Taiwan offshore pension mandate looms

The $5.5 billion Public Service Pension Fund, one of Taiwan's big four government pension schemes, is expected to announce its criteria and qualifications for global fund managers next month, with requests for proposals for $500 million of assets to go out in January, and mandate to be awarded by the end of February.

The PSPF will be the first Taiwanese entity to provide an offshore mandate on a discretionary basis, and the first pension fund to invest abroad at all. It is being closely watched by the other three pension schemes, which together have nearly $100 billion in assets and are keen to diversify offshore.

According to drafts being circulated by the PSPF's committee of bureaucrats and academics in charge of establishing this process, there will be five mandates of $100 million each, two for international equities and the other three balanced. Fund managers say there are approximately 20 houses likely to bid for these pieces of business.

The qualifications drawn up by the PSPF emphasize size and performance, but are otherwise reasonably flexible, notes Frances Chang, president at ABN AMRO Asset Management in Taipei.

Foreign firms must have either a local license for discretionary portfolio management or an equivalent in their home jurisdiction recognized by Taiwanese authorities. The manager must also have either assets under management of $25 billion or be listed among the top 100 firms in terms of AUM according to Pensions & Investments magazine. They must have a local client servicing team of at least three professionals, but houses without a local presence can outsource that work to a local company with an investment consulting license.

There are also performance hurdles. Candidates must have outperformed benchmarks established under global investment performance standards (GIPS) for two years. GIPS is an internationally recognized set of standards.

These criteria are still subject to change pending the release of the final draft in December, and some fund houses that do not meet all of them are said to be making a final lobby effort.

Once mandates are awarded, managers for the equities component must beat the MSCI World Index for developed countries by .5%, with a permitted tracking error of 3%; and for balanced managers, must beat a customized benchmark comprising 60% of that index and 40% of the JPMorgan global government bond index by 2%, with a tracking error of 6%. Mandates will be for two years.

Fees will be based on how managers pitch the PSPF. Fund managers were appalled by the misery fees they've had to swallow for the PSPF's domestic mandates, which can be as low as 16 basis points. They believe the industry has learned a lesson and will pitch higher for the international component, which in any case involves more costs. The PSPF committee evaluating managers is sensitive to being accused of picking managers based simply on the lowest fee. So some managers think the second-lowest fee will win; others think the PSPF will average them. Ultimately they see fees falling anywhere from 35-50 basis points.

The next step will be for the PSPF to select a global custodian. This issue involves legal problems, for in Taiwan custodians are also saddled with fiduciary responsibilities beyond their normal role of warehousing assets. (In most jurisdictions, there is a separate trustee function that has fiduciary responsibility for the assets.) The result is that global custodians don't operate in Taiwan in regard to discretionary portfolio management, which has been too small a business to warrant the risks. They are now in talks with Taiwan authorities about creating a structure more in line with international practice for the PSPF's offshore assets.