By Quentin Sommerville
BBC News, Shanghai
China's National Audit Office says its investigations have found that as much as 7.1bn yuan ($900m) of pensioners' money has been misused.
Shanghai's top Communist Party official was fired over the scandal
It said the money had been used in overseas investments, construction projects and unauthorised lending.
Private pensions are almost unheard of in China. Most people rely on state schemes.
Any crisis in China's pension funds could have important political consequences.
So the leadership in Beijing is thought to be considering plans to tighten the governance of China's fractured social security system.
Until recently, China's state pension funds were controlled locally. With little independent auditing or oversight, these provincial schemes have been open to abuse.
Rather than investing in safe but low performing treasury bonds, some local leaders chased the higher returns of China's booming economy, putting cash into riskier overseas investments and construction projects.
The audit investigation is thought to have been triggered by a pension scandal in Shanghai. Almost $400m has been misappropriated from the country's richest fund.
Chen Liangyu, the city's Communist Party secretary and most senior official, is the most highly profile victim of the scandal - although his removal from office has as much to do with an internal Communist Party power struggle as it does with a crackdown on corruption.