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November 20, 2017

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Shares in SOEs to help support pension system

CHINA has announced a pilot program to help pension schemes meet growing pressure from an aging society by transferring shares of state-owned enterprises to social security funds.

A document released by the State Council said the program would begin this year with shares of up to seven SOEs to be transferred.

The plan is intended to help make up for shortfalls in the nation’s pension schemes and will be expanded in 2018 to involve more SOEs, the document said.

The move will ensure the sustainable development of the country’s basic pension insurance system, while also diversifying the capital structure of SOEs as part of an ongoing reform to improve efficiency, the Ministry of Finance said in an online statement.

The program will only involve a small number of listed SOEs, with the majority being non-listed central and local SOE equity, the ministry said.

The assets will be transferred to the National Council for Social Security Fund and wholly state-owned firms, the State Council said. The initial transfer ratio will be 10 percent of the state-owned equity.

Under certain circumstances, the NCSSF can set up a pension fund management company to independently operate the transferred assets.

The recipients can earn dividends from SOE shares and have the right to disposal, but will not be involved in the management decisions of the companies, the document said.

The recipients will, in principle, be subject to a three-year lock-up period before they can sell the transferred shares.

The transfer program will cut the burden of the working generation by expanding the pension fund scale without raising taxes or pension contribution rates, the finance ministry said.

It said the program is not aimed at selling off state-owned assets to meet pension obligation. Rather, it is a long-term mechanism that supplements social security funds and optimizes the structure of state-owned capital.

China has more than 200 million people over the age of 60 and the country faces a severe challenge in meeting its pension obligations.

The problem has become acute in certain regions, such as the northeast industrial belt, home to many elderly former workers at now struggling SOEs.

Pensions are traditionally held by banks or used to purchase treasury bills. They are now allowed to be invested in a variety of financial products, including bonds and stocks.

Since the end of 2016, seven provincial-level regions have entrusted their pensions to the NCSSF.

The State Council said its plan would help foster a more sustainable pension system and promote reform of SOEs.

“Over the course of economic development and the aging of the population, the pressure on basic pension payments has continuously increased,” it said.

According to China International Capital Corp estimates, a 6 percent transfer rate of SOE shares to social security funds would result in a 1-percentage-point reduction to basic pension contribution rates for companies.

That will lower corporate costs, and also foster healthy growth of the capital market as social security funds become a large and long-term institutional investor in the market.


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