Pensions complémentaires (volontaires)

Regulatory Framework

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2017: MOHRSS No.92 "Enterprise Annuity Measures": regulates (enterprise annuity) plan establishment, funding, account management, payment, supervision, etc.

2015: MOHRSS No.11, revised "Administrative Measures for Enterprise Annuity Funds": regulates (enterprise annuity) fund management, fund investment, plan management and information disclosure, etc.

In China, the occupational pensions for commercial companies and enterprise employees are voluntary arrangements and are usually called "enterprise annuity". For government employees and state sponsored institution employees, the occupational pension is compulsory. Therefore, the information provided in the above sections covers voluntary occupational pension schemes, e.g. "enterprise annuity", established by commercial companies for enterprises employees.

Plan Profile

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Plan sponsors

Enterprise employer and its employees are able to establish a voluntary pension plan. Occupational pensions are the second pillar of the country's pension system. Enterprise employers should co-pay and withhold social security ("basic pension") for employees, the first pillar of the country's pension system.

Any enterprise which pays contributions to the basic pension insurance and is able to afford the financial burden, can establish an occupational pension plan.

Enterprise employer and its employees should make a collective agreement to confirm and establish an annuity plan. The plan should be approved by the employee representative committee or all employees.

Both enterprise employers and its employees are involved in the bargaining process. In China, a worker union is function as representative of employees and negotiate with employers.

Types of plans

Enterprise employer should submit the documents in relation to the establishment of occupational pension plan to the local Human Resources and Social Security Department (the state owned enterprises should submit to the Ministry of Human Resources and Social Security (MOHRSS) of China). In case the Human Resources and Social Security Department does not raise any objections in 15 days after receiving the documents, the occupational pension plan will become effective.

The types of the plan could be a single-employer plan or multi-employer plan. The pension plans are DC in design.

The participation in the plan is voluntary for employees. The contribution rates and plan are usually uniformly set up. Employees have little choices.

Institutional Framework

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Trustees can be corporate trustee and enterprise annuity council formed by the enterprise. Enterprise annuity council involves enterprise representatives, employee representatives, and experts invited outside from the enterprise. The proportion of employee representatives should be no less than one third.

Trustees should entrust qualified account management institutions, investment managers, and custodians, to exercise the duties of annuity funds operation.

The sponsors are not involved in the management of the plan, The trustee will engage investment manager to manage the plan. The institutions managing the plan are separate from the sponsors and are profit-making institutions.

The trustees and investment managers can be insurance companies, but cannot operate on the basis of an insurance contract.

There are no other institutions involved in the collection or payment of contributions. The service charge for trustees and custodians cannot be higher than 0.2% of fund's net asset value, and cannot be higher than 1.2% for investment managers.

Coverage

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All employees who have passed probationary period can be members of voluntary occupational pension plan.

Regulations in force prohibit discrimination. Any employee who contributes to the basic pension insurance can join the enterprise annuity plans.

Financing / Investment

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Sources of funds

Employee contributions

Plans are usually defined contribution plans. Employees do need to make contributions. The contribution by employer is not compulsory. Based on current legal requirements, employer's annual contributions should be less than 8% of the total amount of employees' salary, while the annual contributions made by both the employer and employees should not exceed 12% of the total amount of employees' salary. The specific rates have to be determined by both the employer and employees. Employee contributions are usually withheld from their salary by their employer directly.

Employer contributions

The contribution by employer is not compulsory. Based on current legal requirements, employer's annual contributions should be less than 8% of the total amount of employees' salary, while the annual contributions made by both the employer and employees should not exceed 12% of the total amount of employees' salary.

Other sources of funds

There are no other source of fund, such as subsidies or rebates. However, there is preferential tax policy. A portion of employer contribution, which is less than 5% of the total employees' salary, is allowed to be deducted when calculating taxable income amount.

Methods of financing

Employee's individual accounts are fully funded.

Asset management

There are four (4) parties involved in the asset management process: trustee, custodian, account manager and investment manager, which are all financial institutions, such as insurance company, bank, fund management company, etc. Qualification licenses are required and are mandatory.

The investment of the plan assets is restricted by laws and regulations. For example, equity investments are limited to 30% of the NAV of the portfolio, no foreign investment is allowed and strict risk control mechanisms are required within the investment parties.
Investment Management fee is limited to 1.2% of the NAV of the portfolio. For each individual account, account management fee should be less than CNY 5 per month.

Benefit provisions

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Acquisition and maintenance of rights

Waiting period

Employees has to pass the probationary period to join the plan according to legal requirement.
Plans are for staff under employment, and have no age limits. Retirees are not included (retirement age is usually 55-60 for male and 50-55 for female).

Vesting rules

Employee contribution and its investment return usually vest immediately. It is not compulsory to set up vesting provisions for the part of employer contribution and its investment return. Employer contributions vest gradually with full vesting should not exceeds 8 years to meet the legal requirements.

Preservation, portability, transferability

Based on laws and regulations, employee cannot make early withdrawals, unless in circumstances like retirement, completely incapacitated, immigration, or death. Employee has choice to get a lump sum or a regular pay (monthly) after retirement. Since there is preferential tax treatment, regular payment is often chosen with the remaining part still under investment.

Employee who changes job can transfer from one pension plan to another if both the previous and new employer has a pension plan. If no pension plan has been set up by the new employer, the employee lose the right to make contributions to the previous plan and his/her account will be turned in to a preservation account, until he/her has another pension plan available to transfer to continue contributions and investment.

Retirement benefits

Benefit qualifying conditions

Minimum age for benefits from occupational plans to be paid is the same as in social security programs.

Employee cannot withdrawal in advance, unless in circumstances like retirement, completely incapacitated, immigration, or death.

Benefit structure / formula

The first pillar of China's pension insurance system, basic pension insurance (part of social security programs), is defined benefit. The growth rate is under unified control of the state according to the economic development and fiscal conditions. Benefit formula for DB plans is quite complex, depending on the average social wage, length of career, and the funded level of individual account. Occupational pension plan which is the second pillar, is usually defined contributions (DC) and it is a supplement to the DB plan. Employee has to join the basic pension insurance program before joining in an occupational pension plan. For the employee individually, the benefits for these two plans are cumulative. The basic pension insurance will be paid until death, while benefits from the occupational pension plan will be paid until the individual account balance being zero.

Benefit adjustment

Employee has choice to get a lump sum or a regular pay (monthly) after retirement. Since there is preferential tax treatment, regular payment is often chosen with the rest part still under investment. The pension increase depends on the investment management. Employer will assess the enterprise's occupational pension plan and decide the benefit according to employees' accumulation, investment return, etc. In China, occupational pension plans are DC plans.

Survivors

In case of death, the legal beneficiary of the employee has the rights to get the pension payment.

Disability

Occupational injury is covered by injury insurance separately. Employee can have indemnity of N times annual salary, according to classification report of disability.

Protection of Rights

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Protection of Assets

Pension plan assets must be held separately from the sponsoring employer's asset according to regulation.

Financial and Technical Requirements / Reporting

Financial statements must be prepared quarterly. After the scheme has been operated for three years, the financial reports have to be audited.
There are also legal requirement to provide investment reports of data disclosure to supervisory authority quarterly.
In situation that the sponsoring company failed to meet its contributions obligation due to business operation issues, the supervisory authority requires the sponsoring company to negotiate the arrears payment plan with employees, and the total arrears payment duration and amount is limited to the interruption durations and amount.

Whistleblowing

Government regulatory departments are responsible for dealing with complaints and investigating violations of laws and regulations.

Standards for service providers

Service providers, such as auditor has to have qualifications according to legal requirements. Auditors must be independent of sponsoring companies. The occupational pension plan has no actuarial exposure since they are DC in design.

Fees

Management fee ratio has an upper limit. Fees standards have to be approved by supervisory authority.

Winding up / Merger and acquisition

A pension scheme would be wound up when terminated. Liquidation team consists of enterprise representative, employee representative, trustee, custodian, account manager, investment manager, accountant (auditor), and lawyer. Within three months after the scheme being wounded up, liquidation reports has to be provided to the supervisory authority.

Regulation states that the scheme asset has to be separated from the sponsoring companies' asset, which means it cannot be calculated in case of merger or acquisition.

Bankruptcy: Insolvency Insurance / Compensation Fund

There are no legal rules that require the company to buy insurance against low performance or insolvency of the plan. However, legal rules require to set up "investment risk reserve" to cover the investment loss when the plan terminates. Investment manager has to set aside 20% of the management fee charged to be investment risk reverse fund. The reverse fund is independent of the investment company's asset. It is allowed to stop accruing reverse, when the balance of the reverse fund reaches 10% of the NAV of the portfolio.

Disclosure of information / Individual action

There are legal requirements to periodically disclose information (e.g. benefit statement, financial statements, fees etc.) to members and beneficiaries.

Complaints or disputes between plan members or beneficiaries and the plan management are suggested to solve by negotiation. When it fails to reach a solution, an arbitration or a suit may be chosen as a way.

Other measures

The rights of members and beneficiaries are protected by laws and regulations. The scheme assets are not allowed to be calculated into the sponsoring company's liquidation assets and are not allowed to be treated as debt payment. It is not allowed to enforce against the scheme asset for debt which is not borne by the scheme itself.

Tax Treatment

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Taxation of employee contributions

Employee contribution which is less than 4% of the employee's salary is exempted of the employee's income tax. The part above 4% is not tax-exempt. Income tax is charged when the employee get the pensions after retirement, and it is calculated based on applicable tax rate.

Taxation of employer contributions

Employer contributions are not considered as taxable for employees. The portion of the employer contributions within the standard of 5% of the total wages of the employees shall be exempted from enterprise income tax.

Taxation of investment income

Investment income is tax-exempt when credited into individual account.

Taxation of benefits

Income tax is charged when the employee get the pensions after retirement, and it is calculated based on applicable tax rate.

Regulatory and Supervisory Authorities

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The Ministry of Human Resources and Social Security of the People's Republic of China is the specific regulatory and supervisory authorities for China's social security program and occupational pension scheme. It is the government regulatory authority. It has power in scheme approval, supervision over the fund operation, punishment on violations and misconduct. It can punish or disqualify service providers or plan manager for lack of compliance. Advisory committee representing different groups involved in complementary occupational pension plans exists.

Information regarding the authority is publicly available on its website: http://www.mohrss.gov.cn/

The China Banking and Insurance Regulatory Commission (CBIRC) is not responsible for the regulation and supervision of the occupational pension plans in China, but assists the Ministry of Human Resources and Social Security when necessary.

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