China’s insurance crack down seen boosting chances for tax deductible savings plan

PUBLISHED : Sunday, 05 March, 2017, 10:08pm
UPDATED : Sunday, 05 March, 2017, 11:00pm

China’s crack down on universal life insurance could help unlock the potential of a highly anticipated tax-deductible commercial retirement savings plan but the size of the deductible is key to success of the pilot, market watchers said.

The long-expected but yet to be launched pilot programme could get a boost this year as the top insurance regulator vows to return the industry to its core mission of providing long-term financial security, with products like retirement and health care insurance expected to be the main beneficiaries, they said.

China has been studying the idea for years. Under the proposal, payments on retirement plans offered by commercial insurers can be deducted from taxation, and therefore tax-deferred until withdrawn after retirement. It aims to boost the willingness of households to invest in commercial retirement plans and to supplement existing social security and corporate pensions as China is under mounting pressure to provide social security payments amid an ageing population. In 2015, six provinces saw a shortfall of social security funds as pay outs surpassed income.

“This year could be a good time window to launch the highly-hyped commercial retirement pilot programme as it exactly encapsulates the insurance industry’s core [mission] to offer shelter against uncertainties. A favourable tax code proves to be an effective incentive in foreign countries,” said Zhu Qian, an insurance analyst at Moody’s.

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A monthly deductible cap of 200 yuan, as used for tax-deductible health insurance, could be too small in relations to a person’s monthly income to provide enough incentive to spark a buying spree of commercial retirement products, she added. In the US, the 2016 deductible cap was U$18,000 under the 401(k) retirement plan used to stimulate individual’s contributions to the country’s tax-deferrable retirement plan.

Tax-deductible health insurance was launched in 31 mainland cities in 2016 but received lacklustre market response as the maximum monthly deductible amount of 200 yuan, or an annual cap of 2,400 yuan, was deemed far from large enough to spur enthusiasm for the policy.

A large deductible could also bring pressure on China’s fiscal coffers, especially against the backdrop of slower economic growth.

In 2016, China’s tax revenue rose 4.3 per cent year-on-year to 13.04 trillion yuan, the finance ministry said in January. But annual tax revenue growth has declined for six straight years since 2010, when tax revenue grew 23 per cent.

“The deduction on retirement plans are likely to be bigger than that for health insurance or the retirement plan wouldn’t be attractive,” said Guo Zhenhua, head of the insurance department at Shanghai University of International Business and Economics. “Its sales model also counts as group buying could be an effective way.”

The deduction on retirement plans are likely to be bigger than that for health insurance or the retirement plan wouldn’t be attractive
Guo Zhenhua, Shanghai University of International Business and Economics

The China Insurance Regulatory Commission has pledged to steer the industry back to its core mission by stepping up scrutiny on universal life insurance, or essential wealth management products, and by fining players like Foresea Life whose aggressive fundraising and short-term investments strayed from insurance’s mission to offer financial protection.

China’s tax office has given priority to studying the launching of tax-deferred pensions this year, said Liu Baozhu, an official from the State Administration of Taxation.

The plan to bolster social security, including expanding the tax-deferred health insurance pilot nationwide this year, are among five key tasks of the income tax department this year, Liu wrote in the China Taxation News, a publication under the supervision of the tax authority.

“The earlier the better to see the launch of the tax deductive retirement pilot for China’s insurance industry, but it’s up to the regulators to set the timeframe as it not only involves the insurance watchdog but the finance ministry and taxman as well,” said Wesley Cui, general manager of insurance consulting at Willis Towers Watson in China.

International experience has shown that tax deductions are a mainstream way to back the long-term prosperity of the insurance industry, he said.

Besides the tax code, economic headwinds could boost life insurance in China as investors opt to increasingly hedge against uncertainties, he added.

China’s economy grew 6.7 per cent in 2016, the slowest growth in 26 years. A slower growth is expected this year despite signs of stabilising.

The International Monetary Fund raised its forecast for China’s 2017 economic growth to 6.5 per cent, up from an estimation of 6.2 per cent made in October.