Taiwanese policymakers could learn from Australia’s A$1.5 trillion superannuation system, where often controversial reforms have driven sustainable growth in the savings pool, says Nick Sherry.
There are few better qualified to give such advice than Sherry, former Australian senator and minister for superannuation and a key architect of Australia’s retirement savings system, which is now the fourth largest in the world.
Recently appointed senior adviser for securities and fund services at Citi, Sherry was in Taipei yesterday sharing his experiences in forums organised by government ministers and pension fund associations.
He has spent 25 years mostly in the public sector, but in an interview with AsianInvestor argues his passion for global pension development could afford him another quarter-century of sharing policy experiences with the rest of Asia.
While he stresses he’s not giving prescriptive views about how governments should seek to reform pension policies, he says the way that Australia established its pension system could be taken as a valuable reference by other Asian markets.
“Sustainability and fairness are two of the biggest challenges encountered by government when they seek to change their pension system,” notes Sherry. “What remains important is the diversification of pension assets through the private sector with an aim to maximise investment returns for pension members.”
In Taipei, the cabinet recently passed reforms that will cut pension payouts for more than 440,000 public sector retirees.
Previously they qualified for a retirement payment equivalent to 1.5 months of their pre-retirement salary – a sort of year-end bonus for all former civil servants. But this was much higher than those received by retirees in the private sector.
In future, bonuses will be limited to lower-income former civil servants, or families of those injured or killed in the line of duty.
The passing of these reforms is seen as a first step in a reformation of Taiwan’s pension system, which has suffered heavy investment losses in recent years. The government’s labour insurance fund, for example, is expected to report liability shortfalls by 2017 and bankruptcy by 2027.
Taiwan’s aging population is living longer, placing increasing financial burden on state pension systems.
It’s the same story in many Asian countries where structural issues are causing governments to rethink. These countries might be at different stages of economic development and socio-political structures, but they face common challenges in terms of reforming their pension systems, says Sherry.
In Australia, the government faced a similar challenge of moving members to compulsory defined contribution (DC), from defined benefit (DB). In 1995 it introduced means-testing to screen retirees on DB plans or other private income from receiving basic government pension benefits and tax concessions on healthcare.
But with more employers/sponsors closing DB schemes and switching to DC plans, the growth of private pension assets in Australia has naturally reduced people’s dependency on government pensions over time.
As chairman of the senate committee on superannuation, Sherry was a key political figure behind the country’s Superannuation Industry (Supervision) Act, which sets all the rules that a complying fund must observe.
Between 1992- 93 he was responsible for overseeing passage of controversial legislation that allowed a gradual increase of compulsory employer’s contribution to a super fund from 3% of an employee’s wage to 9% over 10 years to 2002. This minimum obligation is to increase incrementally to 12% by 2020.
Despite triggering opposition at the time, this gradual increase in compulsory contributions has been the bedrock of Australia’s superannuation regulation structure since, to some acclaim and no little envy elsewhere in the world.