China's social welfare fund is busy seeking partnership accords with investment benchmarks and overseas partners to smooth its pending trade in foreign securities as it tries to boost returns amid an estimated pension shortfall.

China's National Council of Social Security Fund, the pension fund's manager, signed deals last month with Standard & Poor's and Xinhua FTSE to use their indexes as benchmarks for its US and Hong Kong equity portfolios.

The agreements, which are expected to be followed by a slew of partnership deals with global asset managers, were seen by analysts as a signal that authorities were ready to launch overseas investments but might still prefer to be cautious as these are initial steps.

"It is anticipated that the S&P 500 will be used by SSF as the tracking index for a passive index fund," the S&P said in a release, noting the gauge covers nearly 80 percent of US equities, making it a proxy of the broader market.

China's national pension fund started in April a program to seek overseas strategic partners, including custodians and fund managers, after receiving approval in March from the State Council, or China's Cabinet, to invest in overseas capital industries.

The fund, which manages 212 billion yuan (US$26.5 billion) in assets, is allowed to allocate up to 20 percent of its total assets overseas, with investment channels covering bank deposits, government and corporate bonds, stocks, mutual funds and financial derivatives.

It currently invests in domestic bank deposits, yuan-denominated securities, bonds, trusts and infrastructure stocks.

"There has been an acceleration in moves this year to help the fund out and you will likely see more deals done with overseas financial companies this month," said Wu Zhiguo, a Guohai Securities Co analyst.

"But any trial overseas investments will only be small scale and won't be into risky products."

Early this year, the welfare fund was allowed to buy into 169 large enterprises directly owned by the central government and has invested 10 billion yuan in the country's No. 2 lender, Bank of China, which raised US$9.7 billion in its initial public offering in Hong Kong in May.

It has also gained approval from the central government to invest another 10 billion yuan in Industrial & Commercial Bank of China, which plans to list in Hong Kong late this year.

A direct overseas equity investment may test waters in Hong Kong with an initial cap of up to US$1 billion, said Xiang Huaicheng, the fund's chairman.

But any move will be subject to the central government's approval.

Meanwhile, China's aging population is calling for more pension funds. The country may need to pay pensions for an estimated 200 million people who will retire by 2035, according to World Bank estimates. The pension gap may widen to 2.5 trillion yuan due to an aging population and higher living costs, analysts and economists said.

Authorities have been adopting various measures to ease long-term pressures on its social welfare system, such as encouraging citizens to buy commercial insurance for protection and gradually allowing people to purchase overseas equities under a Qualified Domestic Institutional Investor scheme.

Selected banks and insurers were allowed last month to invest in overseas fixed-income products with their yuan-backed assets while fund managers can tap the overseas stockmarkets with their own foreign exchange assets.

The moves will make it possible for individual clients to buy a product that invests in overseas financial instruments, helping them to diversify risks and boost returns.

To further bolster the pension system, regulators now require Chinese companies with either domestic or overseas listing to transfer 10 percent of their state-held stakes to the pension fund.

Analysts said the move could largely increase the amount of the fund as a myriad of state companies is queuing to launch IPOs after regulators last month lifted a yearlong ban on first-time stock sales.

Letting the pension fund, which features a long-term investment strategy, take stakes in listed firms may also help prevent a flurry of stocks from flooding the mainland markets, which have rallied nearly 40 percent this year after a four-year slump, they said.

"Now there's a two-way approach for the government to tackle the growing pension problems," said Zhu Yan, a Bank of China manager. "It has to boost the returns of the national welfare fund while opening more investment channels for citizens."

Editor: Yan