Pension Funds
The Chinese Pension System
February 12, 2025
Pension funds are present in some form in almost every country of the world. Hence, ideally, there should be comparisons between the returns provided by pension funds in different parts of the world. However, this does not generally happen. This is because pension funds are not like mutual funds or other investments.
There are certain issues that are specific to the pension fund industry. These problems make the comparison of data almost impossible. The details related to the issues which make it difficult to compare pension fund returns have been explained below:
- Different Methodologies: It is common for pension funds across the world to report their investment performance by expressing the market value of the investments that they hold. However, the methodology for computing these market values can differ from country to country.
There are many countries across the world that have their own detailed statutory mechanism which explains how the returns need to be expressed. The western developed nations have similar standards when it comes to expressing pension returns. However, developing countries in Latin America and Asia have methods that can be quite confusing and make it impossible to compare data.
- Treatment of Expenses: The way in which management fees are represented while expressing returns also creates a problem when it comes to comparing data. There are some countries of the world that express their return net of the management fee which is being charged by the pension fund.
On the other hand, there are some countries that express their return without deducting the management fee. Since data regarding the management fee is not publicly available, comparison can become quite difficult.
Also, differences in regulation can make a huge difference in how expenses are treated. In some countries, the outflow of certain types of funds is capitalized whereas, in other countries, it may be immediately expensed.
- Calculation of Real Returns is Difficult: The inflation rates in different parts of the world vary considerably. For instance, the inflation rate in the developed world is much lower as compared to the interest rate in the developing world.
Hence, the nominal rates of returns between different countries should not be compared. It is somewhat possible to convert nominal rates to real rates of return by using the officially stated inflation number. However, the official numbers are not very accurate and hence any comparison based on such numbers is not accurate either.
- Cannot be Reconciled: There are some countries in the world that do not publish quarterly or six-monthly data. Many countries only publish annual data when it comes to pension fund performance. Also, many countries have a unique style of publishing pension fund data.
For instance, Colombia only publishes a 36-month moving average return when it comes to pension fund performance. In some cases, it is possible to reverse engineer the return to a quarterly or six-monthly number in order to facilitate comparisons. However, in many cases, it is impossible to reverse engineer the data. In such cases, data presented by different countries is irreconcilable.
- Asset Class Wise Data Not Present: In many parts of the world, there are explicit restrictions on the percentage of funds that can be invested in an asset class. For instance, in many parts of the world, pension funds are not allowed to invest more than 50% of their investible funds in equity assets. At the same time, there are no such restrictions in other parts of the world.
Therefore, the pension funds which operate in countries where there are no restrictions are able to invest more funds in equities and other high-risk assets. As a result, the nominal returns provided by such funds are higher but then the risk taken by these funds is also higher.
Since different funds are allowed to take on the different quantum of risks, the returns generated by them cannot directly be compared. It is impossible for a fund that invests the majority of its fund in debt instruments to compete with a fund that largely invests in equity.
- Survival Bias: Also, when comparing data over large periods of time, we tend to only consider the data of the pension funds which have survived. Over the years, there are several pension funds that have either merged into other funds or have simply become extinct. Since this data is not included in the comparison analysis, the resultant data does not represent the true picture of the underlying events.
The fact of the matter is that even though pension funds are a global phenomenon, their performance cannot be compared with their global peers. There are a wide variety of factors that render such comparison meaningless. Hence, an investor should be careful while making comparisons between data from different countries.