, the market size of occupational annuity will arrive at RMB1 trillion in five years.
It is stipulated that the upper limit of occupational annuity invested in the stock market is 30% of the assets. However, by referring to the experience in corporate annuity investments, the stock market investment ratio is generally lower than 30%, and it only reached the 30% ceiling in the strong bull market in 2007. When the stock market saw a big rally in 1H 2015, the average stock positions of corporate annuity were less than 15%; the stock positions have been generally less than 10% since the year beginning; and a certain ratio of annuity invests no stocks. Accordingly, the occupational annuity size investing in the stock market will be about RMB100 billion in the coming 5 years, which will not have a major impact on the stock market. In addition, occupational annuity will not enter the market at one time. Occupational annuity funds at the central-government and provincial levels are established in different time, and there are new fees paid after the establishment on an annual or monthly basis. The pace of entering the market will be more similar to automatic investment plans, exerting a minor one-off impact on the stock market. More importantly, occupational annuity will bring long-term investment funds to the stock market, serving as a stabilizer to the capital market.
Occupational annuity is similar to corporate annuity, adopting a governance structure of 'Client + Trustee + Investment Manager + Custodian', yet without an independent account manager. The account management is in the charge of social security departments of different provinces. Trustee is clarified as a legal person trustee, and the council trustee in corporate annuity is not applicable any more. Currently, corporate annuity has 10 legal person trustees, with pension insurer trustees accounting for over 72%, bank trustees about 26% and trust trustees only 1.5%.
The Interim Measures emphasize the responsibility of occupational annuity trustees for investment returns: trustees are to work out the strategic asset allocation strategy for occupational annuity funds, propose the investment proportions of different asset classes, and are responsible for selecting, supervising and changing investment managers of occupational annuity plans. On the risk management front, the Interim Measures highlight the responsibility of professional trustees, mentioning 'risks' for 20 times, stressing 'security' for 4 times, and designing multiple security and risk management mechanisms in such key chapters as Fund Investment, Income Distribution, Information Disclosure and Supervision and Checks. In the future, each province can establish one or multiple occupational annuity plans. It is expected different occupational annuity trustees will compete in investment returns, and the legal person trustee's investment staffing, strategic asset allocation capability and capability for selecting investment managers and investment products will have an major impact on investment returns of occupational annuity.
The investment scope and proportion of occupational annuity follow the existing investment rules for corporate annuity. The investment varieties include not only stocks and bonds in the secondary market, but also non-standard assets that could not go to the market for trading, such as debt plans, trust plans, wealth management products and specific asset management plans. From 2014 on, pilot programs for preferred shares and equity investments are allowed to be carried out for corporate annuity.
However, the investment scope of occupational annuity can be further expanded. Take the national social security fund for example. Similar to the pension nature of occupational annuity, its investment scope also includes industrial investment, such as pilot programs on restructuring or reforming of enterprises under direct management of the central government. The BoCom, BOC, ICBC and Beijing-Shanghai Expressway projects invested by SSF have all brought about a substantial long-term return. At the same time, SSF can make a certain ratio of overseas investment. Based on international practice, most pension funds are allocated around the globe. The social security fund has seen a decent investment return in the past 4 years, i.e. 7.01%, 6.2%, 11.43% and 15.19% respectively; and the annual average investment return has reached 8.82% since inception. We believe with the growing maturity of occupational annuity investment operation, it will be a general trend to further increase the investment scope.
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