China finally agreed to the long-awaited tax deferral for corporate annuities, as authorities seek to address overwhelming pension demand through alternatives to the nation's mandatory pension fund.

In a joint statement issued by China's finance, taxation and human resources ministries on Dec. 6, the corporate contribution to annuities, or fixed annual payments, will be exempt from tax, so will individual contributions as long as it is within four percent of an employee's taxable income, starting from Jan. 1, 2014.

The change will defer tax on corporate annuities until retirement, an arrangement that will add incentives for companies and individuals to step up their investment in corporate-managed retirement plans and more importantly, will reduce retirees' over-reliance on the state-collected pension fund.

"The move has cleared the way for corporate annuities to become an alternative to the basic state pension scheme," said Yang Qun, an executive with the Ping An Annuity Insurance Company, the pension management arm of Ping An Insurance Group.

China has long relied predominantly on a state-managed mandatory pension fund for pension payouts for its retirees. The fund receives 20 percent of payroll from employers and another eight percent from employees.

Industrial analysts say the state-managed scheme may experience a funding shortfall due to ballooning pension demand from a rising number of retirees.

To ease pressure on the overwhelmed state pension pot, authorities are now seeking to fund pension payouts through annuities and a voluntary insurance scheme, both of which have been in place for years but remain underdeveloped due to a lack of tax incentives.

Corporate annuities in most developed economies account for the majority of pension payouts, but not so in China. According to Yang, so far an employee's contribution to annuities is very meager.

Yang said that employees of 40 percent of her company's corporate clients contribute only 1.5 percent of taxable income.

Analysts have also urged the government to diversify investment options for annuities. So far China allows up to 30 percent of annuities to be invested in the stock market. Authorities have been prudent in opening new investment channels for annuities for fear that increased exposure to risks would incur a loss in a meager fund reserve.

The tax-deferral for annuities has also raised hopes for the rise of voluntary insurance marketed by insurance companies, which is considered as a third source of pension payouts in addition to state pension and corporate annuities.

"There has long been a discussion of a trial in Shanghai to deduct an insurance premium from one's pre-tax income, but it hasn't worked out yet," said Ben Lin, managing director of Morgan Stanley Asia Limited.

"If we can push tax on annuities to retirement, then we can expect similar incentives for voluntary insurance," said Yang, adding such incentives will prompt more people to buy insurance products as a way to provide for their old age.