China’s Ministry of Human Resources and Social Security has raised the Enterprise Annuity Plan (EAP) equity investment threshold to 30%, along with other changes to the scheme. The new regulations, included in a document called Decree 11, will allow equity allocations to take up all of the ‘equity or equity-like’ asset class, and not take share from other allocations.

The EAP’s total contributions reached 291 billion yuan ($45bn) in 2010, with the assets managed by approved local fund houses. Previously, assets had an enforced 20% minimum allocation to high-liquidity money markets; a maximum 50% in term deposits, contractual deposits, government bonds, corporate bonds, convertible bonds and securities, with at least 20% in government bonds; and a maximum to 30% allocation to equity or equity-like assets, with no more than 20% in equities.

The EAP scheme has had a mixed reception since it was launched in 2004. The new change is one of a series of measures aimed at improving uptake. In 2009, the government released Decree 27 and Circular 694, which went some way to clarifying and standardizing tax incentives for employer and employee contributions respectively.

A recent report from Mercer Investment Consulting in Shanghai had suggested that the EAP was Beijing’s favoured supplementary pension scheme and regulators are considering expanding its tax incentives, including allowing pre-tax employee contributions.

However, Decree 11 itself will have only limited impact, according to Leslie Mao, Director of Investment Services at Towers Watson in Shanghai. “We do not see this as a signal that EAP will get more policy support in future. Big hurdles still exist in terms of clarifying tax incentives on the scheme,” Mao commented.

On the topic of future trends in the EAP fees structure, Mao said that “we have observed discussions from industry players about a lower limit on fees. Due to strong competition, many vendors have commented that current fees are two low. For this reason, we have seen vendors coming together to establish a semi-formal industry norm for minimum fees.

Under the initial scheme, administrators received just 5 yuan ($0.035) per plan per month, custodians and trustees up to 0.2% and investment managers up to 1.2% of the net value of the pension fund

On the other aspects of Decree 11, Mao said “the most significant point is that Decree 11 recognizes the master trusts, bringing them under regulation for the first time.”

Master trusts were previously a grey area, and their inclusion could pave the way for more small and medium-sized enterprises to adopt EAPs.

In another shift in policy, the China Insurance Regulatory Commission will approve variable annuity (VA) products on a pilot basis, as it continues attempts to strengthen and diversify the country’s pension market. The pilot will run in Shanghai, Beijing, Xiamen, Shenzhen and Guangdong.

VA products were due to come onto the Chinese market in the last quarter of 2010, but concerns over excessive risk levels prompted the CIRC to postpone their introduction.

The pilot scheme is only open to insurers with a solvency ratio of 150% and at least three years’ experience with investment-linked-insurance products. Applicants can only apply for one product and the product must have an investment scope of longer than seven years. AXA-Minmetals Assurance, Sun Life Everbright Life Insurance, Huatai Insurance, and Happy Life Insurance, have reportedly expressed interest and some have already developed VA products to submit to the regulator.

VA products will have fee structures similar to those of unit-linked insurance plans (ULIPs) and could impose a capital projection fee, according to the circular.

Asked about the strategy for introducing VA products at this stage, Min Tha Gyaw, director of operations with Z-Ben Advisors in Shanghai, told IPA “The motivation is two-fold. On the business side, insurance companies have been pushing to expand their product range. Part of the insurance companies’ thinking could be that VA would help make up for lost revenues from previous schemes which have run into difficulties, such as ULIPs, which still haven’t regained their attraction as an investment since market sentiment fell away in 2008.

“From the policymakers’ standpoint, they are clearly looking to increase secondary support for the pensions market, to cater for the aging population,” he added.

Selling VA products in China is not without its challenges, Min continued. “We are still at the very early stages of VA as a product class. Implementation speed will depend very much on how attractive these products are.

“VA products could be a complicated product to sell in China not least because many investors are looking for short-term returns and VA products necessitate a long-term approach. So a lot of investor education is needed, but if and when it gains traction it will probably expand very rapidly,” he ventured.

On the longer-term outlook, Min emphasised the importance of the success of otherwise trial period in determining future expansion. “I think the risk from the first batch of VA products is minimal because the insurance companies involved are large players who probably have adequate internal risk management systems. If the product expands, risk concerns would take on a new dimension.

“And obviously it’s a new asset class, so although it’s a positive development for the retirement segment of financial investment in China, we will have to wait and see how the trial period develops before having a clearer picture of the long-term potential of VA products in China.”