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Politicians and Academics Call for More Privatized Pension Scheme

By Shelley Shan, The China Post

Taiwan

August 8, 2005

While waiting at the MRT station, taking the bus, and getting the direct mail piece from their mailboxes, "New Pension Scheme: have you chosen yet?" is a question that has been proposed to the 5.74 millions workers in Taiwan (those qualified by the Labor Standards Act) each day since the beginning of this year. The massive campaign unleashed by the National Council of Labor Affairs constantly reminds workers in this country to consider their life after retirement and presents a plain and simple solution for it: a choice between an old pension scheme and a new one. 

Although a few incidents occurred in which some employers intentionally avoided making mandated contributions to the pension funds, the nation's corporations in general have been complying with the regulations since the new scheme took effect in July 1. 

As of July 28, statistics provided by the National Bureau of Labor Insurance showed that 83 percent of the 394,000 business units which by law must report employee survey results on the New Pension Scheme have completed the process. 

The report further showed that 2.2 million workers chose the new scheme, 1 million went for the old scheme, and approximately 30,000 chose not to make a decision at this point. 

The new scheme, however, generated more than just a required "yes" or "no" from the nation's employees. Questions arose as to whether the government should manage and supervise the management of the accounts on employees' behalf or simply privatize the accounts and give employees the flexibility to reinvest the pension into financial goods with higher investment rates of return. 

Based on the regulations in the New Pension Scheme, corporate employers are required to contribute at least six percent of an employee's salary to his or her pension fund. Employees themselves can also deduct from their monthly salary a certain percentage that can go into the retirement account as well. The percentage may vary, however, depending on the amount employees are willing to put aside. 

Each employee will then have a retirement account with the Labor Insurance Bureau. The New Scheme guarantees a fixed minimum yield over two years and estimates that the rate of return on investment will reach 6 percent. 

Lai Ching-Lin, deputy director-general of the Council of Labor Affairs, said in a statement in a China Times story that the amount of pension accumulated each year will exceed NT$3 trillion, including both contributions from the employers and employees themselves. The amount is said to be one of the largest in the world managed by a government. 

But the huge sum, when appropriated into individuals accounts, reduced to almost nothing. A study published in the Journal of Risk Management showed that the 6 percent defined contribution from the corporate employers will not help deliver the 50 percent income-replacement ratio, referring to the percentage of working income that an individual needs to maintain the same standard of living in retirement (usually 60 to 90 percent). 

Chiu Shean-Bii, professor of Department of Finance and chairman of the Pension Fund Association, pointed out that the new pension scheme, with its estimated 6 percent of return on investment, can only help deliver 30 to 40 percent of the income-replacement ratio. This, he said, makes the contribution from employers themselves key in expanding the fund. 

Christina Liu, a legislator serving on finance committee on the Legislative Yuan, said that she believed these accounts should be privatized. 

"People think that employees in Taiwan are not sophisticated enough to invest themselves, but I think it (investment) is not something entirely new to them, and they in general pick it up really fast," said Liu. 

Liu added that there is no need for the government to establish a new mechanism evaluating the viability and credibility of these financial institutions. The evaluation standards already existed when these firms first passed the screening process. All the government should do, she said, is simply to monitor and supervise the fund management services and operations of these institutions. 

Others hold ambivalent views on this issue. Norman Ying, a professor of Banking at National Chengchi University, said it is difficult to determine at this point who is entitled to manage the pension funds, given the advantages and disadvantages of privatizing or having the government regulate the funds. 

"It's really hard to say... people in general don't have the capability of managing their wealth," Ying said, "If it (the pension funds) is handled by the government, it will probably go into financial stability funds [released when the stock market tumbles]. They (the legislators) drafted rules on how to do it. But it's a poor way, and we don't believe the government will do it well." 

Ying once compared the pension systems in eight countries and said that the system in the United States is relatively better, noting the flexibility and choices they have in expanding their retirement funds. Overall, the corporations contribute 11.37 percent of the employee's salary for the pension fund and the system provides employees with a social security account for retirement. The income-replacement ratio can reach between 44 and 66 percent. 

Since most employees in Taiwan tend to invest their money in the stock market, creating an environment that is free from market manipulation becomes crucial, according to Ying. 

"The government should focus on regulating the stock market," he said. 
Employees reacted differently to how the retirement fund should be managed. King Kuo, a sales manager in private firm, said the pension that was entrusted to Central Trust Bureau, where the fund will be managed, is invisible to the public eye and could be affected by so many factors, such as changes in government policy. 

He preferred his money to be managed by insurance firms that have expertise and experience in managing funds for people, he said. 

Julia Wu, currently a clerk in a firm, said the New Pension Scheme does not affect her in any way. Wu has switched jobs among five to six companies within her five years of experience in the job market. 

"The only thing I see that affects me is that I won't get any pay raise in the near future, since it has now turned into the six percent for the pension fund," said Wu. "I don't really care much about retirement. It doesn't really bother me." 


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