China: New voluntary personal pension system announced

Employer Action Code: Act

China’s central government recently announced a phased rollout of a new system of tax-favored individual retirement accounts to complement social security pension benefits and help address the challenges arising from a rapidly aging population. Vehicles for tax-favored private retirement savings are limited and under-developed in China. Enterprise annuity plans (EAPs) — the only tax-qualified voluntary defined contribution (DC) retirement arrangements, introduced in 2004 — are the most common employer-provided plans. As of June 2021, 28 million employees were covered by over 100,000 EAPs, with total assets of 2.4 trillion Chinese yuan (Ministry of Human Resources and Social Security [MOHRSS] data). This accounts for only 3% of the workforce, while assets equal less than 2% of GDP.

Key details

• The new system, regulated by the MOHRSS, will be rolled out in selected cities over a one-year trial period, before being implemented more widely. The cities and launch timing have not been announced yet.
• Participation will be open to individuals enrolled in the social security pension insurance system.
• Accounts will be funded by individual voluntary contributions of up to ¥12,000 (approximately US$1,800) per year, supported by tax incentives. The government has not indicated the specific tax incentives, but they are expected to be similar to those for EAPs, under which contributions are tax-deductible; investments accrue on a tax-deferred basis and benefits are taxable on receipt.
• Benefits will be payable in the event of retirement, disability, death or permanent emigration from China.
• Account holders will select how their funds are invested, from among approved low-risk financial products suitable for individual investors (including bank wealth management products, savings deposits, commercial pension insurance and mutual funds), provided by approved financial institutions.

Employer implications

Though employers won’t have a financial or administrative role in the new system, the availability of the new program to employees (once rolled out) could affect employers’ future thinking on providing retirement benefits. Interest in supplemental retirement plans has been growing, if modestly, among the companies surveyed by WTW. As of 2022, 17% provide supplemental retirement plans (the majority being EAPs).