The annual Asian Pension Fund Roundtable has established a reputation as a high level think-tank on best practice and corporate governance. Under the heading ‘Demographic pressures in Asia: Driving retirement system reform and capital market development’, this year’s event, held in Beijing, brought together representatives from pension funds, government agencies and plan sponsors from 23 countries. The organisers are the Pacific Pension Institute and the Asia Foundation, two California-based non-profit organisations that assist pension funds and financial institutions in carrying out their fiduciary responsibilities.
The Roundtable is by invitation only and the involvement of so many top executives from east and west provides a genuinely meaningful exchange. It allows the emerging economies to benefit from the experience of the developed world, while allowing the promoters and consultants from the first world to better understand the needs and challenges of the emerging markets.
The discussion ranged from China and India’s mind-boggling demographics, through the chronic under-funding of the US retirement system, and why Japanese women should be allowed to play a greater role outside the home.
At last year’s event, held in Tokyo, delegates heard about the problems Japan’s pension industry had to face up to in re-building a system that would be able to meet future demands. At least Japan has a system that is up and running. In Beijing, it was clear from comments made by the delegates, that China is still learning to crawl. In the next 50 years, according to UN estimates, the ageing of Chinese society will fall into three stages. Up until 2020, the number of people aged over 60 will grow from 7% to 11.5%. From 2020 to 2040, the proportion will grow to 21.4%. By 2050, there will 332m people over the age of 65. But as veteran pensions consultant Stuart Leckie pointed out, the magnitude of error in assessing the number of people covered by the pension system in China is 2%. That’s 26m people.
Xiang Huaicheng, chairman of the National Council for Social Security Fund (NCSSF), spoke of how improvements in infant mortality (down to around 2%) and average life expectancy (up from 41 to 72 years since 1949) had not been achieved easily. The problems that lay ahead with regard to a potentially massive dependency imbalance will occur in advance of China’s emergence as a true economic super power. “The pension system will develop in advance of us being better off. If we do not have the resources, the impact will be very profound.”
Leckie believes the key challenge for China is to make sure economic growth is permanent and to encourage the development of new companies and new industries, to ease the legacy funding problems. With the capacity of 200-300m new migrant workers, China will probably remain a low wage economy for another 20 years at least. Leckie says what China has to do is reduce poverty, extend pension coverage to all urban employees, integrate systems across provinces allowing portability and gradually raise the retirement age.
The various measures being undertaken to broaden the scope of the pension system in China were detailed in last month’s IPE cover story. Xiang Huaicheng said that for the work being done by the Social Security Fund, “the prospects are good but the investment environment is not that desirable”.
Xiang’s comments, spoken in Mandarin and representing the conservative Chinese view, was in stark contrast to comments made later in the conference by Gao Xiqing, a former Wall Street lawyer and vice chairman of the China Securities Regulatory Commission (CSRC), now vice chairman of the NCSSF. As the discussion turned to issues of governance, Gao spoke of the fraud at various points in the system, of his frustration at the domestic investment limitations the NCSSF operates under, and how the development of a broad and well-supported capital market was essential to ensure “regulatory system optimisation”.
It is widely agreed there is lack of good quality companies among the 1,300 domestically-listed Chinese stocks. Citibank’s Jennifer Jiang asked now that foreign capital is no longer a concern for the Chinese government and with a high level of savings looking to buy more than just bank deposits, what can be done to encourage overseas listed Chinese companies to come back to the local markets. Zhu Min, executive assistant president at the Bank of China replied, “This is the big dilemma we face. The regulatory environment is not sophisticated enough. Would the China market be able to absorb the IPO of Bank of China, a $60bn deal? No. The regulator can’t do everything though. Companies have to make their own decisions.”
Gao added: “The relative depth of the market now is an issue, but more important is the governance issue. If you look at the overall increase in our capital markets, look at the policy and the market expectation, it is a much more deeply rooted problem within our culture.”
Mark Cutis, CIO of Shinsei Bank in Tokyo fanned the flames with his comment, “For me, the word governance implies a civil society, the rule of law etc. I don’t quite see how you get this spontaneously. I don’t understand how you just adopt governance rules and they work.”
Noriko Hama, Professor at Tokyo’s Doshisha Business School responded that “regulations and the rule of law are all very well, but they do not mean that companies and individuals behave properly and show integrity in running their businesses. Too many rules can result in more cheating and more loopholes.” Nonetheless, Zhu Min said that Cutis had a point: “We don’t have the environment for real governance and besides, the bank is still majorly owned by the State. So how do we move towards this idea of governance? It has to be a gradual influence. Three years ago, I was in charge of structuring an IPO for a division of the Bank of China. Within 6 months, our CEO was in jail.”
Enter Linda Tsao Yang, chair of the Asian Corporate Governance Association, former US Ambassador and director of the Asian Development Bank; the grande dame of Asian market supervision and development, although Zhu referred to her more as “a very tough grandma”. Zhu brought Mrs Yang in to advise on improving the company’s internal governance. The result is that the company’s share price has doubled in the past three years. Zhu sums up the process: “In China, we try very hard, but we have to cross the river stone by stone”.