Pension Reform and Stock Market Development

IMF Working Papers, February 28, 2025

Source details

The paper highlights the strong connection between developing fully-funded, individually-owned, collectively-managed, mandatory/incentivized (FICMI) pension schemes and the development of domestic stock markets.
Core conclusion: FICMI pension schemes—when sufficiently wide in coverage and large in size—can serve as coordination devices to support long-term equity investments, promoting domestic stock market development, easing firms’ access to long-term equity capital, and supporting long-term economic growth and inclusive growth.

Builds a stylized model to analyze the link between pension reform and stock market development.
Complements the theoretical model with cross-country empirical analysis and case studies.

Identifies key challenges to long-term equity investments:
- Individual impatience
- Network externalities
- Coordination failure
Argues that these frictions are crucial for stock market development and technological innovation.
Role of FICMI pension schemes:
- Act as coordination devices to overcome these frictions when coverage and size are sufficient.

The introduction of FICMI pension schemes can impact household savings in two distinct ways:
- Increase household savings via a “forced/incentivized” savings channel where households save too little without FICMI pension (example context: many EMDEs).
- Decrease household savings and increase household consumption by reducing non-pension savings and decreasing precautionary savings where households save too much without FICMI pension (example context: China).
In both cases, FICMI schemes can move the economy closer to the optimal level of household savings and may improve the structure of savings.

Promotion of domestic stock market development.
Easier access for firms to raise long-term equity capital.
Support for long-term economic growth.
Enhancement of financial inclusion and enabling more households to benefit from economic development, contributing to inclusive growth.

Discusses necessary enabling conditions for successful FICMI reforms, including:
- Strong political commitment to the reform.
- A well-designed fiscal strategy for financing the transition.
Addresses policy design considerations for implementing FICMI pension schemes.

Analysis is supported by cross-country empirical work and specific case studies (examples referenced in text: many EMDEs; China).

Authors: Shujaat Khan, Bo Li, Yunhui Zhao
Publication date: February 28, 2025
Series: IMF Working Papers
Working Paper No.: 2025/049
Issue: 049
Volume: 2025
Pages: 68
DOI: https://doi.org/10.5089/9798229002318.001
Stock No: WPIEA2025049
ISBN: 9798229002318
ISSN: 1018-5941
Subjects: Capital markets, Expenditure, Financial markets, Labor, Pension reform, Pension spending, Pensions, Stock markets
Keywords: Capital markets, East Asia, Equity Financing, FICMI pension schemes, Funded and Private Pensions, household saving, IMF working paper No. 25/49, Innovation' Financial Inclusion, Intertemporal Optimization, Pension reform, Pension Reforms, Pension spending, Pensions, Public Pensions, savings channel, Stock Market Development, Stock markets

IMF Working Paper: "Pension Reform and Stock Market Development" by Shujaat Khan, Bo Li, Yunhui Zhao (February 28, 2025).