On 18 December 2017, the Ministry of Human Resources and Social Security and the Ministry of Finance jointly issued the Measures for Enterprise Annuity (Measures). The Measures took effect on 1 February 2018 and allow employers and employees to jointly formulate and contribute to voluntary pension schemes.

Major Developments under the Measures

Enterprise annuity is an autonomous pension scheme jointly established by employers and employees to supplement the mandatory government-run social insurance scheme. Both employers and employees pay their respective contributions to the enterprise annuity according to the enterprise annuity plan jointly formulated by them. The annuity fund is held by a qualified trustee on trust and is managed and invested in accordance with relevant laws and trust agreements. Compared to the Trial Measures in 2004, the major developments under the Measures are as follows:

(A) the maximum annual contribution to be paid by the employer has been amended from 1/12 (approximately 8.33%) to 8% of the employees' total wages. The total contribution to be paid by the employer and employees has been amended from 1/6 (approximately 16.67%) to 12% of the employees' total wages.

(B) the annuity contribution is allocated to employees' personal accounts on a 'reasonable' basis and the maximum amount allocated to a single employee cannot exceed five times the average amount allocated in the same payment cycle.

(C) the Measures introduce procedures for modification, suspension and termination of the enterprise annuity plan.

(D) the Measures stipulate the ownership of annuity contributions and investment income derived therefrom, that is, a. the contribution paid by an employee and related investment income belong to such employee; b. the ownership of contribution paid by an employer shall be determined according to the agreement (i.e. the enterprise annuity plan). The parties may agree that the employer's contribution and related investment income belong to the individual employees from the very beginning or that they will be gradually transferred to employees' personal accounts for a period not exceeding eight years.

(E) under the Trial Measures, withdrawal of enterprise annuity is only allowed when an employee reaches the statutory retirement age, dies or settles abroad. According the Measures, an employee who loses capacity to work may also withdraw amount from his or her personal account under an enterprise annuity on a monthly basis, for several times or in a lump sum.

Impact on Enterprises and Employees

Long-term development of enterprises

Enterprise annuity has been hailed as an attractive benefit for employees, supplementing the existing statutory scheme. The flexible distribution mechanism of enterprise annuity stipulated under the Measures can be used to incentivise employees, in particular high potential employees. It will also help improve the competitiveness of employers and demonstrate an investment in the employee's long-term development.

Increased income of employees after retirement

s living standards are constantly improving, the basic statutory social insurance increasingly falls short. These Measures will complement the statutory social insurance and help improve the living standards of employees after retirement.

National tax incentives

According to the Notice on Individual Income Tax on Enterprise Annuity and Occupational Pension, the annuity contribution paid by employers currently is not subject to individual income tax when allocated to employees' personal accounts. The portion of annuity contribution paid by an individual employee not exceeding 4% of such employee's salary base shall be deductible from the individual's taxable income of the current period.

Key takeaways

Employers are encouraged to establish enterprise annuities according to the Measures. The Measures provide a transitional period of one year, i.e. enterprise annuity plans already existed before the Measures came into force which are inconsistent with the Measures shall be modified before 1 February 2019. We noticed that some Social Insurance Bureaus at provincial or municipal level have published local regulations or guidelines for the implementation of the Measures, including Hebei, Tianjin, Hainan, Jilin, Zhuhai, etc. It is expected that enterprise annuity will be adopted by many enterprises in China in the future.