The Chinese Pension System
February 12, 2025
Definition of Financial Planning Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise. Objectives of Financial Planning Financial Planning has got many objectives to look forward to: Determining capital requirements- […]
The gender gap in pension systems around the world is a very real and pressing issue. Numerous studies have been conducted on this matter and almost all of them have concluded that the gender gap is a systematic problem that needs to be addressed by pension funds as well as by pension fund regulators across […]
What is a Currency War ? A currency war is a situation wherein devaluation of currency by one country is retaliated by a competitive devaluation from the other country. For instance if the United States were to devalue the dollar against the Pound Sterling and if the British retaliated with their own devaluation then the […]
What is the Fed Wire System? The Fed Wire system is a service that is offered by the Federal Reserve, which is the central bank of the United States. This service is provided by the main Federal Reserve bank as well as its twelve regional offices. Since this service is offered by the central banking […]
Step-up bonds are special types of fixed income instruments. They help investors partially offset the risks of rising interest rates. This is because when investors invest in a bond, they typically lock in an interest rate. If the interest rate rises beyond that number, then the investors are at a loss because their money has […]
Advances in medical science have increased the life span of individuals. It is now common for people to live for ten to twenty years longer than their previous generation. This seems like a good development from a humanist point of view. However, from a pension fund’s point of view, a longer life span has several financial implications. These financial implications are called “longevity risk”. In this article, we will have a closer look at the impact of longevity risk on pension funds.
Pension funds sell annuities of uncertain tenure to their beneficiaries. The tenure for which the monthly payment will continue depends upon the longevity of the beneficiary. If more beneficiaries start surviving for a longer period of time, there can be a significant financial impact on the fund.
Changes in the medical field lead to a change in this data every year. However, a lot of the time, pension funds do not account for these changes. Hence, money is invested based on assumptions that are very different as compared to the final outcome.
Hence, the pension funds can start adjusting their financial plans which would allow them to make these payments at a later date. At the same time, if the mean age of the pension fund is high i.e. most of the beneficiaries are old, the pay-out might not be affected so much. However, the fund has very little time to make adjustments in order to provide for this increased cash flow.
It has been estimated that a two-percentage-point fall in the interest rate leads to a 20% increase in the liabilities of the pension fund. Since lower interest rates have now become the norm across the developed world, pension funds are feeling a greater impact of the longevity risk.
Pension funds have created another method that is more useful in managing their financial position. Pension funds have started indexing the value of their pay-outs with the average life expectancy. This solution allows pension funds to manage their finances without using discriminatory policies.
The bottom line is that longevity risk is unique to the pension fund industry. However, it can have a massive impact on the financials of any fund. Also, with medical science advancing by the day, life expectancy is expected to continue to rise in the future. Hence, it is very important for pension funds to recognize longevity risks and also take steps to properly manage the same.
Your email address will not be published. Required fields are marked *