Investing more in alternatives will help to boost returns but this alone will not solve a fundamental issue at Taiwan’s labour funds, where contributions are lagging behind payouts.

Taiwan’s Bureau of Labor Funds (BLF), which oversees six labour funds, faces an “imbalance” problem because contributions, due to lower birth rates and a rapidly aging population, are smaller than pension payouts, deputy director-general Liu Li-ju told Asianinvestor.

Liu Li-ju, BLF

The front end of the system, being the sources of funding, and the back end, where payouts are being made, should be reformed drastically, she said. BLF is caught in the middle, and raising alternative investments alone can't solve the root of the problem, she added.

“We strive to deliver value from the assets we have. But we can't resolve problems if the other two ends are imbalanced. We definitely cannot do that,” she stressed. 

BLF told AsianInvestor last month that it planned to invite bids for two mandates before the end of the year to raise its alternatives exposure and replace underperforming managers. The bureau is looking to issue requests for proposals for two global investment mandates on infrastructure and multi-asset. 

The asset classes make up about 11% of its NT2.4 trillion ($81.46 billion) labour pension fund, the biggest fund among the six funds under its management. The target level is 13%, Liu said.

Like many pension funds in Asia BLF’s alternatives exposure pales in comparison to that of global peers, which often invest up to 30% of their portfolios into such assets. Pension funds in Asia ex-Japan invest an average 52.8% of their assets in fixed income, followed by 33.8% in equity and 7.6% into alternatives, according to a recent Mercer study on pension allocation trends in emerging markets. 

In contrast, pension providers in more developed countries such as the US, UK and Australia, retirement funds generally have an allocation of between 20% and 30% to alternatives, said Janet Li, wealth business leader for Asia at investment consultancy Mercer. 

“Anything that is less than 10% is considered not that significant in the whole portfolio,” she previously told AsianInvestor.
 
Mercer and German insurer Allianz have urged that asset owners invest more into private and illiquid assets to ensure better return performance amid the market risks presented by the Covid-19 pandemic. Cameron Jovanovic, head of global retirement proposition at Allianz, noted in a survey released last month that the Covid-19 pandemic had depressed already record low yields and that raising alternative investments could be part of the solution for asset owners to raise returns.
 
REMEDIAL ACTIONS

Taiwan is exploring different solutions to address the retirement needs of its rapidly aging population, as it could become the world’s first “super-aged society” by 2026. 

That is not an easy task. President Tsai Ing-wen’s administration tried reducing retirement payouts to military officers in 2018. Military personnel strongly opposed the plan, causing major clashes between protesters and the police in front of the legislative building before the reform came into effect on July 1 in the same year. Tsai's Democratic Progressive Party (DPP) then suffered a huge defeat in local elections a few months later.

Donna Chen, Keystone

The government also intends to let workers invest their voluntary pension contributions in a bid to encourage them to save more for the long-term. At present, employers in Taiwan must contribute 6% of employees’ salary to their pension, while employees can voluntarily contribute up to 6%, or none at all, of their pay. These contributions will all go to BLF’s labour pension funds.  

Under a two-year trial scheme launched in August last year, individual pension savers can choose how to invest their pension savings. Three fund houses – Cathay Site, Capital Fund and Allianz Global Investors – obtained regulatory approval to offer a total of nine target-date and target-risk funds to the participating pension savers under the scheme, who enjoy low management fees of 0.3% to 0.5%.

The scheme allows members to choose the investment funds they want based on their risk profiles, and is expected to attract more pensioners when it is officially up-and-running due to its tax incentives, Donna Chen, founder and president of Taipei-based market research house Keystone Intelligence, told AsianInvestor.  

However, lower-income groups and the younger generation who can barely make ends meet will still be unwilling to save for their retirement. Requiring workers to make mandatory pension contributions should help to fix the pension system in Taiwan, but such a move will likely draw fire from the public, she said.

“Our birth rate is declining. Our population is ageing rapidly. Our population is living longer,” said Liu at BLF. Fixing the situation requires public consensus and understanding, she noted, and that will take time.

“Anything that is less than 10% is considered not that significant in the whole portfolio,” Li previously told AsianInvestor.