Portable pension system in the works
 By Francis Li
, Taipei Journal

October 10, 2003

A new law in the works promises to substantially improve old-age security for the great majority of Taiwanese. Staff Writer Francis Li examines the provisions of the Labor Pension Statue draft bill recently submitted to the Legislature, based in part on an interview with Lee Lai-hsi, director of the CLA Department of Labor Standards.

Taiwan is a step closer to guaranteeing retirement pensions for all of its workers now that a Labor Pension Statute draft bill has been drawn up by the Council of Labor Affairs (CLA) and sent to the Legislature for review. Under the existing Labor Standards Law, more than 75 percent of workers in Taiwan are not able to receive pensions upon retirement. To be eligible for a pension under current rules, employees must have been employed at the same company or organization for at least 25 years if retiring before age 55, or for at least 15 years if retiring thereafter.

In effect, this means that in order for employees to be qualified for a pension, they must not change or lose their jobs after age 30, and that the law safeguards only employees of long-lived state-run enterprises and large-scale private companies offering solid job security. Since most Taiwanese enterprises are small or medium-sized, and since, according to Council for Economic Planning and Development statistics, such enterprises have an average life span of only about 13 years, for most Taiwanese a retirement pension is a pie in the sky.

In light of this situation, the CLA has been mapping out possible revisions to the law since 1990. Though several versions have been put forward, thus far they have failed to win the consensual support of employers and labor groups. It was not until the Economic Development Advisory Conference (EDAC) held in August 2001 that a general consensus was finally reached and a resolution made to adopt a multi-track system of three alternative programs for workers to choose from. The draft bill drawn up by the CLA is designed to conform to the EDAC resolution.

Lee Lai-hsi, director of the CLA's Department of Labor Standards, explained that the current Labor Standards Law, which has been in effect for nearly two decades, was formulated under the premise of lifelong employment and founded upon the presumption of enterprises' long-term, sustained operations. Due to changes in economic conditions, however, few even relatively large enterprises in the world are able to sustain operations for as long as 50 to 100 years.

Despite a lack of universal satisfaction with the proposed new system and anxieties over possible pitfalls, Lee noted that the CLA's proposed system is much better than the existing one in many ways. "At least one thing is for sure: Every worker will be able to receive a pension upon retirement," he asserted.

Three options According to the bill, the multi-track system will allow a choice between establishment of individual retirement accounts (IRA) and participation in either a standard annuity insurance program or flexible, specially designed annuity insurance programs. Workers will be allowed to switch programs twice within the first five-year period of their participation in the system, but at the end of that period, they must stick to a single program for the rest of their working lives.

The most notable feature common to all three programs is that employee accounts will be portable--that is, tagged to employees rather than, as in the past, tagged to employers. This means that, in the calculation of retirement benefits, workers will sacrifice no retirement credits as a consequence of changes in employment, and all periods of employment will be applied toward the final pension payments.

Another common feature of the alternate pension schemes is that employers must pay no less than 2 percent of employees' monthly salaries into their retirement accounts in the first year, 4 percent in the second year and 6 percent from the third year onward.

In the IRA program employees entering the job market will set up retirement accounts, similar to ordinary savings accounts, at a financial institution designated by the CLA. In addition to employers' mandatory payments into the account, employees who wish to receive a larger pension may opt to pay in up to 6 percent of their monthly salaries.

 Once workers have either reached the age of 60 or have become disabled, they will be able to withdraw the whole of their accounts plus interest in one lump sum. Should they die before the age of 60, their heirs will likewise be able to withdraw, in a single lump-sum payment, the cumulative amount in their retirement accounts plus interest.

Annuity insurance funds In the standard annuity insurance program, employers will pay annuity premiums amounting to 6 percent of employees' salaries into an account at a CLA-designated financial institution. According to this program design, payments will be pooled in a group-insurance fund. In the event the fund runs a deficit, premiums will be raised, and fund participants will make up for the amount of the premium exceeding the employers' 6-percent allocation.

Those in the standard annuity insurance program, having reached the age of 60 and participated in the program for at least 15 years, will receive monthly pension payments for life. The program also guarantees a minimum pension- payment period of 10 years. This means that if a retiree dies within 10 years of beginning to receive monthly pension payments, his or her heirs can continue to receive monthly payments for the remainder of the guaranteed 10-year period. Should one die before beginning to receive pension payments, one's heirs can withdraw the invested amount in a lump sum.

In flexible annuity insurance programs, the amounts of premiums to be paid by employers and employees will vary in accordance with conditions negotiated between them and private-sector insurers. Such tailor-made programs can be implemented only in enterprises with at least 300 employees, of whom more than half must choose to participate in the program.

According to Lee, the advantages of the new system are many. Most importantly, no absolute minimum years of employment at a given company or organization will be required in order to receive a pension, and all working time will apply to the pension ultimately received. As for employers, cost management will be easier, since under the present system, pension payments are based upon the average six months' salary prior to retirement, which no employer is able to anticipate many years in advance.

 A further advantage of the proposed new pension law is that labor disputes will be reduced. Under the existing system, many employers, under various pretexts, have dismissed middle-aged and near-retirement workers in order to avoid having to pay pensions. Under the new system, this problem will no longer arise, nor will employers incur any extra financial burden by hiring middle-aged or older workers.

Also noteworthy is the fact that the existing pension system will continue to be in force for workers who wish to remain under that system. Most such workers, as Lee pointed out, are employees of state-run enterprises. In the private sector, employees of enterprises considered to have a bright future are less likely to consider changing jobs and may therefore likewise choose to remain in the current system, Lee said.

 All new entrants into the job market, however, will be obliged to follow the new system once implemented.

Just how much will people receive under the new system? According to CLA estimates, employees opting for the IRA program with a present monthly salary of about US$900, assuming a 3-percent annual growth in salary and 30 years of work, would receive a lump-sum payment of about US$73,000 upon retirement, or 24.3 percent of the "income replacement rate." Assuming the same salary conditions, employees participating in the standard annuity insurance program would receive a monthly pension of almost US$250, or nearly 28 percent of the income-replacement rate. Though this figure may appear insufficient to assure a comfortable retirement, it must be pointed out that workers in Taiwan all benefit from an additional Labor Insurance Program, which, together with pension payments, would add up to about 50 percent of the income replacement rate, said Lee.

In a nationwide survey conducted by the CLA in 2002, 42.4 percent of respondents opted for the IRA program, 21.7 percent for the annuity insurance program, and 1.8 percent for a flexible annuity program, while 20.4 percent would choose to remain in the existing pension program. Another 13.7 percent of respondents were undecided or had no opinion.

So far, there seems to be little controversy over the IRA program. There remain a number of concerns, however, regarding several aspects of the draft legislation.

One major concern is the question of what will happen if most people in higher-income brackets opt for the IRA program--which the survey indicates has a high probability of occurring. In that case, the standard annuity insurance program may become infeasible, as the size of the insurance fund would be smaller than ideal, and employees participating in the program might often have to pay increased premiums while ending up with a smaller-than-expected monthly pension.

 Another concern focuses on the fact that the standard annuity insurance program design is based on projected average life expectancy in Taiwan . Since life expectancy is steadily rising, there exists the risk that a growing number of people will outlive the calculated average and bleed the fund dry. Additionally, the CLA public-opinion survey reveals dissatisfaction with the complexity of the proposed new system and demand for a simpler, uniform standard.

These and other issues raised by social, labor and other special-interest groups during public seminars and workshops must be addressed in order for a Labor Pension Statute to be passed in the near future. Given that the CLA poll has revealed an overwhelming demand--by 83 percent of respondents-- for revamping pension-related rules, the government, legislators and concerned groups will surely be working hard in coming months to hammer out a viable, comprehensive plan acceptable to all.





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