Changes in store for China's workplace retirement pillar

A new mandatory element in China's workplace defined contribution space this year could set the stage for the country's second pillar — enterprise annuities — to morph from an afterthought into a full-fledged leg of China's retirement stool.

Policy guidelines in 2016 that laid the groundwork for the addition of a mandatory pillar two category — occupational annuities for employees of provincial governments and public-sector institutions — are finally being implemented.

"In the last three or four months, all provincial governments have started to hand out occupational annuity trustee mandates, as well as investment mandates through pension companies," said Thomas Cheong, Hong Kong-based president of North Asia for Principal Financial Group.

That, in turn, will provide a jolt for second-pillar growth, which had stalled in recent years when enterprise annuities — voluntary plans offered by mostly state-owned companies — were the only game in town.

Analysts say enterprise annuity growth has moderated because companies in China's vibrant private sector, a focus of job growth in the country, have mostly balked at taking on the burdens of additional retirement outlays for employees whose wages, in many instances, are experiencing double-digit annual growth.

Public-sector employees coming into the workplace savings fold will bring "new dynamism" to China's second pillar, with the addition of 37 million government workers more than doubling the 23.5 million private-sector employees covered by enterprise annuity plans, according to a January report by Shanghai-based ZiAsset Consulting.

Just as importantly, the public institutions and employees will be making mandatory contributions of 8% and 4%, respectively, of employee salaries. Contributions under enterprise annuity plans, while set at the same level, are voluntary.

For the quarter ended Sept. 30, China's Ministry of Human Resources and Social Security reported 1.4 trillion yuan in enterprise annuity assets under management, up from 1.37 trillion yuan as of June 30.

Over the past few years, meanwhile, the number of predominantly state-owned enterprises offering enterprise annuity plans has continued to push higher, with a 7% increase over the latest 12 months through Sept. 30, 2018. However, growth in the number of employees covered by those firms' supplementary workplace retirement plans has stalled, rising a mere 1% over that period to roughly 23.5 million, or 6% of the workforce.

Growth could accelerate this year. When all 37 million employees with provincial governments and related institutions are covered, annual contributions will come to roughly 150 billion yuan, according to the ZiAsset report.

Defined contribution assets will grow faster than in the past, said Calvin Chiu, Hong Kong-based senior managing director and head of Asia retirement with Manulife Asset Management.

There will be an acceleration of the launch of occupational annuities by public entities across the length and breadth of China — from provincial governments to hospitals, educational facilities, postal systems and government research centers — in 2019 and beyond, said Mark Yang, a Shanghai-based principal and actuary, health & retirement, with Aon Hewitt Consulting (Shanghai) Co. Ltd.

The size of the occupational annuity market could exceed the enterprise annuity market within a few years, he predicted.

Currently, 22 local managers — including joint ventures with minority foreign partners such as ICBC Credit Suisse Asset Management; China Life Pension Co., an AMP Capital Investors Ltd. affiliate; and HFT Investment Management Co., a BNP Paribas Asset Management affiliate — have the license to manage enterprise annuity money.

Meanwhile, some analysts are asking if the occupational annuity story points to bigger changes to come for China's second pillar — with even greater implications for asset growth.

Once provincial governments and affiliates have their contracts in place, the stage could be set for policymakers to make enterprise annuities mandatory as well, said Principal's Mr. Cheong.

Making enterprise annuities mandatory and expanding tax incentives are necessary for making "the defined contribution pension pillar ... a major contributor to China's retirement protection," said Janet Li, Mercer's Hong Kong-based wealth business leader, Asia.

With mandatory participation, enterprise annuity plans could become a "huge accumulator" of retirement assets, agreed Josef Pilger, Sydney-based partner and global pension and retirement leader with Ernst & Young.

But making pillar two a mandatory powerhouse could require reform of China's pillar one system, warned Principal's Mr. Cheong.

It would be tough to force companies making mandatory first pillar contributions of 20% of employee salaries — especially those in China's cutthroat private sector — to take on the added burden of mandatory second pillar contributions as well. If enterprise annuities become mandatory, steps would need to be considered to lighten that corporate load, he said.