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