Taiwan’s Bureau of Labor Funds (BLF) is likely to undergo drastic internal compliance and governance reforms following its recent bribery scandal, with the government having appointed a former financial watchdog head to lead the state pension fund.

Su Yu-Ching

Su Yu-Ching, former secretary general of Financial Supervisory Commission (FSC), takes office as the director general today (March 10). As the first female head of the pension fund manager, she replaces Tsay Feng-Ching who stepped down in mid-February as a result of the scandal. The appointment was made by the Ministry of Labor, which oversees BLF.

BLF, which manages NT$4.61 trillion ($162.69 billion) of public pension assets as of January, has been under fire since a bribery scandal came to light last November that implicated one of its internal managers with a few external fund managers overseeing BLF mandates.

Su marks a radical change in leader from Tsay, who was the vice chairman of the Public Service Pension Fund’s management board before taking the helm at BLF in 2017. She previously worked at the Ministry of Finance before moving to the FSC where she held various position, including as division head at the Securities and Futures Bureau, before being promoted to secretary general.

Su left the FSC in 2017 to become chief executive of the Taipei Exchange. She was also an independent board of director at biotech company Pharma Engine, a position she left on March 4.

Donna Chen, founder and president of Taipei-based market research house Keystone Intelligence, says the government evidently decided the BLF's new leader needed to be a committed and experienced regulator instead of an internal candidate in order to help restore public confidence in the state pension fund.

"She doesn't have any baggage ... she's from the regulator. If she were [instead] from the [asset management] industry she may know someone that needs her help. So, Su can bring about drastic changes," she told AsianInvestor.

The head of wholesale of a foreign asset management firm added that he does not know Su, but that her appointment indicates a desire to prioritise internal governance processes instead of investment experience in order to restore public confidence. That process is likely to take a lot of time.

That said, reforms within the state pension fund will not happen overnight, requiring an overhaul of internal processes, governance, compliance measures and internal training, said Chen.

SCANDAL IMPACT

The bribery scandal at BLF first emerged  last November. Yu Nai-wen, director of domestic investment division at the state pension fund, was charged with accepting bribes from PJ Asset Management executives to use BLF accounts to buy shares of Far Eastern Group from PJ Asset Management at a premium.

Yu was also suspected of requesting senior executives of Fu Hwa Investment Trust, one of BLF’s external asset managers, to place orders of Far Eastern Group shares. Domestic asset managers Uni-President and Capital SITE were later suspected of also having violated rules in the incident

BLF’s deputy director general Liu Li-ju told AsianInvestor in February the pension fund was taking a prudent approach to its management lapses after the incident. She noted that it is slowing down its process of appointing new asset managers and conducting more frequent reviews of its current asset managers, as well as placing more emphasis on the generally high governance standards of international fund managers.

MORE ETF INVESTING

BLF has already been on a process of rules-tightening, implementing stricter rules on external managers since the start of the year. However, some market experts believe that the state pension fund will seek to further inoculate itself from potential scandal by increasing its use of passive investment strategies and local exchange-traded funds (ETFs).

Such products track a benchmark that is comprised of a broad array of stocks or bonds, making them far harder for a person to manipulate than the individual stocks at the heart of BLF's bribery scandal. 

A Taipei-based business development head at a foreign private equity firm said BLF will probably increase its exposure to domestic ETFs at the expense of active equity mandates, given that at least three big-name local asset managers are now involved in the scandal.

That could mark a big change; domestic market investments make up 48% of BLF’s investment portfolio and, not coincidentally, about half of BLF’s assets are externally managed. About 62.5% of these external managers are local players, Liu told AsianInvestor in January. Liu said BLF is on track to gradually reduce it to just 40% by 2025.

While that shift is likely to disappoint active equity managers, Taiwan’s financial regulator may well be glad to see more institutional funds flowing into Taiwan’s sometimes fickle domestic ETF market. 

The island’s ETF market has grown a lot in the past years; indeed, ETFs accounted for the lion’s share (36.9%) of the $160.4 billion onshore public fund market in Taiwan as of end January 2021, according to Keystone Intelligence. That size means it can begin to accommodate more institutional investor funds.

While Taiwan's bond ETF market is dominated by local insurers, its equity ETF market is relatively retail investor driven. Adding BLF’s long-term institutional assets would help give stability to core ETFs and help slow the rapid turnover of the products, said Chen.

It could also help drive down management fees of 0.4%-0.5% for domestic equity ETFs, the business development head added.

However, a rising emphasis on ETFs will take time to implement. Liu told AsianInvestor in February that BLF intends to invite bids for a domestic equity mandate worth at least NT40 billion ($1.42 billion), which uses an absolute-return strategy, in the second quarter of the year at the earliest. In an absolute-return strategy, investors aim to deliver a specified return above a benchmark by using both long and short investments.

BLF declined to comment on the new appointment and ETF investing.