PSPF: Hedge fund ETFs are a great idea

Plagued by underfunding and mismatches in assets and liabilities, like many other defined-benefit pension funds in Taiwan, the Public Service Pension Fund (PSPF) is thinking about ways to resolve an expected crisis when it will not have enough cash to pay out its pension participants.

Tsay Feng-Ching, vice-chairman of the PSPF management board in Taipei, speaking at AsianInvestor's fourth Annual Taiwan Institutional Investment Forum this week, says the Ministry of Finance and the PSPF have long considered the possibility of introducing a defined-contribution system alongside its present defined-benefit scheme.

Future civil servants joining the government workforce will be removed from the generous pay-as-you-go DB pool and be asked to participate only in the DC scheme. The government has been waiting for a suitable "political mood" to introduce the change.

Furthermore, Tsay said there is a likelihood that contributions will need to be raised from the present level of just 12% to 18%.

Moves like these may help to put a defined limit on the government's share of the liability burden and mitigate the size of the funding problem. However, the root problem is that the PSPF is simply not generating enough investment return to pay for itself. 

According to the PSPF's latest available asset report, as at the end of February, the fund had total assets of NT$434 billion ($13.6 billion).

Of the $13.6 billion, curiously, one-fifth is kept in cash, without being allocated to productive investments despite the fund's imminent funding crisis. This includes a 12.78% allocation kept in local currency deposits, and 7.45% in foreign currency.

Local financial industry leaders, like Liu I-cheng, head of corporate banking at Cathay United Bank, blame government funds like PSPF for their outsized cash holdings, which exaggerate the amount of liquidity in the Taiwan market. The result has pushed down yields and interest returns in the local market, contributing to local financial institutions' difficulty, as the liquidity has made yield curves in the local fixed-income market largely non-existent.

When asked what the PSPF might do to reduce its cash holdings, Tsay says the fund is plagued by two issues in its search for good investment products.

First, the board only wants to invest in instruments that can be easily traded in the secondary market; liquidity is key. Second, the PSPF isn't interested in products that are too complex.

The board is aware that institutional investors are now adding alternative investments and ETFs to their portfolios. Tsay says he thinks the idea of pension funds investing more in hedge funds is a good development.

"Better yet, if someone can figure out how to wrap together a hedge-fund portfolio in an ETF, that would be great," he says.

(Perhaps it is time for someone to tell Tsay that hedge fund ETFs already exist.)

With regards to its outsourcing plans, the PSPF put out two batches of overseas investment mandates last year, and Tsay reckons it is unlikely the fund will send out another round of requests for overseas managers.

As of the end of February, 38.34% of the PSPF's assets were outsourced to domestic and overseas external asset managers.