New York, NY, July 20, 2022 (GLOBE NEWSWIRE via SEAPRWire.com) — Pension secures material needs for people in their old age and is the wealth foundation for the sustainable development of our society. China is turning into an aging society and facing the challenges of “getting old before getting rich” and “getting old before getting prepared”.
In response to the “century-old issue” of population aging, China has implemented an array of pension reform initiatives. The “Opinions on Pushing Forward Private Pension Funds Development” issued in April 2022 specified the detailed rules for developing the third pillar. We believe this initiative will make a difference in the following three aspects. First, accumulating private pensions through market-oriented investment helps improve the pension protection system. Second, providing tax benefits is conducive to stabilizing consumer expectations. Third, introducing long-term funds facilitates high-quality circulation of technology, capital and the real economy.
Globally, mutual funds have always been the dominant force of pension investment. In China, pensions managed by mutual fund managers have reached RMB4 trillion, accounting for 50% of China’s total entrusted pension investments. Developing the third pillar pension is a new mission entrusted by the era. The nature of pensions determines that their investment management needs to pursue a “long-term and sustainable” goal. In this regard, we have the following four opinions.
First, we need to create long-term sustainable investment returns for customers on the asset side
A scientific and diversified asset allocation is the key to sustainable and solid returns on underlying assets. Stocks are the most important investment target for pensions: As of 2020, mutual funds held USD5.5 trillion in the US IRAs, with USD2.3 trillion allocated to domestic stock funds and USD0.8 trillion to overseas stock funds. The fact that pensions have continued flowing into the capital market has not only contributed to the development of technological innovation capital in the US, but also pushed the US stocks out of the long-term and slow-growing bull run. Global pension investment is being diversified with an increase in green investment, overseas investment and alternative investment. That means a diversified allocation will offer a tailwind to improve the long-term risk-reward ratio of investment portfolios.
In terms of technological means, intelligent digital integration could be the solution to problems arising from long-cycle, large-scale and cross-category investment as well as mass customers. Empowering asset management across the business chain with intelligent digitalization will reshape the efficiency and quality of value creation.
On the product front, pension target funds can better translate fund returns into customer returns. Such funds enable long-term steady pension investment and are an appropriate default choice for the investment of private pension accounts when combined with individuals’ lifecycle. Results show that pension target funds are ushering in a rapid development period on the back of solid performance and good control over risks and retracement. By the end of 2021, pension target funds exceeded RMB110 billion.
Second, we need to expand long-term sustainable fund sources for the third pillar
The development of the third pillar should be consistent with the goal of common prosperity, highlighting inclusiveness and covering as many people as possible. However, pure tax benefits offer insufficient incentives to the middle and low-income groups, as confirmed by the pilot launch of the third pillar in an early stage. Overseas experience shows that, in addition to tax benefits, supporting the flexible transfer of private pensions between different pillars can play a significant role in promoting the development of the third pillar. We recommend opening up the transfer channel between corporate annuity, occupational annuity and private pension accounts.
Third, further efforts should be made to tap into ESG investment to share long-term sustainable development dividends
Sustainable, high-quality development of society is a key to long-term returns on pension investment. The application of ESG strategies in pension investment has become a prevailing trend because ESG strategies are highly compatible with the characteristics of pension investment being long-term and risk-averse as well as a comprehensive metric for social returns.
In addition to financial statements, ESG investment will measure the non-financial risks faced by enterprises. Those with poor ESG performance in investment portfolios will incur material risk exposure. ESG investment eliminates the tail risk in portfolios by evaluating the value of enterprises on all fronts. Both environmental and social problems can only be addressed through major technological innovations in the long run. In this process, there will certainly be key technological breakthroughs and industrial upgrades, delivering long-term alpha returns in EGS investment strategies. ESG investment will also consider spillover costs caused by enterprises to society, re-examine the value creation and allocation of enterprises to society, and truly screen out outstanding enterprises that can create both economic and social value. Institutional investors can allocate resources through ESG strategies or participate in corporate governance to improve corporate quality, so as to promote high-quality and sustainable development of society.
Finally, mutual funds should further improve long-term sustainable asset management capabilities for better pension management
Essentially, pension management is to deal with the long-term cross-category allocation of funds. Mutual funds should enhance their response to changes and uncertainties and build the capability for sustainable asset management.
China Southern Fund Management Co., Ltd. (“Southern Asset Management”), one of the first fund management companies approved in China, has remained true to its original aspiration and continued efforts for 24 years. It has taken an active part in and promoted the development of China’s mutual fund industry. Since 2002 when it was enlisted as an investment manager for National Social Security Fund (“NSSF”), Southern Asset Management has been deeply involved in the pension field for almost 20 years, and is dedicated to providing “one-stop lifecycle management” of pension assets. By the end of 2021, the company registered more than RMB350 billion of pension assets under management, deemed as a trustworthy and creditable manager by the National Council for Social Security Fund (“NCSSF”) as well as corporate annuity, occupational annuity and pension target fund customers. Looking ahead, we will further implement top-down design for high-quality development of the pension industry and grow into an everlasting century-old company.
The construction of the third pillar has been rolled out. We are fully aware of our responsibility and social expectations for us. We will keep our mission of “continuously creating value for clients” firmly in mind and strive to blaze a trail for mutual funds to serve the national pension scheme. Thank you!
Company Name: China Southern Asset Management
Contact Person: Si Chen