New tax incentives for enterprise annuities may lift assets almost sevenfold
China's enterprise annuity program, the local version of a 401(k), could be poised to shake off a reputation for disappointing growth as the 10th anniversary of the program's launch rolls around this year.
Analysts predict tax incentives announced in December could help lift the program's combined retirement assets under management from less than 600 billion RMB ($98 billion) last year to 4 trillion RMB or more by 2020 — making it the second biggest supplementary corporate pension market in Asia after Japan.
The flourishing of that retirement “pillar” could help put the country's fund management companies on firmer footing, at a moment when a stubborn bear market for large-cap domestic equities since 2009 has found many firms turning to riskier business segments — securitizing assets from their bank and securities company owners — for the bulk of their growth.
That securitization push has been a rewarding decision for fund management companies struggling to boost revenues from their core mutual fund businesses, said Xu Lirong, chief operating officer of Shanghai-based Franklin Templeton (BEN) Sealand Fund Management Co., in an interview. But it has entailed taking on risks that other players in the “shadow banking” space, such as trust banks, could prove far better equipped to handle if and when markets sour, he said.
In its latest quarterly assessment of China's fund management landscape, released Feb. 27, Z-Ben Advisors, a Shanghai-based consultant on investment management business opportunities in China, said an “explosion” of assets derived from packaging products for their shareholders had helped boost the share of fund management firms' non-mutual fund assets to 30% of the total, from 21% a year before. (The non-core segment includes institutional accounts managed for the country's National Council for Social Security Fund, insurance companies and enterprise annuities.)
And that 30% total doesn't even count the assets controlled by the 61 subsidiaries set up by those firms over the past 15 months to conduct that securitization business. But some institutional help for the industry could be on the way.
Recent moves by the government to strengthen China's retirement system have left enterprise annuities “primed to finally live up to expectations” as that system's “second pillar,” complementing the country's national pension coverage and private savings, Z-Ben said.
In December, the government announced that beginning in January 2014, employers may take tax deductions for contributions to enterprise annuities of up to 8.33% of their total salary outlays for the prior year, while individual income taxes on employee contributions to company plans of up to 4% of wages would be deferred until the point when retirement funds are drawn down.
In the absence of tax incentives, those plans “were not very attractive and the participation ratio remained relatively low,” noted Ivan Shi, Z-Ben Advisors' Shanghai-based head of research.
Currently, less than 20 million employees in China are participating in enterprise annuity plans, out of an urban working population of 158 million.
That favorable tax treatment introduced in January “removes a major barrier to the development of (enterprise annuities) in China,” according to a December report by PricewaterhouseCoopers LLP.
Combined with an expansion of permissible investments last year, the latest enhancements have given enterprise annuities “the necessary tools to meet surging demand on the mainland for attractive pension options,” agreed Z-Ben in a December report.
The report predicted a spike of 40% this year in the program's total AUM, followed by annual growth of 30% between 2015 and 2020. That pace would lift total enterprise annuity assets to 4 trillion RMB by 2020.
In a telephone interview, Chengsen Yeh, a Shanghai-based director with accounting heavyweight EY's (formerly known as Ernst & Young) asset management business in China, said the scale of reforms needed to better support capital markets in China makes him cautious about the growth prospects for enterprise annuities over the coming year or two. Longer term, however, Mr. Yeh said he's optimistic, noting that Z-Ben's 4 trillion RMB forecast for 2020 could prove conservative.
Vanessa Wang, Beijing-based managing director and Asia-Pacific head of pension fund services for Citigroup, said in an interview that while the latest tax incentives “will make a difference” in promoting enterprise annuities, considerable work remains to be done — from making “the product” easier to set up and run, to better engaging employees participating in those plans.
Still, while the government has allowed tax deferrals before on an ad hoc basis, this first instance of a systematic application for enterprise annuities should “work wonders,” helping boost enterprise annuity assets to a few trillion RMB by 2020, even if 4 trillion RMB may prove too ambitious, Ms. Wang said.
In an interview, Michelle Zhou, a Shanghai-based tax partner with KPMG China, said the tax incentives announced in December for employers could prove more significant in the near term.
Ms. Zhou noted that the 4% contribution limit for employees comes with an annual cap of three times average monthly city wages — between $1,100 and $1,200 a year for major cities such as Beijing and Shanghai. By contrast, employers are restricted to only ensuring their combined contributions don't exceed 8.33% of the firm's total salary expenses for the prior year. That leaves employers poised to be the primary source of enterprise annuity asset growth for now, Ms. Zhou said.
If December's tax incentives are widely seen as a sign China's regulators are getting serious about making enterprise annuities work, many observers expect more to come. Just as the 401(k) program was bolstered by successive raises to the amount of tax-deferred contributions U.S. workers could make, it's highly likely enterprise annuities will see “further adjustments to get more employers and employees to join,” Z-Ben's Mr. Shi said.
For now, any surge in enterprise annuity assets will be a boon mainly to China's biggest domestic fund management firms, which snared the bulk of the licenses issued by regulators between 2005 and 2007 needed to manage money for corporate plans.
Six of the 11 outstanding license holders are foreign joint venture partners: Deutsche Bank, which owns a 30% stake of Beijing-based Harvest Fund Management Co. Ltd.; Global Assicurazioni Generali SpA, with a 30% stake in Shanghai-based Guotai Asset Management Co. Ltd.; BNP Paribas Investment Partners, with a 49% stake in Shanghai-based HFT Investment Management Co. Ltd.; Bank of Montreal, with a 28% stake in Fullgoal Fund Management Co. Ltd.; Power Financial, with a 10% stake in the Beijing-based China Asset Management Co. Ltd. and Credit Suisse Group AG, with a 20% holding in ICBC Credit Suisse Asset Management Co. Ltd., Beijing.
The other license holders are E Fund Management Co. Ltd., Guangdong and four Shenzhen-based fund management companies: Bosera Asset Management Co. Ltd.; China Southern Fund Management Co. Ltd.; China Merchants Fund Management Co. Ltd.
This article originally appeared in the March 3, 2014 print issue as, "China's 401(k) may see vast growth".