China to Use State Assets to Close Pension Fund Gap

The Chinese government is transferring part of the state’s assets into social security funds to help close the country’s growing pension gap, China’s State Council said.

The move is part of an ongoing effort by the Chinese government to prepare pension funds to handle the strain of a rising elderly population coupled with a declining working-age population. According to UN data, China’s working-age population, which was just over 1 billion in 2015, will fall by 3 million to 6 million each year after 2021 to 952 million in 2030, and to 808 million in 2050. Meanwhile, China’s population aged 65 or older is expected to be 262 million, or 18.1% of the country’s population, in 2030, rising to 395 million, or more than 28% of the general population, in 2050.  

Earlier this year, the Chinese government for the first time allowed pension funds to invest in securities, which was a major change from its traditionally low-risk, low-return strategy of parking the funds in banks, or treasury bills.

There is a shortfall under the current basic pension system due to a longer deemed payable period than actual payable period, said the State Council. Under the new plan, the transfer proportion has initially been set at 10% of the state-owned shares, but the State Council said that might be adjusted considering the reform of the basic pension system, and requirements for sustainable development.

The pilot program will start with between three and five centrally supervised state-owned enterprises, and two central financial institutions regulated by China’s State-owned Assets Supervision and Administration Commission. Other state-owned enterprises that meet the requirements will gradually transfer their shares, starting in 2018, based on the pilot experience, said the Council.

The party receiving the transfer will act as the financial investor, and manage and operate the transferred capital.  Profits earned will be turned over to fill the gap in the pension fund balance. The plan also calls for transferred capital to be operated and accounted for independently, with management receiving evaluations and supervision.

The State Council said central and regional state-owned, and state-holding medium and large-sized enterprises and financial institutions, need to transfer part of their capital. It also said central and regional state-owned enterprises that have completed restructuring to corporations can directly transfer shares. However, it said those that have not completed the transformation need to accelerate the reform and transfer shares afterwards, according to the plan.

China’s National Council for Social Security Fund is authorized to hold the shares of centrally supervised state-owned enterprises. According to the plan, the council can set up a pension management company specially operating the transferred shares when “conditions are mature.”

Provincial governments can establish state-owned companies to manage the shares of regional state-owned enterprises, or entrust companies that have the capacity to run state-owned assets to manage the transferred shares.