Fund System Of Public Pension Fund Management

In the 1990s, in order to solve the shortcomings of traditional pay-as-you-go old age pension system and deal with the pressure of population aging, China sets up a pay-as-you-go and funded incorporated old age pension system, also called partial-funded old age pension system. In the new system, funded old age pension funds, which include the basic old age insurance individual accounts and the national social security fund (as reserve fund), has a significant role. After recent development, the basic old age insurance individual accounts and national social security fund has accumulated huge amount of assets. According to statistics, by the end of 2005, the assets under individual accounts has reached over 400 billion RMB; by the end of 2006, total asset value of national social security fund calculated by cost method has reached 282.8 billion RMB. The proper management of these funds has a great impact on not only the value protection and improvement of funds, but also the development of the whole old age pension system. Currently, government Labor and Social Security agencies at provincial level are responsible for the management of basic old age insurance individual accounts. These funds of individual accounts are only allowed to be invested in bank deposits and government bonds, plus the management of these funds is lack of market rules, as the result, funds are facing great pressure to protect its value and therefore, jeopardizing future retirement population's welfare. Reinforce the scientific management of funded old age pension funds is one of the key issues that we need to solve urgently.The scientific management of funded old age pension funds needs to solve the following core issue, which is to properly define the relationship among governments, individuals, and the market. In further details, first, what is the role of governments in the management of funded old age pension funds? In other words, should the funds to be managed by a government agency, or by a special institution that is independent of the government, or by any institution decided by individuals. Second, what is the relationship of funded old age pension funds and economic development? This question refers to how we properly use the accumulated social wealth under funded system, and to realize its intrinsic value. The key is to understand the relationship between old age pension funds and capital markets, and how should these funds enter the capital markets. Third, the value protection and improvement of funded old age pension funds. This refers to the structure of the institution responsible for managing the funds, the investment and management model, and how to use market investment tools. The purpose of this paper is to accurately and objectively analyze these questions and provide feasible solutions.This paper uses the method of theoretical analysis and empirical analysis, standard analysis and practical analysis, comparative analysis and use for reference. This paper studies current situation of basic old age insurance individual accounts funds. By analyzing the centralized individual accounts management model, fiduciary responsibilities, and pension governance, this paper makes suggestions to construct a National Central Council for Social Security Funds. By analyzing the basic character of pension fund assets, this paper discusses the necessary reason for pension fund assets to enter capital markets. By analyzing advanced experiences from western countries, this paper demonstrates the method for pension fund management institute to participate in the governance of public trading companies, as well as pension fund asset allocation strategies and risk management techniques. By analyzing features of the funds, this paper studies the model of pension fund's supervisory body and supervising methods.Currently, the basic old age insurance pension funds are under the management of the government Labor and Social Security agencies at provincial levels. The Labor and Social Security agencies are both the trustor (representing workers and retirees) and the trustee (responsible for managing the pension funds). Under this kind of arrangements, the fiduciary responsibility of trustee can not be clearly defined and therefore, it brings serious structural problems to the pension system. Moreover, the pension fund exists as financial assets and is the accumulations of savings. As the pension fund requires long period of time to be accumulated before withdrawn, pension fund assets need to be invested in the capital market to share the economic development outcome and realize its value protection and improvement. The investment of pension funds requires marketization and professional management, and it is obvious the operating mechanics of government is far away from these. As a result, the institution responsible for the management of pension funds should be a specialized institution which is independent for the government. This specialized pension fund management institution is the trustee, the government Labor and Social Security agencies are trustor representing government and workers, and retirees are beneficiaries. By clearly defining the relationship between the trustor and the trustee, we could build a structure to protect the safety of pension fund assets, control the pension fund management institute by using fiduciary responsibilities and ensure the main goal of the institution is to protect retirees' interests, construct a mechanics to realize the value protection and improvement of pension fund assets. Based on the analysis of fiduciary responsibilities, this paper makes suggestions to set up a National Central Council for Social Security Funds to be the centralized trustee responsible for the management of basic old age insurance individual accounts funds assets.The pension governance is the key issue for the management of pension funds. It relates to the structure of the institution, mechanics of investment and operation, and investment outcomes. The board is the most superior body within the pension fund institution and therefore, it is governing body. Based on the analysis of mature western pension management experiences, this paper suggests the governing body should represent interests of all stakeholders. The board should consist of representatives from the government, enterprises, employees, and other members from the society. Governing body should also clearly define the personal duties and responsibilities of board members, reinforce their fiduciary responsibilities, and ensure the interested of all stakeholders are the primary goal of the pension fund investments.Pension funds need to be invested in the capital markets in order to realize the value protection and improvement. Therefore, the development of capital markets and pension fund operation are closely related to each other. Although the pension fund management institution can not control directly the capital market, as one of the most important institutional investors, the pension fund management institution may use its rights as a shareholder and promote sound corporate governance for public traded companies and therefore, contribute to the development of capital markets. After analyzing experiences from western countries, this paper provide suggestions for how pension fund promotes corporate governance in China. Furthermore, asset allocation is the most important element in the investment of pension fund assets. By analyzing underlined rules of capital markets, this paper make suggestions for the active asset allocation strategy for pension fund investment in China and the importance of risk management. In the end, by analyzing international experiences and situations in China, this paper suggests setting up a special pension fund supervisory body, and after comparing the characters of "quantitative" and "prudent person" rules, this paper suggests using "prudent person" rules in the supervisor of National Council for Social Security Fund.This paper systematically analyzes the theoretical fundamentals of funded old age pension funds, pension governance, relation between pension funds and capital markets, asset allocation strategy, and supervising models. The study in this paper is an integrated and structured system. This paper constructs the basic structure for managing the funded old age pension funds. The management of pension funds is a complex and detailed work, the related study in this field has just started and hasn't developed a clearly recognized structure in China. As for this reason, the study in this paper borrows huge amounts of international advanced experiences during the progress, and makes its own views. It should be noted that, although this paper constructs a basic structure for managing the funded old age pension funds, in many particular issues, such as the pension fund asset allocation and risk management strategies, still need further study.