The Chinese Pension System
February 12, 2025
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Since pension funds manage assets worth billions or even trillions of dollars. This means that it is crucial to create a structure that manages the pension fund itself.
Since the pension fund industry is highly regulated, it is important for the fund to have a structure in place which allows for quick and effective decision-making. This is where the pension governance structure comes into play.
Having an effective governance structure is vital to any organization and this includes pension funds. In this article, we will have a closer look at the governance structure of pension funds.
When it comes to pension funds, good governance means a clear, unambiguous, and non-conflicting assignment of rules and responsibilities to different people within the organization.
The purpose of this internal allocation of responsibilities is essential to ensure that no single person or a small group of people can hijack the working of the fund and use it to their own personal advantage.
A good governance structure builds a system of checks and balances which ensures that the investment actions of the pension fund are taken in accordance with the investment policy of the firm and not based on the whims and fancies of an individual.
Good governance of a pension fund is only possible after creating a basic structure that controls the functioning of the pension fund. It is standard practice across the industry to divide the pension fund into three distinct layers.
It is common for pension funds to have at least five members on board who have expertise in different areas of the functioning of the fund. This layer is involved in making the policies.
The job of the accountability council is to take ownership of the policies once they have been made and ensure that these policies are strictly implemented.
A clearly defined governance structure is necessary because of the reasons mentioned below:
The governance team then controls the flow of this information. Some policies are publicly available whereas some other policies are shared only on a need-to-know basis.
The governance team also creates a feedback mechanism that allows the proper monitoring of these responsibilities from higher levels of management.
Since these decisions emanate from the fund’s beliefs about the macroeconomic factors, it is the job of the governance team to conduct meetings and codify these commonly held beliefs so that they can be used for decision-making and also be reviewed at a later stage.
The bottom line is that good governance is truly important. It can truly be the difference between a well-managed and a poorly managed pension fund. Over the years, investors, as well as regulators, have recognized the importance of such governance. It is for this reason that they have taken steps to encourage better governance of the funds.
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