After a bribery scandal was unearthed in late November at Taiwan’s main state pension fund, investment industry experts have expressed concerns about the institution’s internal controls and argued that substantial reform is needed, such as increasing its independence from the government to better incentivise its investment staff.
The Bureau of Labor Funds, which oversees NT$4.45 trillion ($147.16 billion) of public retirement and insurance money, has moved to strengthen its internal controls after its head of domestic investment Yu Nai-Wen was detained on November 26 on suspicion of accepting bribes to make or request certain trades and thereby manipulate stock prices (see boxes below, BLF's new measures).
But some are sceptical whether these measures go far enough or if BLF can restore public confidence.
BLF’S NEW MEASURES
On December 17 the Bureau of Labor Funds announced 12 measures that it would introduce on January 1 to improve its internal control procedures following the emergence of the bribery scandal.
It said it would comprehensively ensure that all of its frontline stock traders were complying with internal rules rather than only doing random checks, while other staff will be examined randomly according to their seniority, the Ministry of Labor said.
In addition, BLF will limit the daily trading of an individual stock to 30% of its 20-day average trading volume to prevent stock manipulation.
Moreover, the institution is considering introducing a mechanism, in conjunction with Taiwan’s Financial Supervisory Commission, to speed up compliance checks on BLF staff and their family members, said deputy director general Liu Li-ju, quoted by Apple Daily.
BLF did not comment on the matter.
Members of the public have accused BLF of allowing its staff to use pension money to buy overvalued stocks for the staff's benefit. Criticism of the fund has been exacerbated by its poor investment performance this year; it posted a loss of 0.98% in the 10 months to October 31.
“I’m not surprised [at the scandal],” Donna Chen, founder and president of Taipei-based market research house Keystone Intelligence, told AsianInvestor. Local investment trusts and government funds in Taiwan are more lax in terms of compliance than foreign asset managers, she added.
BLF is taking action in hindsight because it is in the spotlight and therefore under pressure to do so, Chen said, but it should continue to improve its governance beyond the new measures.
Yet it may be difficult to restore public confidence in the institution after such a scandal, said Stuart Somer, director of Hong Kong-based compliance consultancy Complyport.
“In private industry, what usually happens is [that] investors take their money back, the manager loses management fees, the shareholders are unhappy, the person [in question] is fired, maybe some of the board is replaced,” he told AsianInvestor. “[But] I don’t know how you can restore confidence in a government provident fund, because it’s not like people can move their funds to another manager.”
Somer added: “It’s hard to believe a person could make an allocation like that with no supervision. BLF may have rules in place, but it perhaps did not ensure its staff were following them.”
Some market experts believe that making the pension fund independent of the government would enable it to improve its governance and establish a staff compensation policy that would help prevent bribery. BLF, which was set up in 2014 under the Ministry of Labor, declined to comment on this.
Investment staff remuneration at the institution is substantially lower than that of private-sector portfolio managers, so the former can be tempted to act in their own interests rather than those of pension members, Chen said. The fund’s pay is low because it is in line with that of other civil servants, and its staff do not receive performance bonuses, she added.
Making BLF independent of the government structure could enable it to hire more professional investment talent, Chen said.
As of September, BLF outsourced 49.7% of its assets to external managers – 37.7% to foreign firms and 12% to domestic ones – according to Keystone. That means Yu oversaw about NT$534 billion for the fund but received a monthly income of around NT$100,000 ($3,552), reported local media. BLF declined to comment on the salary figure.
The Taipei-based head of wholesale at an international asset manager also said a profit-sharing scheme for BLF’s money managers could be one solution, admitting that his compensation was far higher than Yu’s.
Yet while making BLF independent of the state might give it more latitude to reform its governance, this alone would not be a silver bullet, said Fan Shaokai, Singapore-based head of central bank relationships at the World Gold Council.
“Stronger internal compliance rules would be a move in the right direction,” he told AsianInvestor.
But a more fundamental issue may be that a large public fund being able to invest in its small local economy can create opportunities for market abuse, Fan said, “because there is naturally more interconnectedness between actors”.
“Many sovereign wealth funds explicitly do not invest in their domestic markets,” he added. “While BLF is not a SWF, it should continue to incorporate best practices from public funds around the world into its compliance and monitoring frameworks.”
Yu had allegedly accepted bribes from PJ Asset Management executives to use BLF accounts to buy shares in Taiwanese conglomerate Far Eastern Group. He is also alleged to have asked senior executives of Fu Hwa Investment Trust, one of BLF’s external asset managers, to buy Far Eastern stock from PJ AM. BLF declined to confirm these reports.
Moreover, Yu had been reported anonymously for four times since 2014 for managing pension money unfairly and socialising with external managers, Taiwanese legislator Kao Chia-Yu said on her social media account on December 14, accusing officials of not taking those allegations seriously. A BLF statement also said Yu once received a demerit for trading stocks during working hours.
"BLF is taking action in hindsight because it is in the spotlight and therefore under pressure to do so" - Donna Chen, Keystone Intelligence
While Yu’s monthly income totalled around NT$100,000, he had an average monthly credit card expenditure of about NT$200,000 between September 2012 and September this year, the anti-corruption watchdog found, quoted in local media. It was also reported that there had been about NT$9 million of deposits in his bank account from questionable sources over that period.
A BLF spokeswoman told AsianInvestor internal staff were forbidden to have dining arrangements with external asset managers, but declined to comment further.
Moreover, the fund had said on November 27 that its investment mechanism was not controlled by a single person.
It declined to elaborate on whether or how Yu could have used BLF accounts to buy shares of a specific company without internal approvals, such as by the investment committee or auditing department.