Chen Xiao and Zhang Ming: A review of the impact of pension investment on economic and financial stability

Source: Zhang Ming Macro Finance Research

Note: This article is the first paper on pension finance by the author's team, which was published in the 8th issue of Financial Regulatory Research in 2023.

Abstract:For a long time, the evaluation of the academic community and the market on the reform of pension investment management is mostly positive, including the realization of pension value preservation and appreciation, coping with the challenge of aging, and enhancing the stability of the capital market. However, with the deepening of the reform of pension market-oriented investment, the impact that pension investment may have on the stability of relevant market entities and the economic and financial system is also worth paying attention to. By combing and summarizing the relevant literature, this paper finds that there are three risks worthy of attention: first, the pension into the capital market to carry out investment, not only may have a negative impact on the operation of listed companies due to its own limitations and investment preferences, but also may increase the volatility of the capital market due to the herd effect, short-sighted behavior, global investment and other operations. Second, there is controversy about the impact of pension insurance system and pension investment on economic growth, and the different macroeconomic environment and financial market structure of different countries make the impact of pension investment on the capital market and economic growth heterogeneous. Third, the shortcomings of the pension insurance system in its own design, income and expenditure system, investment management behavior, etc., may also cause the pension to decline in its solvency, affecting economic, social and financial stability. In the case that the development of the mainland financial market is not yet mature, the relevant departments should introduce corresponding policy measures to promote the reform of pension investment step by step, and to a certain extent limit the proportion of pension equity investment, the degree of participation in corporate governance and overseas investment behavior.

I. Introduction

According to the data of the seventh national population census, as of 0:00 on November 1, 2020, the total population of the country was 1.41 billion, of which 190 million were aged 65 and above, accounting for 13.5%, an increase of 4.6 percentage points from the data of the sixth population census and higher than the current average of 9.3% of the world's aging population. At the same time, the growth rate of the mainland's total population has been declining since 2016, and by 2022, the country's total population will decrease by 850,000, and the growth rate will fall to -0.06%. The continuous increase of the elderly population and the decline in the growth rate of the total population mean that the inflection point of the total population size of the mainland may have arrived, and the degree of aging will continue to deepen and become a severe challenge to the stable operation of the national economy. In the face of this situation, it is urgent to promote the reform of the construction of the pension insurance system and the management of pension investment in the mainland.

In recent years, the mainland has implemented a series of major reform measures in pension investment management, and has achieved remarkable results: the first pillar of the basic pension insurance fund (hereinafter referred to as the "basic pension") and the second pillar of the annuity fund have achieved remarkable results in maintaining and increasing their value, and the third pillar of personal pension is also gradually landing.

From the perspective of the first pillar of the basic pension insurance fund, before 2015, the basic pension in the mainland had been managed by the provincial level and below for a long time, and the two investment methods of bank deposits and the purchase of treasury bonds were the mainstay, and the investment yield was lower than the inflation level in the same period for most of the time. In August 2015, the State Council promulgated the Measures for the Investment Management of Basic Pension Insurance Funds, which clarified that the basic pension insurance fund of the first pillar of the mainland implements centralized operation and market-oriented investment operation, which is unified by the provincial governments and entrusted to the pension management institutions authorized by the State Council for investment and operation. Since then, all provinces and cities have successively entrusted the basic pension to the National Council for Social Security Fund (hereinafter referred to as the "National Social Security Fund" or "Social Security Fund") for management, and by the end of 2021, the scale has reached 1.46 trillion yuan, and the average investment rate of return from 2017 to 2021 has reached 6.49%, achieving excellent value preservation and appreciation effects. As of the end of 2022, the balance of the mainland's basic pension insurance fund was 6.98 trillion yuan, and the overall planning of the whole country was nominally realized. In the future, with the substantive implementation of the national overall plan and the continuous advancement of the investment management reform of the basic pension insurance fund, there will be more considerable basic pension into the capital market investment. According to the regulatory requirements of the 30% upper limit, the 6.98 trillion yuan basic pension can have up to 2.09 trillion yuan of funds into the capital market to invest in equity assets.

From the perspective of the second pillar annuity fund[1], the scale of the mainland enterprise annuity accumulation fund continued to climb from 15.46 billion yuan in 2007 to 2.87 trillion yuan by the end of 2022, the number of enterprise accounts increased from 32,000 to 128,000, and the number of employees covered rose from 9.29 million to 20.103 million, and the scale and coverage of the second pillar continued to expand. The investment management of enterprise annuities in mainland China adopts the mode of trust management, and entrusts qualified investment operation institutions as investment managers, including pension management companies, trust companies, fund management companies, insurance asset management companies, etc. By the end of 2022, there are 22 enterprise annuity fund management institutions, managing 5,097 enterprise annuity portfolios, and the average annual investment return from 2007 to 2022 is 6.58%, and the overall investment return rate is outstanding. In December 2020, the Ministry of Human Resources and Social Security issued the Notice on Adjusting the Investment Scope of Annuity Funds, allowing annuity funds to invest in the underlying stocks of the Hong Kong Stock Connect, and increasing the policy upper limit of the proportion of annuity funds investing in equity assets by 10 percentage points to 40%. However, judging from the asset allocation of enterprise annuity products at the end of 2022, fixed income assets accounted for 87.2%, and equity assets accounted for only 6.2%, far below the upper limit of 40%. If calculated according to this upper limit, among the 2.87 trillion yuan of enterprise annuities, the highest 1.15 trillion yuan of funds can enter the capital market to invest in equity assets, and the potential market space is huge.

From the perspective of the third pillar of personal pension, its establishment and development process lags significantly behind the first and second pillars. In order to promote the development of personal pensions, the government continued to support the development of commercial pension insurance from 2007 to 2016, and in May 2018, it landed a pilot project of individual tax deferred commercial pension insurance in Shanghai, Fujian and Suzhou Industrial Park, and officially issued the "Opinions on Promoting the Development of Personal Pensions" in April 2022, which marked the official implementation of the top-level design of the third pillar of the personal pension system, and its total payment scale was 14.2 billion yuan by the end of 2022. This is an important part of improving the multi-level pension insurance system in the mainland. Prior to this, the third pillar was dominated by various commercial pension products, such as the pilot tax-deferred commercial pension insurance products in various places, with a cumulative scale of about 600 million yuan as of October 2021, and the pension target investment fund with personal savings and pension functions, with a cumulative scale of about 100 billion yuan as of the end of the first quarter of 2022. In general, the overall scale of the current personal pension products is small, and it is difficult to play the role of supplementing the elderly. However, with the deepening of reforms such as the introduction of detailed rules for personal pensions and the determination of preferential tax methods, it is believed that the third pillar will gradually develop and become an important long-term investment force in the capital market.

In general, the reform of pension investment management can not only realize the preservation and appreciation of pensions, help to cope with the challenges of aging through the improvement of the pension insurance system, but also introduce long-term investors to the capital market and enhance the stability of the capital market. Therefore, for a long time, the evaluation of the reform of pension investment management by the academic community and the market is mostly positive. At the risk level, the existing literature studies more about the risks that pension may face after entering the market investment, including principal-agent risk, operational risk, macroeconomic risk, financial risk, investment risk, regulatory risk, etc., mostly from the perspective of pension self-preservation and appreciation. This paper argues that in addition to the risks faced by the pension itself, the negative impact of pension investment management on the operation of the economic and financial system and the capital market should be paid attention to. With the deepening of the pension market-oriented investment reform, it is necessary to clarify the potential impact that pension investment in the capital market may have on the stability of relevant market entities and the economic and financial system, so as to provide reference for future policy formulation and reform promotion.

The follow-up arrangements of this paper are as follows: the second section sorts out the potential impact of pension investment on the stability of the capital market, including the main body of the capital market and the operation of the capital market, and summarizes the heterogeneity of these impacts; the third section expounds the potential risks of pension investment to macroeconomic growth; the fourth section analyzes the institutional design defects of the mainland pension insurance system itself, and the negative impact that may have on the stable operation of the economy and finance; the fifth section draws conclusions based on the literature review and puts forward policy suggestions for the pension reform in the mainland。

Second, the potential impact of pensions on the stability of the capital market

So far, most of the domestic and foreign studies believe that pension funds are based on long-term investors' consideration of investment stability, safety and long-term, which is conducive to maintaining the stability of the capital market and promoting the sustainable development of the capital market. For example, pension funds can help expand the scale of the capital market by maintaining and increasing the value of funds through cross-border diversified investment (Davis, 2002), pension funds can help the capital market optimize the structure and improve the system by adjusting the asset portfolio (Zhang Xue, 2017), and the long-term nature of pension investment can provide continuous liquidity for the capital market, thereby promoting the stability of the capital market (Liu Wanting and Liu Mingming, 2014). In addition, the diversified demand for security, income, and liquidity after the pension market can also stimulate financial institutions to develop corresponding investment products, thereby promoting financial innovation and improving the quality of financial services (Zheng Bingwen, 2006).

This paper argues that while pension investment promotes the sustainable development of the capital market, it also cannot ignore the risks that may be brought to market entities and the operation of the capital market. This section will analyze these risks from two perspectives, one is the impact of pension investment on the main body of the capital market, and the other is the impact of pension investment on the operation of the capital market. In addition, this paper also summarizes the reasons for the heterogeneity of the impact of pension investment on the capital market.

(A) the impact of pension investment on the main body of the capital market

1. Pension investment may have a negative impact on the operation and governance of listed companies

Theoretically, after entering the market, the pension needs to deal with the relationship with the management of the listed company and the regulator, and fully participate in the governance of the listed company. In this regard, some scholars believe that the participation of pension management institutions in corporate governance can not only promote the more standardized and orderly development of the stock market, but also improve the quality of listed companies by inhibiting the occupation of controlling shareholders' funds and increasing the number of institutional surveys in order to protect their own investment interests (Li Chuntao et al., 2018). Liu et al. (2011) came to the same conclusion through an empirical analysis of the public data of A-share listed companies in 2009.

However, there are also a considerable number of studies that have a negative attitude towards this, arguing that there is no systematic measurement and the results show that the supervision from pension funds can significantly change the performance of enterprises (Zeng Xianrong, 2007), and even that the participation of pension funds may have a negative impact on the invested enterprises: on the one hand, pension investment managers represented by fund companies are usually good at capital management, but it is often difficult to accurately judge the operation and management of listed companies, so it is difficult to promote the virtuous circle of listed companies through monitoring (Meng et al., 2015); on the other hand, pension funds may have a negative impact on the production and operation of listed companies due to political considerations。 In the case of the latter, not all pension funds have the sole goal of preserving and increasing their value, for example, the investment management of pension funds in some states in the United States incorporates other political and social objectives (Bradley et al., 2016). Therefore, when the influence of pension funds on listed companies is too large, it may be difficult for listed companies to constrain their political considerations (Jiao and Ye, 2013), that is, they cannot be fully oriented towards the improvement of the financial performance of listed companies. This creates a new principal-agent problem, which in turn undermines the shareholder value of listed companies (Wang and Mao, 2015).

In addition, it is worth mentioning that the mainland's basic pension insurance investment management system has set up many restrictions on the proportion of stocks invested in individual enterprises with entrusted assets, the prohibition of buying ST stocks and shares of listed companies with serious violations, the prohibition of buying stocks that have risen by more than 100% in the past two years, and the stocks with a circulating market value of less than 300 million yuan and stocks with less than 30 million shares in circulation, so as to ensure investment security (Kong Lingfeng and Huang Qian, 2004). These restrictions lead to the fact that the current pension is not deeply involved in the governance of listed companies after entering the market, so the risks it brings to the operation and governance of listed companies may not be large.

2. The investment preference of pension may have an impact on the effective allocation of market funds

From the perspective of investment target selection, pension investment has at least the following three preferences:

One is to prefer large-scale companies. The larger scale of the company means that its past operation is better, and to a certain extent, it can endorse the company's reputation, thus becoming the primary factor in the choice of pension investment. Gompers and Metrick (2001) found that it was difficult for small firms with higher risks and usually fewer dividends to obtain pension fund investment by statistical analysis of firms invested by institutional investors such as pension funds during the period from 1980 to 1996. This preference has led to relatively high stock prices for large firms and a lack of capital for smaller firms, resulting in the so-called "McMillan gap" (Davis, 1998). Liao Li and Shi Meijuan (2008) collected the relevant data of listed companies in mainland China from 2003 to 2005, and studied the investment preference of social security funds from five perspectives: safety, prudence, liquidity and transaction costs, corporate performance, and investment style, and found that company size is also one of the most important factors in the investment choice of mainland social security funds.

The second is to prefer companies with high stock prices and low price-earnings ratios. In the empirical research, a number of scholars have found that as the main embodiment of the fair value of the capital market, the stock price is also one of the important reference factors for the social security fund to choose companies for investment. Zhu Weihua and Liao Shiguang (2012) conducted an empirical test on the shareholding data of the mainland social security fund in 2008 and found that stocks with higher stock prices and lower price-earnings ratios were more popular with social security funds.

The third is to prefer companies that have been on the market for a long time. To a certain extent, the longer time to go public indicates that the company can withstand the test of the capital market and has a more mature business model (Guercio, 1996), and in addition, the selection of companies that have been listed for a longer period of time can also help pension funds avoid large losses in individual stocks. As a result, there is often a significant positive correlation between the proportion of pension fund holdings and the timing of a firm's listing (Falkenstein, 1996).

Pension investment prefers larger, high-price-to-earnings and low-price-earnings ratios, and long-established enterprises, stemming from their objectively stable investment objectives and strong aversion to risk. However, this characteristic of the pension also makes it difficult to form a strong support for some small and medium-sized emerging enterprises that need more funds, and such enterprises may be an important force to promote economic transformation and industrial structure upgrading.

(2) The impact of pension investment on the operation of the capital market

1. The herd effect of pension investment may have a negative impact on the stability of the capital market

At present, many studies at home and abroad have proved that the investment behavior of pensions may cause a herd effect. From the perspective of foreign research, empirical analysis using panel data of OECD countries in different periods shows that pension investment behavior not only does not play the role of market stabilizer, but exacerbates market volatility (Gomez and Agudo, 2016, Holzner et al., 2022), and the herd effect is more obvious in pension funds in emerging economies (typified by Chile) than in developed economies (Olivares, 2005). Domestically, the statistical study of the national social security fund portfolio shows that there are great similarities in investment style, investment strategy and investment industry, and further research finds that although the social security fund portfolio has achieved a performance higher than the average market rate of return, when the capital market fluctuates, its herd effect actually exacerbates the market volatility (Chen Jiaxu and Zhang Li, 2013). In addition, according to the research of foreign scholars, the herd effect of pension funds is different[2], which will have different degrees of impact on the capital market. A study of investment transaction data from Dutch pension funds shows that the weak herd effect of pension investment can help promote financial market stability, while the strong herd effect significantly increases the volatility of capital markets (Broeders et al., 2016).

2. The short-sighted behavior of pension investment may have a negative impact on the stability of the capital market

Although pensions are generally recognized as long-term investors by the market, excessive regulation may amplify the short-term value preservation and appreciation needs of pensions, resulting in short-sighted behavior in investment decisions, thereby exacerbating the volatility of the capital market. Specifically, the pension market scale and market impact of both the increase, although will prompt the government departments to strengthen the supervision of pension investment behavior, so that the pension to increase information disclosure, which is conducive to the healthy development of the capital market (Hu Jiye, 2012); In particular, when the market price of pension assets falls significantly, excessive regulation will increase the risk aversion of pensions, so as to make investment decisions with obvious short-term tendencies (Chen Ji, 2008). Sunstein (1996) also revealed that pensions may be over-regulated, including pensions being regulated by multiple agencies at the same time, and being regulated at a high frequency within a year, which may force pensions to make short-sighted behaviors that go against the willingness to invest in the medium and long term. Ma Bing (2006) pointed out that due to the high requirements for the security of funds, pensions may be more impatient than other institutional investors when asset quality deteriorates. Especially in the unsound capital market, it is difficult for pensions to resolve risks through effective asset portfolio allocation, and it is easier for long-term investors to degenerate into short-term speculators, and exacerbate market volatility through frequent buying and selling.

3. The globalization of pension investments may exacerbate the international transmission of related risks

In the context of rapid economic and financial globalization, the openness of the mainland financial market to foreign institutional investors has gradually increased, which has significantly improved the correlation between the mainland capital market and the international capital market, making the mainland capital market more vulnerable to the impact of international capital flows and the contagion of the international financial crisis (He Xiaoxia and Liu Yingfei, 2008). From the perspective of international experience, international investment in pensions in advanced economies may increase the volatility of financial markets in emerging economies. After the huge pension fund enters the capital market investment, the sharp increase in the supply of funds will lead to a significant decline in interest rates and further hinder the improvement of investment returns. In order to achieve the desired rate of return, there is a need for pension funds to invest in non-traditional assets, and emerging market assets will naturally become one of their important choices. However, the demand for emerging market assets for pensions in developed countries is not stable, and when they face pressure on the liability side (such as increased pressure on pension payments or rising interest rates in their own countries), they may preferentially sell the financial assets of emerging economies, thus bringing a serious negative impact on the economic and financial stability of the latter (Bonizzi and Kaltenbrunner, 2019).

(3) There is heterogeneity in the impact of pension investment on the capital market

The different macroeconomic environment and financial market structure of different countries may be an important reason for the difference in the impact of pension investment on the capital market.

The first is the structure of the financial market. When the pension is sold and liquid assets are purchased, it is conducive to improving the liquidity of the capital market and promoting the rapid development of the capital market. Compared with the bank-led financial system, the market-led financial system contains a higher proportion of liquid assets such as stocks, which is more conducive to improving market liquidity through pension investment (Feng Tieying and Li Mengyi, 2010). Zheng Jianhao (2007) through the UK, the United States, Germany and Japan through the empirical research shows that compared with the bank-oriented financial structure, the pension in the market-oriented financial structure can promote economic growth.

The second is the level of financial development. Pensions have a positive impact on stock market depth, liquidity and bond market depth, but this impact is related to the level of financial development. In countries with a low level of financial development, pension investment will not have a significant positive impact on the capital market. Therefore, there is a need to rethink pension management and investment strategies in these countries (Meng and Pfau, 2010). The empirical study of Liu Yanlei and Ji Cheng (2017) found that the positive effect of domestic pension investment on the capital market is weak at this stage, for two reasons: first, the development of the domestic pension system is slow and the integration into the capital market is shallow;

The third is the degree of pension market. Empirical research by Catalan et al. (2000) shows that there is a positive causal relationship between pensions and capital markets and their liquidity in OECD countries, while those in developing countries are mixed. For example, there is a positive two-way interaction causal relationship between pensions and capital markets in Chile, while Malaysia and Singapore do not. It may be because the latter two countries have strict government regulations, which limit the investment of pensions in the domestic capital market.

Fourth, regulatory capacity and macroeconomic environment. Yi Zhihong (1999) believes that the development of pension has higher requirements for regulatory capabilities, and it is necessary to break the boundaries between the securities industry and the insurance industry, so the relevant regulatory authorities need to closely cooperate and coordinate to prevent regulatory loopholes or duplicate supervision. If the regulatory capacity does not meet the requirements, it may drag down the development of pensions and have a negative impact on the capital market. Alier and Vittas (2000) emphasized the importance of low inflation and a stable macro environment for the stable operation of pensions and the development of capital markets.

Third, the potential impact of pension investment on macroeconomic growth

In addition to the capital market, there are also many discussions in the academic community on the potential impact of the pension insurance system and pension investment on economic growth, but there is still a great deal of controversy so far.

(1) The impact of pension investment on personal savings

The available literature compares the impact of two different pension systems – pay-as-you-go and full accumulation (fund) – on individual savings. Although there is no consensus conclusion at present, the general view is that the pay-as-you-go system has a certain "crowding out effect" on personal savings, while the full accumulation system may have a small impact on personal savings due to a variety of factors.

Most of the early studies believe that the pension insurance system has a "crowding out effect" on personal savings. This mainly refers to the fact that due to pension schemes, people can reduce the need to accumulate wealth while working for retirement consumption, resulting in a decline in personal savings (Feldstein, 1974). A number of scholars have used the life-cycle model of savings to conclude that the social insurance system will reduce individual savings and reduce the capital stock in closed economies (Modigliani and Brumberg, 1954, Ando and Modigliani, 1963, Kotlikoff, 1979). In particular, for pay-as-you-go pension systems, it is easier to slow down the rate of capital accumulation and reduce the steady-state capital stock (Diamond, 1965).

Some scholars also believe that there is uncertainty about these effects. Barro (1978) points out that the existence of the inheritance motive makes the crowding out effect of social security on personal savings zero. Leimer and Richardson (1992) found that while the loss of social security wealth would increase private savings, it would also lead to significant losses in consumer welfare. Slate (1994) argues that the establishment of social security systems has no significant impact on individual savings. Zhou et al. (2007) proved through empirical tests that the scale of the "crowding out effect" of pay-as-you-go pension plans on personal savings depends on a country's economic growth rate, the rate of return on physical capital and the ability of young people to learn Xi, so there is obvious international heterogeneity. Berger (2000) conducted research using an indefinite generational overlapping model shows that the impact of the pension system on economic growth and Pareto effectiveness depends on the ratio of the compulsory savings rate to the natural savings rate, the pay-as-you-go contribution rate, and the proportion of compulsory savings to total individual savings.

For the full accumulation system, due to the accumulation of fund balances and investment management operations, the system may not have a negative impact on personal savings, or even have a positive incentive effect. Specifically, due to the uncertainty of pension investment returns and its illiquidity restricting individual free borrowing, personal savings may not be "squeezed out" by pension contributions and accumulation. Davis (1998) argues that whether pensions have a crowding out effect on personal savings actually depends on the size of the marginal substitution rate between the compulsory savings caused by pensions to individuals and the voluntary savings of individuals: if the marginal substitution rate is equal to 1, then pensions have no effect on the individual's life-cycle savings. On this basis, he conducted an empirical study based on the data of 12 OECD countries, and did not find a regular impact of pensions on personal savings. However, a World Bank study of annuity schemes in countries such as the United States, Australia, and Chile has found that fully accumulating pension systems in these countries can increase household savings and promote capital formation (World Bank, 1997).

(2) The impact of pension investment on economic growth

Some scholars have demonstrated the positive effect of pension investment behavior on economic growth. Li Zhen et al. (2001) based on the United States found that pensions can stimulate the growth of domestic consumption: first, the operation of pensions promotes the growth of consumption of the elderly population, and second, pensions play an important role in stabilizing everyone's confidence in economic prospects by ensuring the public's future retirement life. Zou Yu (2002) believes that pension investment has many roles in improving social welfare, adjusting the layout of the national economy, promoting efficiency improvement and promoting market-oriented reform. Davis and Hu (2004) examined data from 38 countries and found that pension investment had a significant positive impact on economic growth, and that this effect was more pronounced in OECD countries. Xu Jingfeng et al. (2006) used a variety of measurement methods to conclude that pension investment has a positive effect on economic growth, but it is not very significant, and the contribution of pension investment to output is much smaller than the contribution to fixed asset investment.

However, some scholars believe that the above-mentioned positive effects require certain prerequisites and uncertainties, and may even manifest as negative effects. Tian Cunzhi et al. (2006) proved the positive correlation between the proportion of pension investment and the economic growth rate by establishing a simple endogenous growth model, but the premise is that pension investment enters the CES-type production function and is not completely substituted with capital goods. Zandberg and Spierdijk (2013) found that there is no substantial evidence that pension investment can lead to higher economic growth, because once the capital market return is controlled in the empirical model, the positive effect of pensions on economic growth is almost non-existent. This means that the positive effect of pensions on economic growth found in some studies is likely to be due to the false correlation between the number of pension assets and the economic growth rate. Cavallini et al. (2013) conducted an empirical study of panel data from OECD countries and pointed out that it is difficult to prove a positive correlation between pension investment and per capita output. Mi Hong et al. (2020) believe that if too many residents participate in pension savings and pension investment, it will lead to a decline in the consumption level of the whole society, and then weaken the ability to drive economic growth through domestic demand. Especially in the context of the deepening aging of the mainland's population, the excessive number of participants in the third pillar may significantly affect the mainland's economic growth.

Fourth, the defects of the design of the mainland pension insurance system

The pension insurance system is the basis for the investment management of the pension. In the context of the deepening of the aging population, the shortcomings of the pension insurance system may cause the gap between income and expenditure to continue to expand, resulting in a decline in its own solvency. This will not only shake the foundation of pension investment, but also have a negative impact on the stable operation of the economy, society and financial system. There are many international precedents for this: the gap in Chile's pay-as-you-go pension system in the 70s of the last century not only made the pension system unsustainable, but even led to social contradictions and group conflicts (M Infante et al., 2000); Overly generous pension policies eventually lead to an imbalance in pension revenues and expenditures, further exacerbating the public debt crisis in these countries (He et al., 2016).

As far as the mainland is concerned, the institutional shortcomings of the pension insurance system have also been the focus of long-term discussion in the academic community. In recent years, the pension reform path has also been formulated and promoted based on this. However, so far, there are still the following three major system defects in the mainland pension insurance system and pension investment management.

(1) The design of the pension insurance system

First, the multi-level pension insurance system is unbalanced, especially the weak construction of the third pillar. At present, the mainland has initially established a three-pillar pension insurance system commonly used internationally (World Bank, 1994), but the development is still uneven: the goal of "full coverage and basic protection" of the first pillar (i.e., the basic pension insurance system) has been largely achieved, the second pillar (i.e., enterprise and occupational annuity) has limited coverage and has not yet formed a strong support for the first pillar (Keyong Dong and Shi Wenkai, 2020), and the third pillar (personal pension) launched a pilot project of individual tax deferred pension insurance in May 2018 [4]. In April 2022, the State Council issued a top-level design for individual pensions[5], but the current operation effect is not satisfactory (Zheng Bingwen, 2021).

Second, the low level of overall planning is a major problem that continues to plague the operation of the mainland pension insurance system. In the early stage of the development of the basic pension insurance system, the low level of overall planning has become an important basis for rapidly expanding coverage and ensuring fund collection, but it has also brought many problems to the subsequent development, including difficulties in pension settlement in different places, low efficiency of fund utilization, and imbalance in financial sustainability between regions (Zheng Bingwen, 2018). As a result, the central government has implemented a central adjustment system since July 2018 to balance the regional differences in basic pensions [6]. However, at present, only a few provinces can achieve provincial-level overall planning of revenue and expenditure, and most provinces are still at the level of prefecture-level overall planning, facing strong resistance from local governments in terms of specific implementation (Fang Le, 2020).

Third, the poor portability of pensions exacerbates the gap between regions and urban and rural areas, and restricts the flow of talent to a certain extent. Although the Ministry of Human Resources and Social Security (MOHRSS) has clarified the rules for the transfer of pension accounts in 2010 [7], it is still difficult to fully implement the basic pension insurance system in mainland China. This benefits the inflow areas and impairs the outflow areas (Wang, 2017). In particular, the differences in pension insurance systems between regions and the inability to settle in different places will undoubtedly restrict the mobility efficiency of rural labor and further widen the income gap between urban and rural areas (Zou Tieding, 2021).

(2) The pension revenue and expenditure system

The deepening of the aging degree is the most important reason for the expansion of the income and expenditure gap of the pension insurance system, but the design defects of the income and expenditure system are also important factors that cannot be ignored to increase the repayment risk of the pension insurance system. Specifically, too rapid pension growth can lead to huge institutional costs and financial pressures (Barr and Diamond, 2013), and an increase in the proportion of pension expenditure in fiscal expenditure may reduce the rate of return on capital and wages, which in turn will reduce pension income (Yan Chengliang, 2017).

There are three defects in the design of the pension insurance system in the mainland:

One is that the level of spending is too high and growing too fast. If the relative level of pension insurance expenditure is measured by the pension replacement rate (the ratio of pension income to the individual's salary before retirement), the average pension replacement rate in OECD countries according to the OECD (2019) is 49.0%, while that in mainland China is as high as 71.6%. Cao Xinbang (2017) pointed out that compared with aging, the institutional risk of utilitarian value orientation is the internal root cause of the financial crisis of the pension system, while the basic pension insurance in mainland China adopts a system that combines fixed income and fixed contributions, which has more utilitarian colors, so it increases the payment pressure of the pension insurance system.

Second, the nominal contribution rate is abnormally high and the real contribution rate is low. Due to the low payment base and some evasion of fees, the real payment rate of social security in mainland China is much lower than the total nominal social security payment rate (Lu Jinfei, 2016). The low real contribution rate has led to a significant shortage of social security premium income, which has increased the difficulty of the pension security system to be financially self-sufficient (Mu Huaizhong, 2020).

The third is the problem of historical debts and empty accounts. After the implementation of the new system of "combining unified accounts" in 1997, the long-standing historical debts and empty accounts of personal accounts have aggravated the already prominent financial problems of the pension insurance system. It is estimated that the hidden debt faced by pensions may not be completely resolved until 2042 (Jia Kang et al., 2007). Overall, problems such as the deteriorating system maintenance ratio, pension overspending, higher payment levels, and lower premium collection rates have led to further exacerbation of pension financial pressure (Li Lianfen and Liu Dewei, 2011).

(C) pension investment management behavior

The investment management of pensions is an important means to achieve long-term preservation and appreciation of their value. The mainland's pension insurance system has undergone profound reforms in investment management in recent years, but in the process, the behavior of pension investment institutions may increase the repayment risk of the pension itself. This is mainly reflected in the principal-agent problem, as well as the mismatch between the responsibilities and rights of pension investment management.

The first is the principal-agent problem. At present, a considerable part of the pension investment in mainland China has adopted the entrusted management mode for operation, but due to the influence of imperfect competition and information asymmetry in the capital market, the principal-agent relationship between the principal and the custodian may lead to different interests of both parties, and it is easy to induce opportunistic behavior and moral hazard (Liang Junlin, 1999). In particular, in the case of malicious behavior or bad intentions of the trustee and its stakeholders, the probability of accidents in pension investment will increase significantly, which will lead to the risk of pension repayment (Cao Xinbang, 2001).

The second is the mismatch between power and responsibility. Pension managers such as local governments and social security funds have decision-making power and bookkeeping power over market-oriented investment, but only bear the responsibility for pension back-up in extreme cases; pension trustee investment management institutions have the right to direct investment and entrusted investment, but only bear administrative responsibility or hedge risks with small reserves, and do not bear the liability for losses and compensation for the risks that may be caused by their investment behavior (Zhang Chunli, 2016). Comparatively speaking, pension beneficiaries do not have the above rights, but ultimately bear most of the actual risks of pension investment management (Shen Che and Deng Dasong, 2014). According to the current system of the mainland, the final risk of investment and management of the basic pension insurance fund and the national pension reserve fund is borne by the government (in fact, the whole people bear it), while the investment risk of enterprise annuity and personal pension is borne by the pension policyholder.

V. Conclusions and Policy Recommendations

In recent years, the mainland has implemented a series of major reform measures in pension investment management, including the first pillar of basic pension insurance into the market, the second pillar of enterprise annuity investment management scope relaxation, the third pillar of personal pension landing and related fund business pilot launch, etc., gradually improve the construction of multi-level pension insurance system, and have achieved remarkable results in the maintenance and appreciation of pension value. At present, the proportion of the three pillars of pension investment equity assets is lower than its regulatory ceiling, theoretically speaking, there is still a considerable amount of pension funds with the possibility of potential investment. This paper believes that continuing to vigorously promote the reform of pension investment management and promoting pension participation in capital market investment is of great significance for realizing the preservation and appreciation of pension value, and also helps to promote the healthy and stable development of the capital market through the introduction of long-term funds.

However, according to the analysis of relevant literature at home and abroad, the potential risks of pension investment in the following three aspects are worth paying attention to:

First, pension investment may have a negative impact on market entities and the operation of the capital market. In terms of the impact on the main body of the capital market, first, pension investment may have a negative impact on the operation and governance of listed companies; second, pension investment may be difficult to provide strong support for small and medium-sized emerging enterprises that need more funds. In terms of the impact on the operation of the capital market, first, the herd effect of pension investment may amplify the volatility of the capital market; second, excessive supervision may amplify the demand for pension value preservation and appreciation in the short term, resulting in short-sighted behavior in its investment decisions; third, the global investment in pension may exacerbate the transmission of international risks. In addition, for different countries, different financial market structure, financial development level, pension access to the market, regulatory capabilities and macroeconomic environment, etc., will affect the heterogeneity of pension investment in the capital market.

Second, the impact of the pension insurance system and pension investment on economic growth has not yet reached a unified understanding. The pay-as-you-go system has a certain "crowding out effect" on personal savings, while the full accumulation system has less impact on personal savings. Although the investment behavior of the complete accumulation pension system may promote economic growth by promoting the consumption of the elderly population, stabilizing the confidence of economic prospects, and increasing the investment of residents' human capital, some studies believe that it is not possible to prove the positive effect of pension investment on economic growth.

Third, the shortcomings of the pension insurance system in the system design may cause the pension income and expenditure gap to continue to expand, its own solvency to decline, and ultimately have a negative impact on the stable operation of the economic, social and financial system. This is mainly reflected in three aspects in the mainland: first, the overall level of pension insurance is low, the third pillar is weak, inconvenient and other problems are prominent; second, the proportion of pension expenditure is too high and the growth is too fast, the nominal contribution rate is abnormally high, and the problem of historical debt and empty accounts needs to be solved urgently; third, pension investment management is facing challenges such as pro-cyclicality, principal-agent problem, and mismatch of rights and responsibilities.

To sum up, in the face of the severe challenges of the mainland's total population growth entering an inflection point and the deepening degree of aging, it is necessary to continue to promote the reform of the pension insurance system and pension investment management to ensure the stability and sustainability of the mainland's pension system. However, considering the potential impact of pension investment on economic and financial stability, we should also pay attention to the rhythm and intensity of its promotion in the process of reform, so as to avoid the above risks as much as possible.

On the one hand, it is necessary to promote the reform of pension investment management step by step. In the case of the development of the mainland financial market is not yet mature, the pace of pension investment management reform should be gradual: one is to prudently increase the upper limit of the proportion of pension investment equity assets, in order to avoid the herd effect of pension investment to exacerbate market fluctuations; the second is to moderately extend the regulatory assessment period of pension investment, to prevent the short-sighted behavior of pension investment decisions caused by its short-term value preservation and appreciation needs; third, it is prudent to promote pension investment institutions to participate in the governance of listed companies, so as to avoid its negative impact on the management and governance of listed companies; fourth, it is prudent to assess and grasp the rhythm of opening up pension investment in overseas marketsIn order to prevent the international risk contagion that may be caused by the global investment of pensions. In general, the steady promotion of pension investment management reform is not only for the safety and preservation of the pension itself, but also to avoid the negative impact that pension investment may have on the capital market.

On the other hand, it is necessary to accelerate the reform of the pension insurance system. We should make up for the design defects of the pension insurance system through system reform as soon as possible, including the realization of the national overall planning of basic pension insurance in the true sense, the implementation of basic pension insurance personal accounts, the improvement of the portability of basic pension accounts, and the continued establishment and improvement of the third pillar of the personal pension system. These are the direction that the government has been working hard in recent years, and it is also a necessary means to avoid the negative impact of the pension income and expenditure gap on the stable operation of the economy and finance in the medium and long term.

Reference notes omitted