The global financial crisis has not stopped the country's national pension fund from trying to get a bigger slice of the action. Fund chairman Dai Xianglong said recently that the National Council for Social Security Fund was likely to enlist the help of private equity funds to help lift the value of its assets as the country faced a growing ageing population problem. If Mr Dai's remarks are any indication, the NSSF may take bold steps in betting on the financial and merger and acquisition markets to capitalise on the current low valuations of stocks and companies. It is unclear whether its efforts will pay off eventually, but analysts and sources close to the pension fund are certain of one thing: the 563 billion yuan (HK$639.06 billion) fund will embark on an aggressive investment strategy under Mr Dai. The financial shrewdness of the former central bank governor, who took the helm of the NSSF in January last year after he stepped down as the mayor of Tianjin, is well known. During his tenure in Tianjin between 2002 and 2007, Mr Dai made the most of his financial expertise and clout in the central leadership, catapulting the city into national limelight to secure concessions to boost the northern city's status as another financial centre, next to bigger rivals Beijing and Shanghai. In August 2007, Beijing designated Tianjin to spearhead the so-called 'through train' pilot scheme, under which mainland residents would be allowed for the first time to buy Hong Kong stocks directly. Though the programme failed to materialise as Beijing backed down for fear of huge capital outflows and boom-to-bust cycles on the domestic A-share market, the 65-year-old Mr Dai received much recognition from the financial community as a reformist. When he took up the office last year, most analysts believed that the NSSF post was a retreat for the former banker as he was reaching the mandatory retirement age. Yet the signs so far are proving the contrary: Mr Dai is aiming high as he seeks to cover an increasing number of retirees on the mainland. That will be an uphill task in the world's most populated country due to a big shortfall in the pension fund that, however remotely, could trigger social disorder. The World Bank has estimated that China will need to pay 200 million retired workers by 2035 and the national pension fund will not be able to meet the demands unless it tops 2.5 trillion yuan by then. The huge gap is one more reason that the NSSF needs to seek substantial investment returns on the equity and M&A markets in addition to the stable but relatively thin incomes from bank deposits and yields from bond investments. The fund's vice-chairman, Wang Zhongmin, says the current capital base is inadequate to cover the pensions that retired workers are entitled to due to the accelerated pace of ageing in the country. The migration of farmers to urban areas poses another challenge to Beijing as more funds are needed to replenish the NSSF when the migrant workers reached retirement age, he says. The NSSF is a reserve fund used to refill the local pools of pensions. Across the country, provincial governments are in charge of paying out the pensions covering their own regions. Under the national pension system, government subsidies, contributions from individual workers and their employers, as well as lottery sales are the three major fund sources. Analysts say the huge multitrillion-yuan shortfall might become a thorny issue for the world's third-biggest economy and could eventually jeopardise the country's long-term growth. For an average company, employees pay up to 8 per cent of salary to the pension pool while the employer contributes as much as 20 per cent of the total pay package. However, companies reportedly owe a combined 38 billion yuan to the fund due to their lacklustre earnings. Making matters worse, the country's pensions cover only 78.4 per cent of the state-owned companies as of 1998, while workers employed by collectively owned firms and private businesses were excluded from the previous pension system. The legacy problems, coupled with the rapid ageing population, have forced Beijing to take drastic remedial action. Beijing now allows the national fund to invest up to 20 per cent of its assets in overseas equities, but the global financial turmoil has deterred the NSSF from going out to chase returns. At the end of 2007, it had overseas assets worth US$1.66 billion, accounting for only 2.6 per cent of its total. Mr Dai has said the NSSF would probably pick three to five private equity funds to help manage part of its assets, without elaborating on how much the fund will allocate to these investments. Last year, it invested 20 billion yuan into each of the homegrown buyout funds CDH Investments, the former private equity arm of China International Capital Corp, and Hony Capital, controlled by Lenovo's parent company. However, sources say the NSSF is considering setting up its own private equity units to seek higher risk but bigger returns. There is a catch, however, because the mainland lacks professionals to run multibillion-yuan private equity funds. China Investment Corp, the nation's US$200 billion sovereign wealth fund, has been recruiting overseas managers including those from private equity groups to help it better tap foreign markets. Government and corporate officials were convinced that private equity deals were surefire bets until the CIC's setback in the United States in 2007, when their investments in Blackstone and Morgan Stanley turned sour, falling victim to the global downturn. But the pension fund still saw a ray of hope in bargain buys in the domestic stock market after a 65.4 per cent slump last year. However, the sharp fall in equity markets also reinforced Beijing's worries of potential social chaos as millions of retail investors saw years of savings evaporate amid the market bloodbath. The nation's top securities regulator has been striving to stop the death spiral and roll out market boosting measures. On November 4, the Shanghai Composite Index hit as low as 1,706.7 points, down 72 per cent from its all-time high of 6,092.06 set in mid-October 2007. The NSSF made a last-gasp effort to support the sagging market on behalf of the central government, grabbing undervalued shares as it was bullish on the nation's economic outlook. Mr Dai commented at the time that the NSSF would act as a stabilising force and dig out more good bargains to achieve long-term returns. The pension fund had earlier been the top beneficiary of a stock market boom in 2006 and 2007 when its assets grew 33.5 per cent and 55.5 per cent respectively. It has yet to publish its performance for last year, but is on the record as saying that it lost 6.75 per cent of equity investment. A Securities Times report said the NSSF had seen its A-share holding increase 1.44 billion yuan in the first quarter of this year thanks to a strong market rebound. Since its creation in 2000, the fund has recorded an average annualised asset growth of 8.92 per cent. 'The national pension fund is seen as a government entity and its moves were read as the government's directives on the market,' said Dazhong Insurance fund manager Wu Kan. 'When it started to heavily buy into stocks at the end of last year, it was a sign that the market might have already bottomed out.' The South China Morning Post learned that the NSSF spent an additional 10 billion yuan at the end of last year to hunt for bargains on the domestic market as a way to shore up investor confidence. Sources also said that Mr Dai was keen to invest in a government stabilisation fund that was expected to be launched soon. 'Mr Dai turned out to be quite aggressive and his strategy might bring a sea change to the operations of the fund,' said a source with knowledge of the NSSF's decision-making. 'But it is still a questionable move since a pension fund is not venture capital. Its priority should be the safety of the assets rather than the return rate.' Analysts said the fund would get a head start on rivals in the M&A sector because the government offered only limited access for foreign private equity groups to the state-owned giants. Carlyle was forced to pull out of its US$375 million buyout deal with the country's largest machinery construction maker Xugong after years of drawn-out negotiations because Beijing was reluctant to cede control of a state-controlled industrial giant amid worries that foreign investment would threaten the national economy with a lion's share of the market. The NSSF would definitely be given an easy access to those profitable projects as Beijing was desperate to avert social disunity, analysts said. Early this month, Beijing announced it was earmarking 300 billion yuan as part of its stimulus plan to upgrade social welfare. It would invest 850 billion yuan between 2009 and 2011 to provide the public with equal health-care treatment. The decision underscored the government's awareness of the necessity to improve people's living standards and welfare so that they would be willing to spend to stimulate the domestic economy. There is speculation that the government will also tap the fiscal revenue to boost the coffers of the pension fund, sending a message to mainland residents that Beijing will adhere to its policy of putting people first.