Taiwan’s public pension fund industry is on track to steadily transition towards defined contribution (DC) schemes as the aging population weighs on the pension system, which is heavily dominated by defined benefit (DB) plans.
The latest development came as the Bureau of Public Service Pension Fund (PSPF) selected Nomura Asset Management Taiwan as its advisor to help design portfolios of different risk profiles for its new DC scheme, which came into effect in July 2023 for new civil servant and public education employee members.
“The scheme will adopt a global approach and construct investment portfolios through multi-asset allocation to diversify risks. There will be no tilt towards a certain type or region of assets,” a PSPF spokesperson told AsianInvestor.
Nomura will help PSPF design conservative, stable, aggressive, and lifecycle investment portfolios, which are expected to be available for a new personalised fund management platform starting January 1, 2025, enabling members to select investment options, or "member choice", according to PSPF’s announcement in November last year.
These pension investment plans are also known as member choice plans.
The advisory firm will also provide asset allocation strategies and fund selection mechanisms, and propose investment portfolio allocations based on global economic conditions and financial market changes.
Nomura will also conduct regular performance reviews for portfolio updates to enhance performance, PSPF said.
Nomura has a five-year term until December 31, 2028. It is the largest domestic public mandate manager for Taiwan’s public pension fund, which had NT$162.6 billion ($5.2 billion) in assets as at the end of November 2023.
There are growing expectations that Taiwan's largest pension body, Bureau of Labor Funds (BLF), may also signal a move towards member choice plans to ease operational pressures, especially as a new government comes into office.
The only member choice retirement plan in Taiwan’s public pension industry is the Private School Teachers’ Fund, which has been operating under a DC scheme for 10 years and is currently advised by Taiwan-based Capital Securities Investment Trust.
“It is expected that PSPF’s new DC scheme will take reference from the Private School Teachers’ Fund in portfolio structure,” said Donna Chen, president of Keystone Intelligence, a Taiwan-based financial advisory firm.
The private school teacher scheme operates under a fund of funds (FoF) structure. The higher a portfolio's risk profile is, the larger allocation it will have in equities.
The current member choice only covers public assets, which will likely be the case for PSPF too, Chen noted.
“The fund structure is very straightforward. Hence, the main responsibility of the advisory firm will be be portfolio design and fund selection,” Chen told AsianInvestor.
PSPF managed NT$806.9 billion ($25.8 billion) assets as of the end of November 2023.
The member choice platform under Private School Teachers Fund offered three portfolio types, conservative, stable and aggressive, encompassing assets of about $2.2 billion at the end of September 2023.
About 44.6% of assets was allocated to fixed-income funds, 42.2% to equity funds, 12.9% to money market funds and 0.3% was in cash, according to data from Keystone Intelligence.
Although the NT$4 trillion ($127.7 billion) Labor Pension Fund under the management of the BLF has become a DC plan since 2005, it is not open for members to select funds by themselves. BLF is still responsible for portfolio management.
It has a minimum guaranteed return against local banks’ two-year term deposit rate, which is now around 1.5%.
URGENCY FOR REFORM
Taiwan turned into an aged society in 2018 with over 14% of the population aged over 65. The percentage is expected to surpass 20% by 2025, according to its National Development Council.
Its public pension system is hence facing increasing pressure to deliver retirement savings, especially for BLF, which managed NT$6.6 trillion ($210.6 billion) of assets for Taiwan’s working population by the end of November 2023.
“A DC plan will largely help the public pension industry reduce operational cost and ease financial burden. It is definitely a positive development,” Chen said.
This would create a win-win situation for asset management firms and the public pension system, she said.