Asian countries still have a long way to go in the evolution of open, comprehensive and well-funded pensions systems. Each one has its own obstacles to overcome but Taiwan is typical of many in that it currently has a restrictive system that simply doesn’t work. Benefits for employees in the private sector are either inadequate or non-existent and many of the plans are under-funded. A low level of contribution and low investment returns have only served to highlight the work that needs to be done. Pension law reform has been discussed, but until recently no real progress has been made in formulating a workable solution; that is, a solution that is politically workable.
Up to now, there have been only two retirement funds in Taiwan. One is the Workers’ Retirement Fund, which is run according to the requirements of the Labour Standards Law. The Labour Standards Law mandates employers to contribute 2% to 15% of the employee’s monthly salary into a special account as the reserve fund for workers’ retirement pension. The law dictates that the workers’ retirement fund should be managed by a financial agency designated by the Ministry of Finance. This government run pension system is far from the ideal and what is meant to replace it might not be much better, given that it is designed to emulate Singapore’s Central Provident Fund, a scheme which has produced less than satisfactory results. However, we are still some way from that, so there is still hope.
Under the LSL system, a worker who meets any one of the following conditions may retire and apply for his or her retirement pension:
o When the worker attains the age of 55 and has worked for one and the same business entity for 15 years;
o When the worker has worked for one and the same business entity for more than 25 years;
o When the worker attains 60 years old.
The other main retirement fund is the Public Service Pension Fund. This fund is established by the Public Servants Law (PSL) as a pension system that is offered to every public servant, who serves either in the military, education, or other civil functions nationwide. The PSL requires that 8% of a government employee’s monthly salary has to be deposited to the fund, and that a 65% of the fund is borne by government and 35% by its employees. The government is responsible for ensuring proper management and supervision of the PSL fund, through the appropriate management bodies.
This brief summary of the pension benefit arrangements in Taiwan will already have raised some questions, not the least of which is what happens to those people who don’t fall within the conditions for pension benefit under the Workers Retirement Fund? This is a key point and one of the catalysts for reform.
Louis Yen, managing director of William M Mercer in Taipei, comments: “The current system for Taiwan is defined benefit (DB) and is governed by the rules of the Labour Standards Law. All private companies, which account for 95% of the labour force, are subject to this law. However, the system is inefficient in a number of key aspects. Because the current scheme is not portable, an employee must stay with the same employer for at least 25 years or until age 55 with at least 15 years of service to qualify.”
Deficiencies in the administration of the scheme also undermine its effectiveness. The LSL requires compulsory funding of the scheme and this is done through a government agency called the Central Trust of China (CTC). The CTC does not effectively enforce the rules, however, resulting in huge shortfalls in funding. Yen says the LSL took effect in 1984 and employees who have completed 15 years’ service and may be due to retire could find the scheme does not actually have sufficient funds.
In reality, the majority of companies in Taiwan are small and medium sized enterprises, which don’t have such a long life span and therefore their employees will not be eligible for a pension any time soon. Employers are naturally reluctant to hire older people and the treatment of senior employees nearing retirement is often fairly callous. The need for a well managed and well policed compulsory scheme is clear-cut.
Proposals for a new DC scheme have been prepared for the legislative agenda but there has been no real political will behind the issue of pension reform, so far. The latest draft is looking more positive though, given an expectation that it may become a key issue in the presidential elections, due in two years’ time. It is felt that President Chen Shui-bian may decide to curry favour with the electorate by pushing through the reforms in the next year.
The proposed scheme is more akin to the government managed Central Provident Fund (CPF) in Singapore, rather than the privately run Mandatory Provident Fund concept which has more recently been introduced in Hong Kong (see IPE, December 2001). The current proposal has an employer’s contribution set at 6% and an optional level for employees with a ceiling of 6%. The benefit can be an annuity-type and all contributions will be tax deductible. There will also be an option to stay within the existing system for those nearing eligibility. One key aspect for multinationals, as well as local employees, is that the new scheme will be portable. Currently, all companies are subject to the same rules and have no option, despite the restrictions, but to follow the government ruling.
Mercers’ Yen says the policy proposals have been through many revisions in recent years and it is by no means certain whether the current legislative plan will make it through a third reading in Congress during 2002. However, he adds: “In the next few months there will definitely be some progress, but it is hard to say exactly what will come through. There have been amendments tabled by the labour unions and employers.” The cost of the new scheme will depend on the employee profile and the investment options taken, but expectations are that the scheme will be more costly. But in an economy that has suffered a major slowdown in the last two years, employers are likely to resist any additional cost burden. For the initiative to succeed, the politicians must appeal to the people.
Investment returns from pension funds in Taiwan have not been good. Louisa Lo, who manages Schroders’ retail Taiwan fund from Hong Kong, says the local pension investment market is very closed and restrictive, especially in terms of exposure to overseas markets. Lo says, “The current regulations are old-fashioned and restrictive, even for domestic investment in the local market. The basic problem is that a lot of pension funds have limited exposure to equities and where they do have such exposure, it is managed by local fund management houses rather than those with a greater level of expertise.”
The investment policy of the CTC investment committee is, as you might expect under these circumstances, conservative and lacking in sufficient breadth to produce adequate returns. They are run very conservatively, with a low allocation to equities, except in the worst circumstances. In 2000, for instance, the government directed funds to invest in Taiwanese stocks and lost the funds in the region of $1bn. Pressure is now being exerted to improve the investment remit of funds. Investment returns are currently required to meet the two-year bank deposit rate, a benchmark which is similar to the returns set out for the Public Service Pension Fund. The PSPF itself has taken steps to outsource $50m of assets to international fund managers. Foreign managers in the frame include ABN AMRO, Citibank, Dresdner RCM, ING, UBS and HSBC. Most of these firms now have strong ties with the local market, having bought stakes in local investment trust managers.
Richard Newell is a consultant
specialising in the Asia Pacific fund markets. He can be contacted at email@example.com