China's Ministry of Labour and Social Security (MoLSS) has reportedly said new legislation creating a long-anticipated form of supplemental pension plan, the enterprise annuity, will be effective on May 1, 2004, according to Hewitt Associates in Hong Kong.

Companies in good financial standing that can meet their compulsory contributions to the national social security system will be allowed to offer workers an enterprise annuity and receive a 4% tax deduction.

The enterprise annuity is not an insurance product; rather it is a type of defined contribution plan, a sort of Chinese 401(k). Stuart Leckie, principal at pensions consultancy Stirling Finance in Hong Kong, says enterprise annuities look similar to Hong Kong's ORSO schemes in that it is supplementary to an existing corporate pension, and is voluntary. However they more resembles the Mandatory Provident Scheme in that it is going to be highly regulated, and will unbundled the various ingredients - trust, administration, investment management and custody - into separate legal entities.

Industry participants have eagerly waited for enterprise annuities to kick off for over two years, so to finally see regulations put in place will please many service providers, both onshore and off. But the law isn't yet public and even after it is passed, many questions will remain.

Because China lacks a pensions regulator, the MoLSS is taking responsibility for authorizing and licensing any institutions serving this new market. What type of institutions will be allowed to participate will remain the MoLSS' arbitrary decision, although it doesn't seem likely that any particular category of institution will be explicitly excluded.

For example, custody seems straightforward. China currently has eight domestic banks licensed as funds custodians. But in the insurance business, companies can bundle record keeping and administration, and insurers aren't required to have a custodian. So can insurance companies service the EA market?

This is reminiscent of pre-MPF Hong Kong, where the drafters of the MPF legislation initially insisted MPF schemes be under trust, prompting the insurance industry to argue that group-insured pensions contracts provided an implied trust arrangement; the government eventually agreed to this.

Who can manage investments remains equally murky. The China Securities Regulatory Commission has licensed nearly 50 fund management companies to handle mutual funds. The MoLSS has indicated it will license fund managers already accepted by the CSRC but it may also impose its own criteria. The average mutual fund is probably not suited to long-term pension investment, and may not make the MoLSS's cut if the regulator imposes risk controls and limits on equities, for example. On the other hand, while assets from EAs remain small, pooled vehicles make more sense than segregated accounts. How this will play out for EAs remains a mystery.
So too does the potential role of trust companies and securities houses, many of which are licensed to manage institutional money. Will they be allowed to take on group pension business?

The regulatory scene is likely to be confusing without a proper pensions regulator. The MoLSS is ostensibly running the show, but the CSRC and the China Insurance Regulatory Commission will have to be brought in to oversee fund houses, securities companies and insurers.

The potential role of foreigners hasn't been fleshed out either. Presumably those foreign fund managers with a stake in a joint venture fund management company will have indirect access to the EA market. Many administrators and custodians will also desire access. This December marks the third anniversary of China's accession to the World Trade Organization, when foreign-invested insurance companies can go nationwide as well as begin group pensions business. Will they be allowed a crack at enterprise annuities?

For all that industry participants are likely to welcome a new law allowing enterprise annuities, they are going to be equally confounded by the system's complexity, for a market that remains unproven.