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Hewitt Quarterly
Asia Pacific
is made possible through the combined skills and experience
of Hewitt consultants from across the Asia-Pacific region.
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For further information please
contact:
Hewitt Associates
2601-05 Shell Tower
Times Square
Causeway Bay
Hong Kong
Tel: (852) 2877-8600
Fax: (852) 2877-2701
editor-hqap@hewitt.com
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Since 1949, China's pension system has undergone several reforms precipitated by changes in the political, economic and
social environment. From the introduction of the Old Age Pension in 1951 to the current three-pillar system of today, pension
reform in China has long been an uphill battle.
The Chinese social pension system is decentralized, with contributions defined by provincial and local policies. At present,
each city and province in China has its own mandatory pension fund and the contribution level and benefit payout are
different in each location.
The Three-Pillar System
The three-pillar system was introduced in 1991 as a result of government policies such as the one-child policy, early
retirement plans, and the transition from a planned economy to a market economy. It consists of the following three elements:
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- Pillar one-basic benefits, which comprise a social pooling component to which enterprises contribute, and individual
accounts to which employees contribute;
- Pillar two-a supplementary benefit to be provided by enterprises in sound financial condition; and
- Pillar three-a benefit based on individual savings.
Enterprise Annuity Versus Non-Qualified Pension Plans
The major difference between Enterprise Annuity (EA) and a non-qualified supplemental pension plan is that the latter is a
result of Chinese pension history development, and is no longer advocated and qualified by the central government and the
Ministry of Labor and Social Security. EA on the other hand is a government-advocated and authorized supplemental pension
plan that boosts the total rewards system in China.
Lucy Liu, Head of Hewitt's Benefits Consulting practice in China, explains,
"Not only is the EA model regulated and supported by tax benefits, it also provides financial security for employees, and supports employee retention and motivation through plan design on contribution level and vesting schedule. The EA framework and infrastructure currently in place in China form a strong foundation,and both national and provincial governments have already emonstrated their support and commitment to future development. With further clarification on employee contributions and tax incentives, we believe that EA will become an even more attractive employee benefits tool in the future."
EA Plan Design and Operation
In order to offer an EA plan, employers must fully participate in the mandatory
basic pension and be up-to-date with their contribution responsibilities. They should also be able to afford the additional contributions, and have a collective negotiation process in place. The plan provision must be put in writing in a plan document, which includes eligibility, funding, administration, fund gement,
accounting, benefit payment options, plan management and supervisory process, and circumstances under which contributions can be suspended.
Liu notes, "The EA is a fully funded defined contribution plan with individual accounts, and as such, both employers and employees are required to contribute under the plan provision.The maximum annual contribution is limited to one onth's average pay of the previous year for employers and two months for employees and employers combined."
Overcoming EA Regulation Challenges
Although there is growing confidence on EA as the future market trend, the
biggest challenge to the development of the market is the lack of a national
taxation policy. As such, EA tax policy is decided at local level and ranges from 4 to 12.5 percent. Companies with multiple operations spanning several
locations must therefore work out how to follow tax regulation while achieving
internal equity within the organization.
Individual income tax (IIT) contributions from employees are required to be on post-tax basis, while there is an expectation that employer contributions will be on a deferred tax basis.
"Employee contribution is mandatory under EA, however according to a recent Hewitt survey among FIEs, 77.1 percent of companies don't require employee contribution under their existing non-qualified supplemental pension plans. And as there is no tax incentive for employees to participate under EA, many employees do not see this as a positive move," says Liu.
Current Market Trends
According to Hewitt's 2006 Benefits Index® Study, approximately 30
percent of multinational companies in China already provide non-qualified
supplemental pension plans, and most of them face conversion to EA in the
future. Further, 60 percent of the remaining companies have expressed Current Market Trends According to Hewitt's 2006 Benefits Index® Study, approximately 30 percent of multinational companies in China already provide non-qualified supplemental pension plans, and most of them face conversion to EA in the future. Further, 60 percent of the remaining companies have expressed an interest in establishing an EA plan in the next two to three years.
"Our research has also found several common traits among companies adopting the EA model. Typically they've been in China for a long time, want to become more competitive in the marketplace, and want to optimize their benefit programs in order to attract and retain key talent," comments Liu.
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EA in Action
In September 2006, the first foreign enterprise in China successfully filed,
approved and implemented its EA plan. A Fortune 500 company with over
200 manufacturing facilities and sales offices in over 30 countries, today the
organization employs more than 3,000 people in throughout six branches
located throughout several provinces in China. The company had been closely following the pension situation in China and was deeply concerned about the inadequacy of social security benefits for its employees. They turned to Hewitt for help.
Hewitt undertook the entire process starting with a feasibility study, internal communications, employee endorsement, vendor selection and government filing before finally establishing the EA plan.
"We needed to create a plan that not only supported the organization's long-term business strategy, but also their people strategy," explains Liu. "As such,
we designed a competitive pension benefits strategy that would attract and
retain talent while also providing a reasonable financial guarantee for post-retirement life of employees."
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So how did Hewitt achieve this? Working in close partnership, the company and Hewitt defined a number of key corporate culture values they wished to focus on, including social responsibility, sharing retirement responsibility with employees to help them save and invest for retirement, and embracing the concept of rewarding employees while making a long-term contribution to the company.
Specific design guidelines and goals were then defined to create a qualified national broad-based employee pension plan with tax efficiency that spanned all six branches and enhanced a single united corporate culture. The plan positioned EA as a strategic part of the total remuneration package and ensured above average competitiveness in the external market, making it more attractive to potential employees. The plan design also factored in years of service and the allocation of benefits to reward long-term employment. Finally an extensive employee communication strategy was created to ensure transparency for the plan.
By Lucy Liu
Elsewhere in Asia—What's New?
Australia
Dramatic changes to the Australian retirement savings system were announced in the 2006/07 Federal Budget. Under the new system, superannuation benefits will be tax free for people aged 60 or over, and reasonable benefit limits will be abolished. Additionally, simplified contribution rules will replace the current system of age-based limits and members will be taxed on any excess contributions. There will be no forced payment of superannuation benefits, and it will be easier to transfer superannuation benefits between funds. Final legislation is due in May 2007, so these proposals may still be subject to change.
By Nerida Seccombe |
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Hong Kong
Effective December 1, 2006, employees may consult with or seek treatment from registered Chinese medical practitioners and be eligible for the sickness-related benefits established by the Employment Ordinance. Previously, benefits were extended to individuals who were treated by practitioners of Western medicine. Employers may wish to align their supplemental benefit programs to the change in legislation.
Since many employers in Hong Kong provide supplemental sickness-related benefits to their employees-topping off the sickness allowance, extending maternity leave, providing long-term disability and medical care benefits and retirement scheme benefits in the event of incapacity,this change in legislation may create some confusion if employer-provided and statutory plans are not aligned. For example, if an employee is simultaneously entitled to both a retirement scheme benefit and a Long Service Payment, employers may offset the statutory Long Service Payment by the Employer-provided retirement benefits. However, if the employee is entitled to a Long Service Payment (due to incapacity certified by a Chinese medical practitioner) but simultaneously not entitled to a disability benefit from the relevant retirement scheme, then the employer may not offset one by the other.
To avoid any misunderstanding about coverage, employers should review their HR policies, benefit plans and employee handbooks to clarify when benefit entitlements are linked to Western medical practitioners.
By Jeffrey Lee
India
The Employees Provident Fund and Miscellaneous Provisions Act applies to more than 180 scheduled factories and enterprises. The act is mandatory to scheduled industries if they employ more than 20 employees, and ensures terminal benefits in the form of a Provident Fund, Pension and life risk cover.
The Provident Fund is a defined contribution (DC) plan with employee and employer contributions, while the Pension is an employer-funded defined benefit (DB) plan. Separate legislation exists for similar schemes for employees of plantation and coal mine workers.
Employer-sponsored Pension Plans also exist, and are purely sponsored by the employer. Benefits are either DB or DC, however most DB plans have recently been restructured into DC plans.
The Payment of Gratuity Act is applicable to all enterprises with a minimum of at least 10 employees and allows flexibility to enterprises to frame its own benefit rules which guarantee better benefits. The Act provides for a lump sum payment which is 15 days wages per year of service to employees who have worked for five years or more. The upper cap for payment is fixed at INR350,000 (US$8,000).
In January 2004, the Indian government introduced a New Pension Scheme (NPS), which is a DC plan for all civil servants and government employees. The necessary infrastructure for managing and administering the scheme is not progressing as fast as was hoped.
By AP Sugathan Nair
Japan
Around 45,000 companies in Japan still have a Tax-Qualified Pension Plan, which need to be dissolved or converted to a new style of plan before April 2012. Defined Contribution plans do exist and are increasing in popularity, although regulations
on contribution limits means that other retirement solutions are often considered.
The Revised Law Concerning Stabilization of Employment of Older Workers came into effect on April 2006. Under these guidelines, companies must review any mandatory retirement age to ensure that employment can continue after age 60, although re-employment on a contract basis is possible. These changes may affect the costs of operating a retirement plan and companies may wish to take advice in this regard.
By Jim Humphrey
Korea
Late 2005 saw the introduction of the Employee Retirement Benefit Security Act (ERBSA), which significantly changed the corporate pension market, allowing companies to move away from the mandatory Defined Benefit System. ERBSA gives companies until 2010 to overhaul their pension arrangements and many companies are taking the chance to move early. Around 5,000 companies have converted to a new pension plan in the last year and almost 80 percent of these new plans are Defined Contribution in nature.
ERBSA requires that any new retirement plan has approval from at least half of the current workforce in Korea, which can pose a challenge for successful implementation and highlights the importance of a clear and open communication strategy.
By Carl Redondo
New Zealand
Traditionally the statutory old age pension has been the central source of retirement income in New Zealand. However this is expected to change with the launch of KiwiSaver, a nationally-defined contribution savings plan, which comes into effect on July 1, 2007.
Under KiwiSaver, all permanent employees (with few exceptions) will be automatically enrolled; however employees can choose their own scheme and can opt out after 14 days. Existing registered retirement plans can be used to meet KiwiSaver obligations, provided they satisfy a number of minimum requirements. Employees will pay four percent (either percent if they prefer) of gross pay, and can elect to cease contributions after at least one year.
Employers are not required to contribute (but any contributions can offset the four percent, however the government will make a NZ$1,000 (US$670) contribution to the employee's scheme.
Contributions will be collected via the PAYE tax system, and benefits are paid as a lump sum from age 65 (or after five years, if later). Withdrawals may be allowed for first-time home buyers, on financial hardship, or on emigration.
By Nerida Seccombe
Singapore
Changes apply to the Central Provident Fund (CPF) from January 2007, requiring employees to increase the Required Amount in their Medisave account before a withdrawal can be made and restricting the proportion that can be used to purchase private residential property. This may prompt employees to assess whether current retirement savings are sufficient. An increasing number of companies are now considering whether to introduce supplemental retirement provision for their employees in addition to the CPF.
By Surendran Ramanathan
Thailand
Plans have been outlined to introduce a Mandatory Provident Fund in Thailand, whereby employers and employees would need to contribute at least three percent of pay into a retirement account (Provident Funds are currently voluntary). However, in response to strong opposition to these plans, disputes over the regulatory framework and the recent political uncertainty, introduction of a mandatory system will be postponed until at least 2008.
By Surendran Ramanathan
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