The risks of investing pension funds in the stock market are totally controllable as long as they can be managed in a centralized and transparent manner under both governmental supervision and market self-management.

Pension funds moved another step closer to entering the stock market as an official draft guideline entered into another stage. Media reports suggest that besides Guangdong and Shandong provinces that have conducted pilot programs, other provinces including Jiangsu and Zhejiang are also likely to be among the first batch to see their locally-managed pension funds invested in the stock market.

The decision is a breakthrough in managing pension funds. It is designed to introduce the tool of market allocation, maintain and improve the funds’ value, and counteract any possible shortfall.

However, investing pensions funds in the stock market is not without risks. For one thing, it is a challenge to put locally-managed pension funds together under provincial and national investment accounts in a transparent manner. It is also a challenge to maintain such investment’s safety amid market fluctuations.

This means that a comprehensive system to manage risks is needed to ensure the success of such investments, which could also encourage an overall reform of the funds’ management.

First, the pension funds’ management has to be increasingly centralized as soon as possible. This is in line with the trend of population mobilization in an aging society and coordinating the imbalances of pension funds in different regions.

Second, the investment sectors and proportion of the funds used should be scientifically decided. The funds should be invested into diversified sectors to reduce the risks and improve the funds’ coordinating role to the macro-economy.

Third, a market role should be introduced to control investment risks. The draft has said managers would be asked to set up reserve funds valued at 20 percent of management fees and 1 percent of yearly returns to offset losses.

The pension funds are critical for the people and their management must be prudent. Through centralized and transparent management, with both governmental supervision and market self-management, the risks involved are totally controllable and the funds can play a positive role in benefiting people’s livelihood.