Regulator’s view: pension member choice in Taiwan
In Taiwan, neither public- nor private-sector employees can pick which products to invest their pension contributions into. Asset managers want to see member choice introduced, but that is easier said than done.
The country's Financial Supervisory Commission (FSC) has been promoting the concept. Rosemary Wang, deputy director-general in the regulator's securities and futures bureau spoke to Christina Wang. The full interview appears in the May 2016 issue of AsianInvestor magazine.
Can you outline the proposed pension fund member choice for employees in Taiwan?
Currently we have a government entity that centrally manages public- and private-sector employees’ pension funds, so they cannot choose which products to invest their contributions into. If member choice were to begin, allowing individuals to choose where to allocate their contributions, the pension fund industry would be more connected with mutual fund industry. That would prompt a huge area of potential growth for fund managers, who want to see this to happen.
We have helped to promote this idea. Because this idea is positive to employees’ interests and the domestic financial industry, the FSC would like to encourage employees to actively participate in pension scheme and increase the portion of voluntary contribution by employees.
The FSC will coordinate positively with the Ministry of Labor on the discussion of pension member choice, and present opinions from the financial industry, for their reference. The FSC has put these proposals to the ministry.
So what is the ministry’s stance on member choice?
Implementation of the scheme would require amendments to the Labour Pension Act, which needs approval from the Executive Yuan and the Legislative Yuan. The Ministry of Labour’s tone is that it would only propose the scheme to the Yuan once the public has reached consensus. At the moment, there are two opposing voices, one for the scheme and one against.
Who is for and who against the scheme?
People against it have raised concerns that employees would not obtain the minimum level of returns guaranteed under the current system, which is the two-year deposit rate. For instance, by investing in high-risk products they might put their contributions at risk and not amass enough of a pension pot to retire on.
People in favour of the scheme argue that Taiwanese people’s knowledge of wealth management has improved to such a degree that they are now able to make good decisions about their pensions.
Perhaps there could also be channels to help them in their decision-making. In addition, the scheme could be set up so public- and private-sector employees could either choose to join the member choice scheme or stay with the current scheme and let the government entity manage their pensions, therefore ensuring they get a guaranteed minimum return.
Why not simply not allow high-risk products among the funds they can choose from?
That could be one method. Other countries use a mechanism to filter the range of funds available. Countries around the world have review procedures and standards for underlying investments eligible for the pension choices. They also develop an investment structure, like the investment platform for the scheme, which is a complicated process.
Given that any financial product has risk, the Ministry of Labour asks the FSC to regulate the standards of underlying investments, qualifications of financial institutions, as well as the review and investment procedures, which we do.
But in the end, it is the ministry that would need to create a structure, and they haven’t reached consensus on this internally yet. All in all, no consensus has been reached either by the public or the ministry.
So what are the current retirement options for Taiwanese workers?
Whether the member choice scheme goes live or not, we encourage fund managers to promote target-date funds for retirement. If someone is due to retire in the year 2020, for example, the rationale of target-date is to invest a larger proportion of equities initially, increasing exposure to fixed income after 2020.
Some managers have already launched [target-date] funds, but they have not been very successful and attracted little in the way of assets under management. Such products do not necessarily perform well over the short term.
To encourage investors to have a retirement plan early in life, FSC will continue to encourage fund managers to devise retirement products into which investors can make accumulative investments, and encourage fund managers and the industry association to promote such concepts to investors.