Caixin Weekly | How Corporate Pensions Can Expand (AI Translation)

财新周刊｜企业年金如何做大

The corporate annuity plan in China, marking its 20th anniversary, serves as the second pillar in the retirement security framework, aiming to provide benefits for 460 million employees. However, it faces bottlenecks in its development. At the 2024 China Academy of Social Sciences Social Security Forum, experts examined the current state and future of corporate pensions, unveiling the "China Pension Development Report 2024." The report highlighted that by the end of 2023, the plan covered 141,700 enterprises with 31.44 million participants, amassing funds worth 3.19 trillion yuan and an average annual return of over 6%. Nonetheless, merely 0.2% of 60.2 million businesses contribute to these annuities, representing only 2.5% of GDP. [para. 1][para. 2][para. 3]

China's pension system is categorized into three pillars: the government-dominated basic pension, employer-led enterprise annuities, and personal savings pensions. The first pillar remains dominant, covering nearly 100% of the workforce, whereas growth in enterprise annuities has slowed. Between 2015 and 2023, participation only increased by 8 million, and fund growth fell below 20% to just 8.75% in 2022. There’s mounting pressure on the basic, pay-as-you-go pension model, highlighting a need to bolster the second and third pillars. The central government aims to expand pension coverage, with strategies from the Chinese Communist Party's Third Plenary Session to address this imbalance. [para. 4][para. 5][para. 6][para. 7]

Current coverage of corporate annuities should ideally reach over 400 million workers, significantly higher than current levels. The China Social Security Society reported an imbalance in pension contributions heavily skewed toward government plans. To maintain pre-retirement living standards, the World Bank suggests a 70% pension replacement rate, but China’s first pillar only provides 48.2%, with corporate annuities adding around 10%. Zhou Xiaochuan, a former governor of the People’s Bank of China, proposed reallocating some contributions to personal accounts to improve incentives. [para. 8][para. 9][para. 10]

Corporate annuities date back to state-owned enterprise reforms, which sought to mitigate retirement income gaps. Although meant to cover more employees, growth has been constrained by high participation thresholds and rigid setup procedures. The Ministry of Human Resources requires companies to first participate in basic pension insurance and maintain profitability before establishing annuities. Consequently, expansion among private firms is challenging. Strategies like revising contribution and tax incentive policies are necessary to improve participation rates. Dai Xianglong, a former banking official, argued for revising outdated regulations and making them suitable for current economic conditions. [para. 11][para. 12][para. 13]

Tax incentives are another hurdle. Currently structured to defer taxes, these incentives have limited appeal, failing to significantly encourage enterprise participation. The corporate annuity typically follows the EET tax model, offering deferral until benefits withdrawal. However, many smaller companies prioritize liquidity over such benefits, preferring direct cash incentives to employees. Experts recommend increasing the tax benefits or alignment with international standards to stimulate enterprise contributions. For instance, Liang Tao from the China Banking and Insurance Regulatory Commission advocated for full tax deductibility on company contributions, which may bolster participation. [para. 14][para. 15][para. 16]

Investment returns, crucial for annuity growth, have been declining, going from 10.31% at their peak in 2020 to only 1.12% in 2023. The investment structure limits equity assets to approximately 20%, with potential for higher returns if the threshold is increased to 40% or more. Permitting employees greater personal investment choices might enhance flexibility and returns. Policies are gradually relaxing to allow more investment in equities and foreign participation, aligning corporate pension investments with potentially higher-return strategies. [para. 17][para. 18][para. 19]

Ultimately, organizational flexibility and policy restructuring are vital to expand coverage effectively. Small and midsize enterprises, often constrained by complex regulations and cost concerns, are encouraged to adopt simplified annuity plans. There's also discussion around making corporate annuities quasi-mandatory, improving individual account transfers across the pension pillars, and integrating currently segregated social security elements to reduce operational costs and increase coverage. [para. 20][para. 21][para. 22]