Last week Taiwan’s government announced it would soon be offering twice as much of its pension funds to foreign asset managers. This comes after legislation to set up a commission to manage the government’s Labour Pension Fund was approved earlier this month.
The Labour Pension Fund is a government-run fund formed following pension system reforms made in July 2005. These reforms require Taiwan’s employers to contribute the equivalent of 6% of their employees’ salaries for a pension to be paid after workers retire at age 60 or above. Previously, the level of contribution was significantly less and contributions were not always enforced.
The local press reports that as of last December, almost 4.3m people, or 77% of all eligible workers, had opted for the new scheme, which has an accumulated worth of $4.27bn. The new pension system allows for workers to transfer between employers without losing any of their pension allowances, which was not the case before the new legislation.
Until the law was passed at the beginning of March, these funds could only be deposited in bank accounts where they made around 2% interest. According to the bill, pension funds can now be invested in the stock market, derivative financial instruments and foreign currency deposits, which should allow higher returns.
It has been reported that the Council of Labour Affairs is hoping the fund will be able to generate returns of 4%. If this were achieved, it is estimated that the average pension from this fund could grow from $170 to $370 per month.
According to reports in the financial press, the government will tender $2.9bn from the pension funds to foreign fund managers this year, twice as much as in 2006. Some analysts have said they believe the total pension fund will build to around $9bn, which would make it the second largest in Asia.
Many fund managers are hoping they will be able to invest some of these funds in alternative assets, such as hedge funds and private equity, but it remains to be seen how the commission will decide on investment platforms. Last year Taiwan’s veterans pension fund invested in a total return product for the first time.
This announcement did not have any effect on the stock market, as the new capital will take between three and six months to enter the market.
Last week the local press reported statistics released by the directorate general of budget, accounting and statistics, showing Taiwan is increasingly becoming an ageing nation, highlighting the need for the population to achieve better returns on pension investments.
At the end of 2006, there were 2.3m people over the age of 65 in Taiwan, making up 10% of the population. While this figure is lower than some countries, such as Japan where people over the age of 65 make up 16% of the population, it is expected Taiwan’s population will reach similar levels by 2025, meaning pension fund performance is only gaining in importance.
According to a study by the ministry of finance, reported in the local press last week, the average pensioner spent around $355 a month. Only14% of that came from their own pension fund while support from family accounted for 53% and government subsidies and assistance made up the final 33%. It is thought that this reliance on transfer payments will restrict domestic consumption, as those in the workforce will be supporting more pensioners. This trend has already been seen in Japan.
It is expected that the new committee overseeing the pension fund will have 21 members, including representatives from labour groups and unions, academics, and representatives from the ministry of finance and the financial supervisory commission.