China Pushes to Expand Corporate Pension Coverage to Bolster Safety Net

China is making renewed efforts to revive and expand its underperforming corporate annuity (enterprise pension) system. The Ministry of Human Resources and Social Security and the Ministry of Finance released new guidelines on January 15th, 2024, aiming to encourage more companies, especially smaller private enterprises, to establish voluntary pension plans for their employees. This is in response to the mounting pressure on China’s state-run pension system, which is facing sustainability issues as the population rapidly ages and the workforce shrinks. Despite existing for more than 20 years, the corporate annuity system currently covers only about 7% of eligible Chinese workers out of a workforce of 470 million, lagging far behind its intended reach. [para. 1][para. 2]

The newly issued “Guidelines on Further Doing a Good Job in Enterprise Annuity Work” acknowledge longstanding barriers to participation, such as overly rigid and complex enrollment procedures and contribution schemes. The guidelines promise greater flexibility, including allowing simpler ways for companies to enroll and more adaptable contribution standards. However, they notably stop short of introducing significant tax reforms, a measure many economists and industry insiders view as essential to substantially increase participation and coverage. [para. 3]

China’s pension system is mainly built around three pillars: the first is the mandatory state-run basic pension, now facing solvency concerns due to demographic decline; the second is the voluntary corporate annuity system, which remains mostly confined to state-owned enterprises and large conglomerates because of high participation costs and regulatory complexity; and the third, a nascent system, focuses on individual private pensions. The corporate annuity’s lack of flexibility has deterred private and smaller enterprises from joining, reflecting rules that rely on organizational structures like workers’ congresses and labor unions found mainly in state-owned entities. [para. 4][para. 5]

To reduce these obstacles, the government’s new guidelines are now allowing alternative procedures for private companies that lack formal worker representation, promoting simplified model plans and the use of online filing systems in designated regions. Employers are given the option to start with lower contribution rates and gradually increase them, addressing concerns about high, fixed labor costs. Current regulation caps employer contributions at 8% of the wage bill, with total employer-employee contributions capped at 12%. The new rules also let companies in financial difficulty reduce or pause contributions, recognizing economic uncertainties. [para. 6][para. 7][para. 8]

To reach more small and midsize enterprises (SMEs), the government is expanding “collective plans,” where trustees pool funds from multiple employers to reduce administrative costs—a model still in its infancy. Initiatives in areas like the Lingang New Area in Shanghai are highlighted as pilots, using local incentives to attract participation. [para. 9][para. 10]

Despite these reforms, the new guidelines have been criticized for not addressing tax issues. China’s exempt-exempt-taxed (EET) tax system for annuities has limited incentives for low- and middle-income workers, as benefits skew towards high earners and annuity payouts in retirement can push lower-income retirees into higher tax brackets. Experts highlight inconsistencies between allowable employer contributions (8%) and the lower tax-deductible cap (5%), noting that effective participation rates are as low as 1-2%. Proposals for improvement include reducing first pillar (state pension) contribution rates and integrating corporate annuities with private pension instruments. For now, however, the government is betting that increased flexibility and reduced bureaucracy will significantly boost participation in the corporate annuity system. [para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17]