Regulation of state and supplementary pension schemes in China: overview
A Q&A guide to pensions law in China.
The Q&A gives a high level overview of the key practical issues including: state pensions; supplementary pensions; funding and solvency requirements; tax on pensions; business transfers; participation in pension schemes; and employer insolvency and overall scheme solvency.
To compare answers across multiple jurisdictions, visit the Pensions: Country Q&A tool.
The Q&A is part of the global guide to pensions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/pensions-guide.
Contributions paid to the government
An employer and its full-time employees must participate in the PRC social insurance scheme, which includes pension insurance. Each month, the employer must pay its own pension insurance contribution and withhold the employees' applicable contributions. Contribution rates for employers and employees are set by local regulations and vary from city to city.
Taxation of contributions
The employee's pension contribution is not taxable for individual income tax purposes. The employer's pension contribution can be deducted as an expense from the employer's pre-tax income and so is not taxable for enterprise income tax purposes.
Monthly amount of the government pension
The monthly amount of a government pension varies by city and by person and is calculated using a complex formula. Generally, the amount of the pension an employee will receive after retiring depends on three factors:
The employee's average salary.
The number of years the employee has made contributions.
The amount of the employee's contribution base.
Occupational (that is, linked to an employment or professional relationship between the plan member and the entity that establishes the plan)?
Personal (that is, not linked to an employment relationship, established and administered directly by a pension fund or a financial institution acting as pension provider, where individuals independently purchase and select material aspects of the arrangements, though the employer may make contributions).
Is linked to the employee's salary (defined benefit)?
Is linked to employer and/or employee contributions and investment return on those contributions (defined contribution)?
Linked to the employee's salary
Supplementary pension schemes can be linked to the employee's salary, the employee's contributions and/or the employer's contributions.
Linked to employer and/or employee contributions
See above, Linked to the employee's salary.
Is there a minimum period of service before workers are entitled to receive vested rights?
Are there any legal requirements for schemes or providers to index pensions in payment and/or revalue pension rights in deferment?
Minimum period of service
Current laws do not provide the minimum period of service but require the employees should reach the statutory retirement age for receiving pension benefits.
Legal requirement to index
Supplementary pension is not directly linked to index; instead, it is composed of three parts, employer's contribution, employee's contribution and the income of the enterprise annuity investment.
Funding and solvency requirements
Funded or unfunded?
Solvency requirements for funded schemes
The Measures for the Management of Enterprise Annuity Funds (2015 Revision) provides some legal requirements regarding the above questions, which include:
The properties under the enterprise annuity funds must be used for domestic investment only, and the investment scope includes bank deposits, treasury bonds, instruments of the Central Bank, bond repurchase, universal insurance products, investment-linked insurance products, securities investment funds, stocks, financial bonds, enterprise (corporation) debentures, convertible bonds (including detachable convertible bonds), short-term financing bonds, medium-term instruments and other financial products rated investment grade or better.
Trustees, account managers, custodians and investment managers must report the information on the management of the enterprise annuity funds in accordance with the relevant provisions, and are liable for the authenticity and integrity of the report.
To what extent can members transfer their funds to another pension scheme?
How do members normally take the benefit of their funds (for example, lump sums, income withdrawals (drawdown), life annuity arrangements)?
What are the legal restrictions upon access to the funds (for example, age)?
What are the common arrangements for early retirement and ill-health retirement?
Are dependants of deceased members entitled to receive benefits payable on the member's death? What form do these commonly take?
Member's transfer of funds
When an employee changes his (her) employer, the fund in his individual enterprise annuities account may be transferred to the new employer. If the new employer does not provide enterprise annuity, the individual enterprise annuity account may be kept managing by the previous entity.
Taking pension benefits
When an employee reaches the statutory retirement age, he may draw the enterprise annuities from his individual enterprise annuities account in a lump sum or regularly.
As a general requirement, an employee under the statutory retirement age cannot draw the enterprise annuities out of his account, unless the employee is dead or abroad for permanent residence.
Early and ill-health retirement
Generally, there are only three ways in which the employee can draw the enterprise annuity from his or her account (reaching statutory retirement, residing abroad and dead). Therefore, if the "early and ill-health retirement" refers to the employee retires because he has satisfied the conditions where an employee can retire earlier than normal as prescribed by law, he should be able to draw the enterprise annuity. However, if the "early and ill-health retirement" refers to the employee leaves the work post before statutory retirement age according to the employer’s internal policies, he may have to wait till the statutory retirement age for drawing enterprise annuity.
After the death of an employee or retiree, the balance of his individual enterprise annuities account can be drawn out in a lump sum by the beneficiary or legal heir designated by him.
The Ministry of Human Resources and Social Security (MOHRSS) oversees the operation of supplementary pension schemes.
Before an enterprise annuity scheme operates, it must be submitted to MOHRSS for registration. When the enterprise annuity scheme changes or ends, it must be reported, in advance, to MOHRSS. Under certain circumstances where an audit of the enterprise annuity scheme is mandatory, the audit report must be submitted to the MOHRSS.
Any service providers involved in the provision of a supplementary pension scheme must be authorised by their respective supervisory authorities and must apply to MOHRSS for authorisation before entering into such a scheme.
Other key governance requirements
When an enterprise annuity scheme operates or changes, it must be reported to the competent tax bureau.
Penalties for non-compliance
Penalties for non-compliance may vary depending on the specific circumstances of the violations, which include: ordering to make corrections, making compensation, criminal liability and so on.
Tax on pensions
Tax relief on employer contributions
Employer contributions to a supplementary pension scheme not exceeding 5% of the aggregate salaries of all employees can be treated as a deductible expense when calculating enterprise income tax (though any amounts above this 5% threshold cannot be deducted).
Likewise, for the calculation of employee's individual income tax, employer contributions not exceeding 5% of the aggregate salaries of all employees can be deducted from the individual's taxable income provisionally (though any amounts above this 5% threshold cannot enjoy this tax exemption).
Tax relief on employee contributions
For the contributions to an annuity plan made by individuals according to the relevant state policies, the part not exceeding 4% of the taxable wage base of an individual must be deducted from the individual's taxable income for the current period. Employee contributions above 4% of the taxable wage base of an individual must be included in the wage and salary income of individuals for the current period and are subject to individual income tax. The taxable wage base of individuals under an enterprise annuity plan is the average monthly wage of an individual in the previous year. The part of an individual's average monthly wage above 300% of the average monthly wage of employees in the previous year in the districted city where the employee works will not be included in the taxable wage base of the individual.
Annuities received on a monthly basis by individuals who reach retirement age after the Notice on Issues concerning Individual Income Tax on Enterprise Annuities (CAI SHUI (2013) No 103, jointly issued by the Ministry of Human Resources and Social Security and the State Administration of Taxation) comes into force (1 January 2014) will be subject to individual income tax in full at the rate applicable to "wage and salary income". Annuities received on an annual or quarterly basis after 1 January 2014 will be evenly apportioned to each month, and the amount received each month will be subject to individual income tax in full at the rate applicable to "wage and salary income".
Where entities and individuals began making annuity contributions before 1 January 2014, annuities received by individuals after 1 January 2014 can be subject to individual income tax according to the above requirement after deduction of the part of contributions made by entities and individuals before 1 January 2014 on which individual income tax was paid. If annuities are received by individuals in instalments, the taxable income for the current period can be decreased according to the ratio of the amount of annuity contributions made before 1 January 2014 to the total amount of annuities contributions, and the decreased taxable income will be subject to individual income tax according to the above requirement.
Funds in personal accounts under an annuity plan withdrawn in a lump sum by individuals to settle abroad or the balances in personal accounts under an annuity plan withdrawn in a lump sum by the beneficiaries designated by or the legal heirs of the deceased can be apportioned over 12 months. The amount received each month will be subject to individual income tax according to the above requirement. This is the only exception, therefore, funds or balances in personal accounts under an annuity plan withdrawn by individuals in a lump sum cannot be apportioned and will be subject to individual income tax according to the above requirement as stand-alone one-month wage and salary income.
Transfer of accrued pension rights
In an employer's merger or division, the new employer will inherit the old pension plan. In this sense, the pension rights are automatically transferred to the new employer. In a share transfer, as the employer and the employees remain the same, the employees' pension rights will not be affected and there is no automatic transfer of pension rights.
Other protection for pension rights
If a business transfer (other than a merger, division or share transfer) has led to the dismissal of an employee and the employee has signed an employment contract with the new employer, the employee's pension will be transferred to the new employer and their supplementary pension rights will be transferred to the new employer's enterprise annuity scheme. If the new employer does not have such a supplementary pension plan, then the employee's supplementary pension rights will remain in the former employer's enterprise annuity scheme.
Participation in pension schemes
Employees who are working abroad?
Employees of a foreign subsidiary company?
Employees working abroad
The supplementary pension related regulations do not prohibit employees who are employed by a company registered in mainland China but working abroad from participating in the company's supplementary pension scheme. Whether the same tax reliefs referred to in Question 8 are still available depends on each individual situation and the applicable local tax regulations.
Employees of a foreign subsidiary company
The employees of a foreign subsidiary company are not prohibited from participating in the enterprise annuity scheme of a parent company registered under the laws of mainland China. However, the foreign subsidiary company should ensure that the laws of the country in which it is incorporated permit its employees to participate in the enterprise annuity scheme of a PRC parent company. Whether the same tax reliefs referred to in Question 8 are still available depends on each individual situation and the applicable local tax regulations.
Employer insolvency and overall scheme solvency
Under the regulations, pension scheme benefits must be administrated under trust by a lawful trustee (and the employer cannot be the beneficiary of that trust). As a result, the pension funds are independent from the employer and will not be subject to claims in the event of the employer's winding up.
Central Government of the People's Republic of China
Description. This website links to the section "Laws and Regulations" under the website of the PRC central government, which is maintained by the PRC central government and contains the official up-to-date PRC laws and regulations. The website is also available in English at: www.chinalaw.gov.cn/article/english. However, these English translations of laws are for reference only.
King & Wood Mallesons
Professional qualifications. China, 1994
Areas of practice. Employment; labour law; labour arbitration/litigation; social security.
- Participating in drafting legislation of the PRC Labour Law, the PRC Employment Contract Law, the PRC Labour Dispute Mediation and Arbitration Law, and the PRC Social Insurance Law, and the formulation of implementing regulations for such laws.
- Advising numerous multinational companies and leading PRC state-owned enterprises on employment issues arising out of M&A transactions, restructurings, reorganisations, bankruptcies and stock listings.
- Representing numerous state-owned enterprises, publicly-traded companies and multinational companies in labour arbitration/litigation and judicial appeals.
King & Wood Mallesons
Professional qualifications. China, 2002
Areas of practice. Labour law; employment; labour arbitration/litigation; international dispute resolution.
- Advising a leading tourism company and a high-tech company on mass layoffs due to the closure of their subsidiaries.
- Advising a leading pharmaceutical company on employee transfer in a global acquisition transaction.
- Representing numerous leading companies, including high-tech companies, insurance companies and real estate companies in labour arbitration and litigation.
- Advising on daily labour and employment issues for numerous leading companies, including drafting and amending internal policies, agreements, incentive plans and other documents, providing opinions on daily inquiries and so on.