China is likely to allow financial institutions to invest individual pension funds in more fields with market risks, including securities fund products, in a bid to increase their value, a Ministry of Labor and Social Security (MLSS) official has revealed.

The authorities have completed the procedure of soliciting public opinions and will submit a draft to the State Council soon, said Chen Liang, a MLSS department director.

The government will extend the scope of investment with individual pension accounts by allowing managers of the fund to buy fund products and financial bonds, he said.

At present, individual pension account funds are primarily invested in low-risk bank deposits and national bonds.

The scheme will stipulate a decision-making and risk-control mechanism to preserve and increase the value of the individual pension accounts, said Chen, adding that it would set a minimum custodian fee to avoid vicious competition among fund managers, according to the sources.

Chen Liang said the scheme is aimed at reducing the pension fund deficit.

The provincial governments will be responsible for hiring financial institutions to manage the pension funds and organize a panel of experts to decide investment strategies and distribution of proceeds, he said, adding that the proceeds would be publicized on a regular basis.

He did not say what would happen if the investments fail to be profitable.

China's pension system is still in transition. The basic structure of the revised system is a mandatory two-pillar pension comprising a "social pension" financed by employers plus "individual accounts" funded by both employer and employee contributions.

Before China began its pension reform in the 1990s, people depended on the state to contribute to their pension accounts; they were, in fact, paid by working population.

Experts predict that funds will swell by 100 billion yuan (US$13.3 billion) a year as China's pension reform deepens.

However, according to the MLSS, the nation's pension funds suffered a deficit of 900 billion yuan by the end of 2006. Thus, proceeds from the new policy are unlikely to solve China's specific pension problems and the country is under mounting inflationary pressure with an increasing aging population.

(Xinhua News Agency October 26, 2007)