Xinhua News Agency, Beijing, April 6 (Reporters Xu Bo and Zhao Yuhang) — On April 6, the General Office of the State Council issued the "Measures for Occupational Annuities in Government Agencies and Public Institutions," marking another step forward in China's pension system "integration." So, what exactly is an occupational annuity? When will contributions begin? What does the 12% contribution rate mean, and where will the funds come from?

     When to start paying

     “Occupational annuities for government agencies and public institutions will be paid this year, in tandem with the contributions to basic pension insurance by these entities,” said Jin Weigang, Director of the Institute of Social Security at the Ministry of Human Resources and Social Security, in an interview with a Xinhua News Agency reporter.

     The State Council’s “Decision on the Reform of the Pension Insurance System for Staff and Workers in Government Agencies and Public Institutions” explicitly states, “On the basis of participating in the basic pension insurance, government agencies and public institutions shall establish occupational annuities for their staff.”

     “Occupational annuities are supplementary pension insurance plans for staff members of government agencies and public institutions,” said Jin Weigang. The regulations clearly state that the costs of occupational annuities will be jointly borne by the employer and the individual employee. The employer’s contribution rate to the occupational annuity is 8% of the unit’s total payroll, while the individual’s contribution rate is 4% of their own salary subject to contributions, which will be withheld by the employer.

     Jin Weigang explained that after the “integration” of pension systems, government agencies and public institutions—as well as their employees—will all participate in the basic old-age insurance. The contribution standards and benefit payments will be largely consistent with those for urban workers’ basic old-age insurance. As a result, the replacement rate of this pension (the proportion of the pension relative to pre-retirement earnings) will not exceed 60%, whereas before the reform, the pension replacement rate for employees of government agencies and public institutions ranged from 70% to 90%.

     To ensure that the retirement benefits of personnel in government agencies and public institutions remain unchanged, occupational annuities will play a crucial role. Through investment and other operational activities, it is expected that the replacement rate can be increased by more than 20 percentage points.

     “One of the key prerequisites for the success of the pension ‘integration’ reform is that retirees from government agencies and public institutions should not experience a significant drop in income after retirement,” said Chen Bulei, a professor at Southwest University of Political Science and Law. “According to comprehensive calculations, a occupational annuity with individual contributions of 4% and employer contributions of 8% can meet this requirement and, together with the basic pension, will become the two major pillars of the pension system.”

     What is the contribution base?

     “What concerns me most is the contribution base!” Wang Qin, a civil servant at a certain ministry of the state, has served in a section-level position for three years and earns around 5,400 yuan per month—of which only about 1,900 yuan is his actual salary, with the rest consisting of allowances and subsidies. “If I were to contribute based on that 1,900-yuan salary, I’d be at a serious disadvantage,” he said.

     A relevant official from the Ministry of Human Resources and Social Security told reporters that for civil servants and personnel working under public institution management, the contribution base is last year’s basic salary, nationally standardized allowances and subsidies, and allowances and subsidies that have already been standardized. For staff in public institutions, the contribution base consists of basic salary, nationally standardized allowances and subsidies, and performance-based pay.

     “Reformative subsidies and incentive-based subsidies will not be included in the contribution base for the time being,” said the official.

     Li Zhong, spokesperson for the Ministry of Human Resources and Social Security, stated that the reform of the salary system for government agencies and public institutions is steadily advancing and is being carried out in parallel with the reform of the pension insurance system for these entities. Under the current salary system, civil servants’ salaries are divided into three components: basic salary, allowances and subsidies, and bonuses. Similarly, the salaries of staff members in public institutions also consist of three parts: basic salary, performance-based pay, and allowances and subsidies.

     “According to the functional positioning of different components of wages, a reasonable wage structure should have basic salary as the main component, with other wage items serving as supplements,” said Li Zhong. This time, in refining the wage system for government agencies and public institutions, we will adjust the salary standards for government agencies and incorporate certain allowances, subsidies, or performance-based pay into the basic salary, thereby appropriately increasing the proportion of basic salary.

     The General Office of the State Council has forwarded three implementation plans in this regard: first, the adjustment of basic salaries for civil servants; second, the adjustment of basic salaries for staff members of public institutions; and third, the adjustment of benefits for retired personnel from government agencies and public institutions. Currently, these documents have been distributed to all relevant units.

     Where does the money come from?

     When establishing occupational pension plans, an unavoidable question is: Where will the money come from?

     The regulations stipulate that for units fully funded by the fiscal authorities, the employer’s contribution portion shall be covered by fiscal expenditures. Based on information provided by the unit, a bookkeeping method will be adopted, and interest will be calculated annually according to the nationally unified bookkeeping interest rate. Before retirement, the accumulated savings in an employee’s occupational annuity account will be substantiated by funds allocated by the fiscal authority at the same level.

     For entities that do not make full contributions, the contribution payments made by the entity will be borne entirely by the entity itself and will be accumulated in a separate account. The occupational annuity fund thus established will be managed and invested through market-oriented operations, with interest calculated based on actual returns.

     “The only channel for civil servants’ contributions is the treasury; therefore, we must establish a professional pension system. The treasury is the sole source of funding, and government agencies are not permitted to raise funds on their own or maintain secret slush funds,” said Hu Xiaoyi, Deputy Minister of the Ministry of Human Resources and Social Security.

     Would this create new inequalities?

     “The crux of this issue lies in how to accelerate the development of corporate pension plans, enabling more enterprise employees not only to have basic old-age insurance coverage but also supplementary pension coverage. This approach will help promote social equity,” said Hu Xiaoyi.

     Chen Bulei also believes that the biggest difference between occupational pensions and enterprise pensions lies in the fact that occupational pensions are mandatory, whereas the establishment of enterprise pensions is a voluntary act by companies. The key reason for currently implementing occupational pensions is to reduce resistance to pension system reform by achieving “seamless integration” of pension schemes. While this approach will indeed bring about some challenges in the short term, the solution lies in further improving enterprise pension systems.

     “As talent competition becomes increasingly fierce, companies will offer employees better benefits—such as corporate pension plans—in order to attract top talent,” said Chu Fuling, a professor at the Central University of Finance and Economics. The state will also gradually introduce policies to encourage companies to provide corporate pension plans for their employees. “As more and more companies establish corporate pension plans, the replacement rate of employees’ retirement pensions will eventually align with that of government agencies and public institutions.”