The National Council for Social Security Fund (NCSSF) was established in 2000 to act as a fund of last resort and is the only scheme allowed to invest overseas. “They recognised that only global custodians rather than local institutions, have the qualifications to provide the services they want,” said Lawrence Au, regional manager, Asia-Pacific for Northern Trust.
For Northern Trust, the mandate includes global custody, compliance monitoring and performance measurement. It followed this deal by winning a mandate to act as overseas custodial agent and provide similar services to qualified domestic institutional investors (QDII) in China for the Bank of Communications.
The NCSSF mandate was won in an open RFP with five competing global players and Mercer acting as a consultant.
What makes the deal more significant is that it is the first step in looking outside China for investment opportunities and a number of international investment RFPs are expected in the coming months.
So far, the NCSSF has only invested part of its underlying assets of $30bn (expected to increase by 20 per cent per year) in domestic products, but its initial foray into international securities is expected to be up to $1bn using fund managers who do not have to hold the qualified investment licences issued by the Chinese authorities.
More importantly, the performance of the NCSSF in investment terms and transparency is seen as the first step towards future liberalisation of the national pension system. “The importance of the NCSSF cannot be underestimated. It enjoys a special status with the Chinese government recognising the serious issues facing it,” observes Mr Au. “All eyes are watching how well the NCSSF manages the fund.”
China, like so many nations in Europe, is facing a pensions funding crisis and the NCSSF was set up to report directly to central government’s State Council to provide future funds to failing pensions. The patchwork of provincial, city and company schemes face huge deficits as a result of a mixture of poor investment decisions, rampant corruption and an aging population.
According to World Bank figures, the current system has obligations for one pensioner to every three workers. As a result of the one-child policy that will be one-to-two by 2010. While liability deficits are not published, Mercer Investment Consulting estimates it will be $27bn by 2010.
Also the scale of corruption was highlighted with the recent arrests of the former director of the Shanghai pension fund, Zhu Junyi, and the city’s most senior communist official, Chen Liangyu. They were accused of misappropriating funds in the region of $1.25bn for illegal loans and investments in real estate and other infrastructure deals.
Currently, these local and company pension schemes are only allowed to invest in cash and national bonds.
Initially, opportunities for fund managers with NCSSF will be limited. “There are certain restrictions on what sort of overseas assets can be used, for example only investing in developed markets,” says Mr Au. Other limitations include forbidding investment in derivative products and disallowing securities lending.
“Everyone anticipates that all the Chinese pension funds will invest overseas but it’ll take time. The NSSF is a role model on how to do it using the cream of Chinese investment managers,” concludes Mr Au.
GOK
