Taiwan pension system to test member choice next year

Taiwan’s private school pension fund is to offer its members the chance to select products on the shelf of Chinatrust Commercial Bank according to their risk profile for the first time next year.

The Supervisory Committee Managing Retirement, Compensation, Registration and Severance (SCMRC) fund was established on January 1, 2010 as a defined contribution scheme for private school teachers and staff. It has NT$13 billion ($440 million) under management.

Its structure is similar to the Public Service Pension Fund (PSPF) except that its management board is a private sector entity rather than government-run, which bestows greater flexibility in its daily operations. The nation’s education ministry is represented on the fund’s supervisory board.

“We plan to start member choice next year so that teachers can choose their own investment targets and strategy,” Lai Jin-Nan, executive secretary of SCMRC, tells AsianInvestor. “The domestic pension fund system has reached the point that it needs reform.”

The overall contribution rate to the SCMRC fund is 12% of twice a teacher’s base salary: of this, the employee contributes 35%, the school 32.5% and the government 32.5%. At present the fund serves 65,000 members working at 364 private schools from kindergartens to universities.

This transfer to member choice was outlined in the Private School Pension Act passed in 2010, which stipulated that for the first two years the fund would manage member money collectively, and thereafter look to introduce investment portfolio options for members with different risk-return features.

On the issue of whether beneficiary members will properly understand their investment options and the additional risks involved, Lai concedes this is always a concern and outlines how the fund aims to protect members inexperienced in market investment.

“For the collective management phase, we offer two-year deposit rate as guarantee,” he notes. “Likewise, after member choice starts, the most conservative investors can also have two-year deposit-rate guarantee, whereas balanced and aggressive investors will need to take responsibility for risk and return.”

As this is the first time member choice will be offered in Taiwan’s pension system, the SCMRC initially wants to ensure that beneficiaries simply are made aware they will have a choice in terms of managing their retirement savings. The hope is that gradually the fund will come to better understand and accommodate members’ needs and adapt its operations accordingly.

“For now, we don’t want to make things too complex but rather have a simple and straight forward system that teachers can easily comprehend,” stresses Lai, noting that the SCMRC is also planning to conduct an island-wide education campaign.

Mandy Tzu, SCMRC section chief, adds. “Even though our fund size is very small compared with PSPF and LPF [Labour Pension Fund], we have been encouraged to start this member choice project as stipulated in the Private School Pension Act.”

At present the SCMRC is working on setting up appopriate product solutions on the Chinatrust platform, a process that is expected to be completed by August.

“There will be a concession area in Chinatrust that is tailor-made for our members to log in and track their account balance, score their risk tolerance level and select appropriate investment products,” explains Tzu.

“For the time being we are open to different options and criteria [for the platform] and we can categorise these by product or asset manager.”

In terms of the SCMRC current asset allocation, it holds 53% in bank deposits and 47% in mutual funds, most of which are equity focused.

Lai notes that under present regulations the fund’s management board is not allowed to invest in stocks directly, not least because they don’t have the investment personnel and capabilities to do so. “Initially mutual funds will be the main investment targets,” he says.

He adds: “The regulation reserves room for issuing mandates, but so far we haven’t started yet.”