I. Q&A on Enterprise Annuity (EA)
An enterprise benefits from EA in the following three ways: 1) The EA plan provides an important way to improve HR management and implement HR strategies. The plan helps the enterprise build a competitive compensation and benefits (C&B) system to retain capable employees, improve competitiveness and corporate culture, and enhance staff cohesiveness; 2) The EA trustee seeks to retain and increase the EA value, laying the material foundation for retirees’ living standards, and reassuring employees during retirement; 3) Entitled to a preferential tax policy, EA enables the enterprise to cut tax costs, as up to five percent of the payroll is exempt from income tax. The government is expected to implement more preferential polices on EA.
Individuals also benefit from an EA plan in the following ways: 1) Filling the gap in social security funds. Currently, the aging population of China has created a serious challenge. This issue is compounded by the year-on-year fall in the replacement ratio of the social security fund, which is operating in a huge deficit. The EA plan can largely offset the replacement ratio of the social security fund to improve the living standards of retirees; 2) Securing the pension fund. Running under a trust model, the EA fund separates management power from money to reduce operating risks and safeguard the interests of employees. Moreover, EA assets are used solely for pension payments, the purpose of which does not alter with management changes or business bankruptcy. Personal EA accounts accumulate incrementally, and are managed clearly and transparently, which in turn enhances the security of the pension fund; 3) Increasing the value of pension funds over the long term. Personal investors cannot compare with institutional investors when it comes to investment scope and category, as a large percentage of products have a minimum limit on investment amount to preclude personal investment.
A personal account generally comprises two sub-accounts, one each for the enterprise and individual employee. The sub-accounts record the amounts paid by the enterprise and the employee respectively, and their respective incomes. The personal account balance is the sum of balances from the two sub-accounts. Assets under the employee sub-account remain the sole and exclusive property of the employee even if the employee withdraws from the EA plan. However, an employee’s ownership interest in the enterprise sub-account may vary based on the plan rules and the cause of withdrawal from the plan. The employee is entitled to 100 percent of the sub-account ownership interest in the case of retirement or death, or a given percentage for resignation or account transfer to another employer based on the following formula:
Employee’s ownership interest = balance of the employee sub-account + balance of the enterprise sub-account x ownership percentage
EA differs from the basic endowment insurance in coverage and nature. The two are also closely linked in terms of policy and assurance. Based on an integration of social pooling and individual accounts, the basic endowment insurance is compulsory for all enterprises and employees, with the fund shared by the government, enterprise and individuals, and the shortfall payable by the government. In contrast, EA is optional and entitled to a preferential tax rate, and operates under individual accounts based on market-oriented practices.
EA is funded and operated differently from basic endowment insurance, which runs on a cash basis. Instead, the EA fund is cumulative and is invested safely in profitable markets. The enterprise and individual employees share all the risks of the EA plan, with the enterprise primarily responsible for managing the fund. As the regulator and policy maker, the government does not intervene in EA plan management and operations.
Commercial personal pension insurance describes an insurance contract between the policy holder and a commercial insurance company. This insurance insures individuals against risks as a complement to the social security system. EA and commercial life insurance are largely similar in terms of investment strategy. Based on accurate calculations using indices such as death rate under the law of great number, life insurance collects fees, pays indemnities, and yields returns from investment without social commitment. Unlike commercial insurance, EA is entitled to tax breaks and is subject to tighter regulation regarding investment scope.
The creation of an EA plan involves a series of procedures that include drafting, submission to a staff meeting for approval, filing the proposal and contract, and operations and management.
1) The enterprise drafts and submits an EA plan to the staff meeting for discussion, and representatives from both sides (the enterprise and employees) sign the final EA plan;
2) The enterprise files the EA plan with the local HR and social security authorities, and, for a centrally-controlled enterprise, with the Ministry of Human Resources and Social Security. The government authorities reply within 15 workdays of receiving the plan;
3) The enterprise selects and signs a trustee contract with the trustee, who in turn selects and enters management contacts with the account manager, investment manager, and custodian respectively;
4) The trustee files the trustee contract EA plan with the local HR and social security authorities, and, for a trustor that is a centrally-controlled enterprise, with the Ministry of Human Resources and Social Security. The government authorities reply within 15 workdays of receiving the application, and assign an EA registration number to approved applicants;
5) As required by the trustee and the custodian contract, the custodian opens two escrow accounts, one for EA fiduciary property and one for EA investment. The investment manager establishes an account with the custodian bank for investment management risk provision;
6) After the enterprise registers the EA and contributes to it, the EA fund becomes operational.
An EA plan contains the following information:
· Methods of fund-raising and payment
· Individual account management
· Fund management
· Payment calculation and method
· Conditions for terminating fee payments
· Methods of management and supervision
· Conditions and procedures for revision
· Conditions and procedures for termination
· Right of interpretation
· Effective date
6. How do we determine the coverage of an EA plan?
An EA plan covers employees who attend the social security program and have completed probation. The enterprise may set other requirements if applicable.
Generally, an EA plan should cover at least 60 percent of the enterprise’s workforce. The minimal initial coverage is one-third of the workforce for a group enterprise and 60 percent for each subsidiary.
7. How does an enterprise file its EA plan?
As stipulated in Decree 35 of the Ministry of Human Resources and Social Security Notice on Filing Enterprise Annularity Plans and Fund Custodian contracts, enterprises file their EA plans with the local HR and social security authorities at county level or above. A centrally-controlled enterprise files its EA plan with the Ministry of Human Resources and Social Security, with copies submitted to the local HR and social security authorities where its subsidiaries are located. Subsidiaries file their own EA plans with the local HR and social security authorities at county level or above.
8. How does an enterprise file its EA contract?
After signing the trustee contract, the trustee files the contract and other contracts with the account manager, custodian, and investment manager to local HR and social security authorities.
If the trustor is a centrally-controlled enterprise, the trustee files the contracts with the Ministry of Human Resources and Social Security, with copies submitted to the HR and social security authorities of the cities that have independent planning power or provinces where its subsidiaries are located.
If the trustor is another type of enterprise, including centrally-controlled enterprises, the trustee files these contracts with the HR and social security authorities of the cities that have independent planning power or provinces where their EA plans are registered.
9. What does replacement ratio mean? What’s a suitable replacement ratio?
Pension replacement ratio is the percentage of an employee’s disposable monthly pension after retirement against his/her monthly salary before retirement. The ratio is one of the basic gauges of the difference in living standards for an employee before and after retirement. A higher pension replacement ratio means a higher living standard after retirement.
1) Globally, a pension replacement ratio exceeding 70 percent enables a retiree to maintain his or her pre-retirement living standard. A range of 60-70 percent allows the retiree to live at subsistence level. A ratio below 50 percent may seriously degrade living standards.
2) China’s social pension insurance system covers basic endowment insurance, EA, personal savings, and commercial insurance. The replacement ratio for basic endowment insurance ranges from 40 to 50 percent, while the figures for personal savings and commercial insurance are highly variable. Therefore, the EA replacement ratio should preferably be within the range of 15-30 percent, which may vary based on the enterprise’s conditions and payment capacity.
10. Can an enterprise drop out of an effective EA plan?
No. However, enterprises can stop paying fees or change the EA manager. The original EA plan remains operational.
11. Can employees claim EA funds after the EA plan becomes effective?
Generally, employees can collect EA money in any of the following circumstances:
1) Reaching the statuary age of retirement or retiring early due to ill-health or disability after having completed the retirement procedure;
2) Having been dead; or
3) Locating permanently overseas.
Employees cannot collect payments from their individual EA accounts earlier than scheduled unless they meet any of the above conditions.
12. How do we handle the EA fund in the individual account when an employee resigns or changes his/her employer?
Article 69 of the Measures on Management Enterprise Annuity Funds stipulates, “If the beneficiary is employed by another employer that has established an enterprise annuity plan, the fund in his/her individual account shall be transferred to the new employer’s enterprise annuity plan. If the new employer has no annuity plan, the fund can be centrally managed under the account designated by the original trustee for its sponsored collective plan. If the original trustee is an enterprise annuity board, the new employer and the beneficiary may select another trustee through negotiation.”
13. Do EA products warrant a break-even amount or a minimum return?
According to the Administrative Measures on Trust Companies and the Interim Administrative Measures on Trust Funds of Trust Investment Companies, trustees are not obliged to either guarantee trust properties against losses or set a minimum return.
The Administrative Measures on Securities Investment Funds also prohibit fund management companies from pledging a minimum rate of return for investors or using their own credit as a guarantee.
14. What fees are charged for EA management?
Pursuant to the Measures on Management Enterprise Annuity Funds, EA managers can collect the following fees for managing EA plans:
1) Trustee fee: The trustee can charge an annual fee to the amount of 0.2 percent of the net value of the EA fund property it manages.
2) Account management fee: The account manager can collect a maximum of RMB5 each month per account from the enterprise that set up the EA plan. Fees for managing the reserved account and retirees’ accounts can be deducted from the individual accounts of beneficiaries based on the contracts.
3) Custodian fee: The custodian can charge an annual fee to the amount of 0.2 percent of the net value of the EA fund property under its custody.
4) Investment management fee: The investment manager can charge an annual fee to the amount of 1.2 percent of the net value of the EA fund property under its management.
15. How are management fees collected?
1) Trustee and custodian fees and investment management fee are deducted directly from the EA fund. The custodian regularly provides and then sends a list of fees to the trustee and investment manager to check. Upon confirmation, the custodian collects the fees proportionally from the EA fund as required, and transfers the trustee fee and investment management fee respectively to the trustee and investment manager, with 20 percent of the investment management fee allocated to the investment risk provision account.
2) The enterprise pays the account management fee to the account manager on a quarterly, half-yearly or yearly basis.
16. How do we disclose EA information?
The trustee submits a quarterly EA management report to the trustor within 30 days of the end of each quarter and an annual EA management report and accounting report within 60 days of the end of each year.
The account manager submits a quarterly EA fund account management report to the trustee within 15 days of the end of each quarter and an annual report within 45 days of the end of each year.
The custodian submits quarterly reports to the trustee covering EA fund management and accounting within 15 days of the end of each quarter and annual reports within 45 days of the end of each year.
The investment manager submits a quarterly report to the trustee covering the EA fund investment portfolio with accounting data verified by the custodian within 15 days of the end of each quarter and an annual report within 45 days of the end of each year.
17. How can individuals and enterprises inquire about EA accounts?
Call CMB’s national customer service hotline at 95555 or 8008308855.
All-in-One EA Card
Obtain an all-in-one EA card from CMB.
EA credit card
Obtain an EA credit card from CMB to receive a bank statement each month.
Visit pension.cmbchina.com, CMB’s All-In-One-Net website for pension.
Query and print your EA account information through CMB’s self-service terminals.
CMB processes your inquiries at your request.
II. Q&A on the Hengkang Plan
1. Q&A on the Hengkang Plan
The plan is designed to indemnify employees against accidents, medial care, and treatment of serious diseases. This helps enterprises attract and retain employees, notably managers and key staff.
2. Under the Hengkang Plan, which products are entitled to preferential tax rates?
Funds for lifelong critical illness and special medical care. In accordance with the Finance & Tax File  No. 27 jointly issued by the Ministry of Finance and the State Administration of Taxation, supplementary medical insurance paid by enterprises is exempt from income tax to the extent of 5 percent of the payroll.
3. What are the intended purposes of the special medical service fund under individual accounts?
Individuals can use the fund to cover medical expenses. Expenses include those incurred by outpatient fees, emergency treatments and hospitalization such as examinations, treatment and medicines, drugs purchased from a drug store, and health checks. The fund can also cover expenses paid by individuals beyond basic medical insurance coverage.
4. How do you handle the lifelong critical illness fund for a resigned employee?
The enterprise can apply to pay off the amount payable at a discount or withdraw from the Life A Plan for the resigned employee. For a Life B Plan, the enterprise can decide whether to withdraw from the plan or retain the employee’s insurance policy.