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Risk Management of China's Pension Funds: An Analysis Based on ALM Optimization Approach

The ALM assesses the stochastic characteristics of underlying liabilities and their sensitivities to risk factors. The main goal of pension fund investment is to minimize risk at a given rate of return. Therefore, it is practical for us to analyze risk factors of pension funds investment in the framework of ALM. This paper starts with regulatory rules and risk factors of China's pension funds. And then in the perspective of the corporate sponsor, we examined the impacts of regulation (inclusive of accounting regulation) on the company's funding cost, cash flow and cover ratio of the balance sheet in both final pay plan and career average plan. Our finding is that the NFC calculated based on our model will result in a low return low risk portfolio. The contribution strategy of the corporate sponsor is relatively flexible because of no additional contribution constraints.