Asset-Liability Models and the Chinese Basic Pension Fund

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