Pension Fund Systems & Capital Markets: International Experience and Prospects for China
To ease fiscal pressures, pension systems across the world have in recent years shifted from a model solely supported by the government (single-pillar model) to a three-pillar model underpinned by the government, businesses and individuals.
Investment management for pension funds has become crucial to supporting a country’s social security system. Investment management styles are changing, with asset allocation increasingly diversified and a larger proportion of investments being made abroad.
Mainland China requires an effective professional pension system to meet the needs of its large, ageing population and address the low level of pension savings currently in the system. It has by now established a three-pillar pension system supported by the government, enterprises and individuals.
However, challenges remain, including the growing gap between pension fund inflows and outflows, the limited scale of Mainland pension funds entrusted for investment and the relative underdevelopment of pension insurance products such as enterprise annuities.
To open up more diverse investment choices for pension funds, China’s Ministry of Human Resources and Social Security expanded the investment scope of Mainland annuity funds at the end of 2020 to include investments in the Hong Kong market via Southbound Stock Connect.
Given the challenges faced by the Mainland pension system, and the growth of overseas investment allocation by pension funds across the world, the inclusion of Southbound Stock Connect for investment by a wider scope of Mainland pension funds would help them achieve their multiple goals of marketisation, diversification, risk mitigation and ensuring asset security, while also making Mainland pension funds an influential institutional investor in international capital markets.
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