Asset-Liability Models and the Chinese Basic Pension Fund

39 Pages Posted: 30 Mar 2020 Last revised: 6 Apr 2020

See all articles by Zucheng Zhao

Zucheng Zhao

University of Reading - ICMA Centre

Charles Sutcliffe

University of Reading - ICMA Centre

Date Written: April 4, 2020

Abstract

Pillar 1B (individual accounts) of the Chinese basic pension fund (BPF) have suffered from substantial underfunding due to a series of challenges such as rising longevity, conservative investment policies, and the fragmentation of the pension system. Using an asset-liability model (ALM) we investigate the effects of the pre-2015 and post-2015 limits on asset allocations, as well as no limits. We also investigate the likely effect on investment performance of transferring the pillar 1B funds to the Council of National Social Security Fund (NSSF) and raising the retirement age to 65. We find that an ALM is superior to an assets-only analysis, removing the limits on investment in domestic assets (but not foreign assets) would be beneficial, as would transferring the assets to the NSSF, and raising the retirement age. Finally, the official notional rate on individual accounts should be set at a realistic level.

Keywords: Pension Scheme; Portfolio Theory; Asset-Liability Model; Retirement Age; Cash Balance

JEL Classification: G11; H55; H75

Suggested Citation

Zhao, Zucheng and Sutcliffe, Charles M., Asset-Liability Models and the Chinese Basic Pension Fund (April 4, 2020). Available at SSRN: https://ssrn.com/abstract=3548718 or http://dx.doi.org/10.2139/ssrn.3548718

Zucheng Zhao (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Charles M. Sutcliffe

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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