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Cablegate: Taiwan Belatedly Allows Investment of Pension

VZCZCXRO4431
RR RUEHGH
DE RUEHIN #0566/01 0730118
ZNR UUUUU ZZH
R 140118Z MAR 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4422
INFO RUEHBJ/AMEMBASSY BEIJING 6464
RUEHHI/AMEMBASSY HANOI 3254
RUEHJA/AMEMBASSY JAKARTA 4021
RUEHKL/AMEMBASSY KUALA LUMPUR 3702
RUEHML/AMEMBASSY MANILA 9973
RUEHUL/AMEMBASSY SEOUL 8523
RUEHGP/AMEMBASSY SINGAPORE 6847
RUEHKO/AMEMBASSY TOKYO 8564
RUEHGH/AMCONSUL SHANGHAI 0883
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 02 TAIPEI 000566

SIPDIS

SIPDIS

STATE FOR EB/TPP; DRL/IL

E.O. 12958: N/A
TAGS: ELAB ETRD TW
SUBJECT: TAIWAN BELATEDLY ALLOWS INVESTMENT OF PENSION
FUNDS

REF: 05 TAIPEI 00383

1. SUMMARY. On March 2 the Legislative Yuan passed a bill
setting up the Labor Pension Supervisory Commission under the
Council of Labor Affairs (CLA) which will permit the
investment of the country's growing pension fund. This
follows two years of bi-partisan bickering which resulted in
the funds sitting in a bank collecting low interest. The
ruling Democratic Progressive Party (DPP) has favored an
Administrative Corporation, mixing public and private
management to manage the fund, whereas the opposition KMT
favors strictly public management. The LY voted in favor of
public management. It is hoped that the new freedom to invest
will result in much better returns for the funds and will
help stimulate the economy in terms of increased investment
both internally and from foreign sources. END SUMMARY


PENSION FUND BACKGROUND
------------------------

2. The current pension fund was adopted in July 2005 after
passage of the Labor Pension Act. Under this scheme,
employers are required to pay 6 percent of the employees
salary every month into individual accounts which are
portable, i.e. when an employee switches jobs he/she can
transfer their account to the new firm. Under the new
pension system, retirees can draw an annuity rather than just
be paid a lump sum at retirement. To date, more than 4.29
million workers have enrolled in the pension program and the
fund has accumulated NT$140 billion (US$1= NT$32.90) at the
end of Feb 9, 2007. Since 2005 until now the fund has been
drawing about 1.0-1.5 percent interest in the banks while the
CLA waited for a final decision. It is estimated that the
fund has lost NT$6.7 billion due to lost investment
opportunities. When payments begin, about 24 percent of
salary will be paid by the fund and if labor insurance is
added total payment can add up to 54 percent of salary for
eligible retirees.


POLITICS OVER COMMON SENSE
--------------------------

3. Following the announcement that the LY had approved a
bill allowing investment of the country's pension funds, AIT
spoke with the deputy chief of the Council of Labor Affairs
(CLA), Lee Lai-hsi. Lee seemed confident that the new
measure would result in the fund growing and becoming more
profitable. Lee acknowledged that the public trust in fiscal
management had been hurt, but he cited previous funds which
CLA had managed, including the Labor Pension Fund and Old
Retirement Fund and indicated that sound management had
ensured a return of 5-9 percent. Lee explained that the
reason why it took so long to approve investment was due to
political bickering between the ruling party and the
opposition. The DPP favors to manage the investments with a
quasi-independent agency or administrative corporation with
more freedom to operate. The KMT wanted to stick to the
administrative organization giving the LY more oversight and
placing the fund managers under stricter rules. In the end,
the LY approved the KMT's version and the fund will be under
CLA supervision.

MANAGEMENT; GOVERNMENT EXPERTS PLUS INDUSTRY ANALYSTS
--------------------------------------------- --------

4. In order to manage the fund, the pension supervisory
commission intends to appoint 21 members. The chairman and
vice-chairman will be appointed by the Executive Yuan. Labor
groups will select 6 persons, and the remaining picked by the
CLA. A total of 10 slots is reserved for scholars and
experts (private sector) so that they can serve as
consultants. The LY has stipulated that the working staff
should comprise over 200 persons, with 60-80 familiar with
accounting, finance investment and risk management but a
final decision is pending. The CLA position is that such a
large staff to manage the fund is excessive and that it could
be done with far fewer people. A final decision has not yet
been reached. The projected inauguration date is August with

TAIPEI 00000566 002 OF 002


an operational date of late 2007.


STEADY GROWTH AND FOREIGN INTEREST
----------------------------------

5. Lee said that the road is open from now for multiple
sources of investment in the fund, both local and overseas.
He said there is still a ban to invest the funds in the
mainland. He added that the management of the fund will be
paid by the government (yearly costs of NT$800-1,000 million)
so that the fund's equity will be freely available to invest.
He foresees the fund to grow by NT$100 -150 billion reaching
over one trillion in a decade with few withdrawals in the
interim. Given the size and potential of the fund, it is no
surprise that foreign interests have shown an avid interest
in becoming investors in the fund. Because domestic sources
of investment are limited, CLA believes that more than 20
percent of the fund is likely to be invested overseas. Lee
said he has talked to several overseas funds and has not made
a decision yet which funds he will recommend for purchase.


COMMENT
-------

6. The passage of the pension fund supervisory act is long
overdue. Political bickering aside, the management of such a
huge fund by the government must be viewed with a certain
amount of distrust by the public, given the poor record of
fiscal oversight of banks and other financial institutions to
date. However, the CLA's plan to add private sector
consultants to its management team to try and manage this
fund could increase confidence in the fund's long-term
viability. Allowing the fund to invest locally and
internationally could not only invigorate local stock markets
but also help attract foreign investment to Taiwan. END
COMMENT


YOUNG

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