Date:October 2016

Place:The CEO office of a large domestic company


Richard, 39 years old, had worked in a foreign-owned enterprise before being employed as HRD by the company six months ago. He has outstanding domestic and overseas educational background and work experience and is extremely strong in execution and innovation.

Mr. Li, CEO of the company, 49 years old, has been in this position for three years. He had worked as an executive for several companies with extensive experience in company management.


Recently, Richard came across again a lively expert discussion about the Enterprise Annuity Provisions (Consultation Draft) on the Internet. That brought back his memory of the days when he studied and worked in the US, where he first learned how local companies operated a well-established enterprise annuity system. In view of the company’s current HR development conditions, he decided to propose the system to the CEO. After several weeks of research and drafting, Richard walked in Mr. Li’s office with a detailed feasibility report.


Richard: Mr. Li, are you free at the moment? I’d like to discuss with you some new thoughts on HR management.

Mr. Li: Sure! Come on in and have a seat.

Richard: I’ll just cut to the chase. I want to talk about the enterprise annuity. I think we could consider installation of an enterprise annuity plan. I have prepared a feasibility report for your review.

Mr. Li: A thick report! I heard of it from some friends at national state-owned enterprises, but I am not clear about it. I will read your report later. Give me a general idea of it first.

Richard: All right! Simply put, the enterprise annuity is a pension insurance supplementary to the basic pension fund, otherwise known as the second pillar of the pension insurance system. It originated from the countries where free-market economies are well developed. The first enterprise annuity plan was set up by the American Express as early as 1875. Now it is widely adopted all over the world, especially in developed countries. A typical example is the 401(K) Plan in the US. You may have heard about it.

Mr. Li: So, what’s the difference between the enterprise annuity and the basic pension fund?

Richard: They are different in three aspects. First, the enterprise annuity is flexible. Pension fund contributions and rates are fixed by law, while enterprise annuity contributions are voluntary, the amounts of contributions can be freely determined within a certain range. If an enterprise is in difficulty, its contributions could be even suspended. The second is the source of funds. In addition to contributions from both employer and employee, the enterprise annuity has a third component: investment income from their contributions. Employees’ contributions and their net investment income are all credited into employees’ personal accounts, while the employer’s contributions are proportionally credited into employees’ accounts. The proportion could be determined according to the annuity scheme. The third is investment operation. Social security is administered and operated solely by government agencies, while the enterprise annuity plan is managed according to market rules. We may engage a professional institution to manage and operate it.

Mr. Li: After all, we still have to open our purse. It’s already a heavy burden for us to pay social security and housing fund benefits for our employees. How can this expense be justified? To be honest, except for those large national champions, I don’t know that any other enterprises like us have any enterprise annuity plan.

Richard: I knew you’d say so (laugh). Apparently, it’s an additional expenditure. Yet, in the interest of our long-term development, enterprise annuities could be an important tool for optimizing human resources management. Mr. Li, you know that now it’s hard to hire workers, and staff turnover is high. We are not particularly attractive to employees compared with our competitors. An enterprise annuity plan will not only be our welfare program, but also be good for our brand buidling. Employees will be happy with our good welfare system, realizing that we are far-sighted and willing to adopt advanced international practice. This will help us attract and retain talented people, especially those high-end and international talents; meanwhile, it is good for our corporate brand and image.

On top of these intangible benefits, we can also benefit from tax incentives. According to current regulations, when annuities contributed by employer and employee and investment income are credited to employees’ personal accounts, their individual income tax could be exempted temporarily to some extent. This could save a lot of tax payments. Besides, the government is expected to introduce more favorable tax policy to encourage enterprises to establish enterprise annuity plans, which is also an international trend. Such tax exemption is a tangible benefit for our company.

About the cost and the specific tax incentives, there is detailed data in my report. You can check it later.

Mr. Li: I got your point on the benefits for our company, but what if our employees believe they will get less money after contributing the annuity and then refuse to do so?

Richard: For employees, the annuity is both a supplementary pension and a benefit offered by the company. It can be used to cover any shortfall in the pension fund and to improve employees’ life quality after retirement. Compared with commercial insurance, investment of annuities is subject to much stricter regulation. So, it carries less risks and more stable earnings. In another aspect, annuities offer better returns than bank deposits. In this sense, annuities can be considered as a good way of money management. What’s more, a big part of the money management funds comes from the employer’s contributions. Even if employees refuse to join in the enterprise annuity plan, the employer will not distribute the annuities as payments to employees. For this reason, it can be very attractive to employees.

In addition, employees will also enjoy the benefit of tax exemption. As contributions to the annuity plan are exempt from individual income tax, that means more funds will flow into investment vehicles, and employees will be better paid. That is also attractive.

Mr. Li: Sounds great. But employees may wonder whether their money would have been wasted if they leave the company.

Richard: Under current regulations, if an employee leaves our company and his new employer does not have an annuity plan, he may keep his account in our annuity plan. After retirement, he can claim his pension at one time or periodically. He may also claim his pension in a lump sum when he settles abroad. If the new employer has an enterprise annuity plan, the employee’s personal account will be transferred to the new employer.

For our part, in designing the annuity system, we may reach agreement with employees that the annuities contributed by the company and their investment income may not be distributed to those who choose to leave the company in breach of their contracts of employment. That would also be a restraint for such employees who commit a breach of contract.

Mr. Li: It looks interesting. Will it take lots of efforts to set up an annuity plan?

Richard: It’s not very complicated. It consists of 5 steps. First, make a plan. For instance, we have to consider how to coordinate the annuity with wages, bonuses, and stock incentive plans, and how to organize and manage the annuity plan, and set conditions for claiming benefits and suspending contributions. Second, adopt the enterprise annuity scheme at a meeting of employees' representatives or a general employees’ meeting. Third, file the enterprise annuity scheme with the competent government authority. Fourth, appoint an appropriate trustee institution to manage the annuity. Such institution could be either an external professional institution, or an enterprise annuity council within our company. The last step that the trustee chooses professional financial institutions or banks as account managers, custodians, and investment managers, and then signs contracts with them respectively.

Mr. Li: That sounds still burdensome. Could we work it out by ourselves?

Richard: We may use the services of professional institutions, such as fund managers, insurance companies and law firms. They have sufficient experience.

Mr. Li: In that case, it will be much easier. But do we have to assign dedicated persons to manage the annuity after it is set up?

Richard: That won’t take us much energy. What we need to do is to introduce and recommend the annuity plan to new employees. The trustee will take charge of the day-to-day operation, our job is to supervise their performance.

Mr. Li: That’s great! For now, I can only think of those questions. Your idea is excellent! I will read your report in detail later, and will get back to you when I have further questions.

Richard: Thank you, Mr. Li. I look forward to more discussions with you.

Editor’s note: this article was simultaneously published on