The Chinese Pension System
February 12, 2025
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In the previous article, we have already determined why it is important to closely monitor the workings of pension funds and also to regulate them. However, regulation is a broad concept. It encompasses a wide variety of actions that need to be undertaken. In this article, we will have a closer look at various activities which are generally clubbed together when the word regulation is mentioned.
The details of the various activities which need to be performed by regulators have been mentioned below. The below-mentioned list is only indicative in nature. It is by no means meant to be an exhaustive list enumerating all the tasks performed by the regulator.
The regulator lays down the conditions which need to be fulfilled before a license is obtained. The regulator clearly mentions the financial as well as non-financial capabilities which will be verified before a license is granted. It is the regulators’ duty to judge each application on its merits and then either provide or deny a license to the pension fund.
Pension funds do have the flexibility to build their own strategy. However, that needs to be done within the framework of the rules and regulations which have been set up by the regulator. In the absence of a regulator, it would be difficult to set up these ground rules which form the basis of risk management at pension funds.
Defined contribution pension funds allow different types of investors to take different amounts of risks. It is for this reason that it is important to segregate their assets. Pension fund regulators create rules which govern this segregation. They also oversee this segregation exercise to ensure that the assets of any investor are not unnecessarily jeopardized.
Only organizations which have a good track record of managing securities as well are in a good financial position are allowed to become custodians of pension fund assets. Having an efficient custodian is very important to ensure that no fraud takes place within the pension fund.
It is the job of the regulator to ensure that the reporting is sufficient so that the investments of the investors are not jeopardized. However, at the same time, the reporting should not be excessive so that the functioning of the pension fund is slowed down.
Hence, there is always a chance that the pension fund may take advantage of the situation and start charging excessive fees. Here, it is the job of the pension fund regulator to ensure that this does not happen.
Pension fund regulators set the maximum limit of fees and expenses which can be collected by the funds. This helps keep the expense ratio in check which ultimately leads to higher returns for the investors.
The bottom line is that pension fund regulators perform several very important tasks. Their existence and smooth functioning are very important for the working of the pension fund industry.
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