Managers alerted to potential of China tax breaks

New tax incentives for contributions to enterprise annuity are tipped to drive asset growth in China’s pensions system, although investors may adopt a wait and see approach at first.
Managers alerted to potential of China tax breaks

Industry players expect new tax breaks for contributions to enterprise annuity in China to drive asset growth in such schemes, although suspect it will take time to catch on.

Under the incentive – effective on January 1 and seen as China’s version of the US’s 401K pension plan – up to 4% of an employee’s contributions of average monthly salary from the prior year are tentatively exempt from individual income tax.

The incentive also temporarily exempts an employer’s contributions in the Enterprise Annuity (EA) and Occupational Pensions plan from individual income tax in the hands of employees.

Under the rules, EA schemes will undertake an exempt/exempt/taxed (EET) model where contributions and accumulations will have taxes deferred, but withdrawals will be taxed, as they are in France, Germany, Japan and the US.

“This is a positive move that may help to attract more [Chinese] companies to set up their enterprise annuity and spur AUM growth from new money,” says one executive who works for a bank’s EA business.

“At present, [Chinese] EA assets are too small for fund managers to make a profit, but there is major potential for growth.”

China’s EA industry totaled Rmb579 billion ($95.7 billion) in assets as end-September, compared with Rmb482 billion at end-2012. But this only accounts for 61,582 companies and 200 million participating employees.

This penetration rate is far below basic pension insurance coverage in China, which covers 304 million employees.

There is also a huge divide in the mainland’s EA market in terms of AUM. Ping An Annuity, for example, has Rmb69 billion in AUM, while Shanghai Trust’s assets total Rmb4.9 million.

Yet analysts agree that the initiatives will encourage employees to contribute to their enterprise annuity in the long run, and that this will represent a key development for China’s pensions system.

In the past only big companies launched EA schemes to attract talent, but employees were not so incentivised to contribute given the lack of tax break, notes Rita Xiao, of pensions consultancy Stirling Finance.

With tax incentives now in place, she expects assets to grow by more than 30% in the coming years, and says fund managers should expect an uptick in pension mandates.

Ping An Securities makes a similar forecast, estimating that enterprise annuity schemes will experience an annualised 30% increase in AUM over the next three years. By 2016, the firm expects assets to spike to Rmb1.3 trillion from an estimated Rmb600 billion as at end-2013.

Xiao says Chinese authorities’ next step will be to launch a tax deferral incentive to individual insurance schemes, although the timeline is uncertain.

But while the introduction of tax incentives is a welcome development in China, some EA managers expect it to take time to gain popularity.

“It is major part of human resource planning for a company,” says the executive. “Companies and employees are still evaluating the benefits of the new tax policies.”

As such, he has yet to receive requests from enterprises seeking to discuss mandates or set up annuity enterprise schemes and does not expect to until the second half of the year.

Shanghai officials started discussing tax exemptions for individual insurance plans in 2009.

The mainland’s finance ministry, human resources ministry and social security and state administration of taxation jointly released details about the new taxation rules on December 6.

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