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Is Enterprise Annuity the Only Option?

What to do with supplementary retirement plans at Shanghai Social Security Bureau

Ministry of Labor and Social Security (MoLSS) recently issued the Policy #34 in September 2006 regarding the management of the funds of the supplementary retirement plans in social security bureau. Paragraph 6¹ of the Policy specifically discusses the future of the supplementary retirement plans at all the local social security bureau (SSB) as below:

• SSB cannot accept new supplementary retirement plans.
   
• All the existing supplementary retirement plans currently managed by SSB need to be transferred out to an Enterprise Annuity (EA) arrangement by the end of 2007.

This will significantly impact many supplementary retirement plans currently managed by SSB, in particular the Shanghai SSB. Companies with such type of plan with SSB have been approached by various EA vendors, which has attracted a great deal of attention to the EA market.

Latest findings from Shanghai Social Security Bureau

Watson Wyatt, as the leading global human resource consulting firm, has been closely monitoring the development of the situation. After several rounds of discussion with the SSB at the various districts in Shanghai², the latest answers to some frequently asked questions can be summarized as follows:
 

Question	Answer
Can a company set up a new supplementary retirement plan at SSB?	No, the SSB has stopped accepting new supplementary retirement plans immediately.
Can a company continue contributing to the existing supplementary retirement plan at SSB?	Yes, but the SSB will only allow such contributions until the end of 2006.
For contributions already at SSB, but not yet being allocated to individual accounts of employees, can the company continue the allocation?	This will depend on the plan provisions and the allocation method should be reviewed / documented by SSB.
Will a company be allowed to terminate the existing supplementary retirement plan before the end of 2007?	There are currently no regulations prohibiting a company to terminate its supplementary plan with SSB.
After the existing plan being terminated, will a company be required to transfer the plan assets attributable to the employees’ individual accounts to an EA plan?	There is no specific regulation on this so far.

While the Policy #34 requires the transfer of the existing supplementary retirement plan from SSB to a qualified EA, we believe that the first question the concerned companies should ask themselves should be: is the EA the only option?

Is It a Good Timing to set up an Enterprise Annuity?

According to our recent survey with multi-national companies regarding EA, majority of the companies are still in the feasibility study and waiting for more clarity on the relevant regulations and taxation on EA. Hence, this may put some companies into a difficult position on whether to rush to set up an EA now just to deal with the current situation with SSB.

Is Enterprise Annuity the Only Option? How Can Watson Wyatt Help?

Is EA the only option for your supplementary retirement plan at Shanghai SSB? If so, what would be the necessary steps you need to go through to set up an EA; and more importantly, if not so, what would be other legitimate alternatives that would suit your company and employees?

Watson Wyatt is currently assisting a number of multi-national companies to review the alternatives. Through our experience and current understanding of the local SSB, we believe that an EA might not be the only option for the companies. With some creative approaches, companies can still find ways to deal with the current supplementary retirement plans with SSB while making of use this opportunity to have an overall review of their total employee benefits.

If your company’s supplementary retirement plan is impacted by this Policy, or you would like to have a further understanding of the EA market or other employee benefits in China, please contact us.

Watson Wyatt PRC Employee Benefits and Actuarial Practice,
November 2006

Contacts:

Joseph Yip, Head of PRC Employee Benefits and Actuarial Practice, joseph.yip@watsonwyatt.com
Johnny Yu, Shanghai Market Development Leader, johnny.yu@watsonwyatt.com

¹ Paragraph 6 states that “After Policies #20 & 23, all levels of social security bureau cannot accept new supplementary retirement plans. All the new Enterprise Annuities must be managed by the licensed financial institutes. The supplementary retirement plans set up prior to Policies #20 & 23 must be transferred to a qualified Enterprise Annuity by the end of 2007”.
² Please note that this summary of Q&A is based on our interview with Shanghai SSB and SSB at some districts where many multi-national companies have been registered at. Some other district SSB might have different answers to these questions