The Chinese Pension System
February 12, 2025
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The number of pension funds, as well as the amount of money being managed by these funds, is increasing exponentially every day. This is creating advantages for the investors. However, this is also creating a lot of problems for the regulators. This is because regulators have scarce resources and they have to manage the regulation of the entire industry with them.
The risk-based supervision model is born out of the need for pension funds to focus their scarce resources while monitoring the activities of pension funds.
In this article, we will have a closer look at what risk-based supervision is as well as the various advantages of using this approach over the traditional approach.
Risk-based supervision is a structured approach followed by pension fund regulators. As per this approach, the pension fund regulators do not pay equal attention to all pension funds. Instead, they ask all pension funds to submit periodic reports. After these reports have been submitted, the regulators use them to ascertain which funds are facing the highest risk.
The funds with low or medium risk are not given much attention. The funds which are perceived to have a higher risk witness a greater amount of regulatory control action. The risk-based model is essentially a model which links the application of supervision with the quantum of perceived risks. The perception of risks can either be quantitative or qualitative.
The risk-based supervision model is quite flexible and it depends upon the regulator applying it. There are instances where the model has been deployed in a very quantitative model. This means that a specific risk score is generated for every pension fund based on various parameters. On the other hand, it is also possible that the model is deployed in a qualitative manner where the risk perception is based on questionnaires instead of being based on verifiable mathematical calculations.
The concept of risk-based supervision has been adopted by many countries. This is because of the fact that there are several advantages to having this system. Some of them have been mentioned below:
Risk-based supervision does not mean that the traditional system is abandoned. Instead, it just means that rules are just being applied in a more rational manner.
The pension funds which are not well run are likely to receive more regulatory intervention. It is quite likely that pension funds will make efforts to ensure that they do not receive this attention since it will impede their day-to-day working and increase their cost of operations.
The fact of the matter is that the application of risk-based supervision is growing rapidly in the market. It is true that the model is facing some risks and challenges. However, based on the current trajectory, it is likely that risk-based models will become dominant in the world in the next few decades.
The regulatory bodies need to be careful in the sense that they should roll out the system gradually. The supervisory authority, as well as the industry, need to be given some time in order to adjust to this new approach.
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