Taiwan Enacts Deep Pension Cuts for Teachers, Civil Servants

In an attempt to prevent, or at least delay, defaulting on retiree payments, Taiwan has enacted deep cuts to pensions for public school teachers, civil servants, and political appointees.

“Now that these laws have been passed, pension system bankruptcy is no longer an urgent crisis in Taiwan,” Taiwan President Tsai Ing-wen said in a statement.

According to Taiwan government data, pensions for civil servants would have defaulted by 2030, while pensions for teachers would default the following year, if no changes were made to the current pensions system.

“It is estimated that these actions will save the public coffers NT$1.4 trillion ($45.8 billion),” said Tsai. “We will take the money saved and inject it into the Public Service Pension Fund to ensure that it will remain viable for at least 30 years.”

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The cuts include the phasing out of an 18% preferential interest rate public school teachers receive on their savings accounts. Under the new regulation, the 18% interest rate on savings for teachers who receive NT$32,160 ($1,074) per month or more in retirement income will be reduced to 9% from July 1, 2018, to Dec. 31, 2020. It will then be cut to zero starting Jan. 1, 2021.

For retirees who opted for a lump-sum retirement payment rather than a monthly pension, the preferential interest rate will decrease to 6% over a six-year period.

Tsai said all pension systems need to be continually adjusted to stay in synch with the times. “In carrying out the pension reform, we established a mechanism for regular reviews,” she said. “Now that we’ve had this successful experience, when it next comes time for a review of the pension system, we will have more confidence.”

The bill also lowers the income replacement rate for pensioners who are receiving NT$32,160 per month or more. Those with 35 years of service will have their income replacement rate drop to 60% from 75% of their pre-retirement income over a 10-year period. Those with 15 years of service will see a decrease to 30% from 45% over the same period of time.

Additionally, teachers’ monthly pensions, which are currently based on their salary during their last month of service before retiring, will instead be based on their average monthly salary in their final five years of employment. That will then be adjusted during a period of 10 years to their average monthly salary over the final 15 years of service.

“This round of pension reform has an important significance, for we’ve proven that pension reform is neither a political minefield, nor a taboo issue that absolutely cannot be broached,” said Tsai. “And no one will become destitute because of the pension reform passed.”

Tags: Pension, Taiwan, Teachers

Weiss Multi-Strategy Advisers, a $1.7 billion New York-based hedge fund, wants insurers to consider a new type of portfolio customization. The firm calls it “enterprise-driven investing” (EDI), and recently authored a white paper making the case for why insurers need to change how they construct their portfolios in order to better address common allocation pitfalls.

According to Bill Poutsiaka, independent insurance consultant, author of the paper and developer of the EDI model, insurers have opted to stick with classical allocation models despite dwindling performance. “Managers need to catch up to customization when it comes to creating investment portfolios for insurance,” Poutsiaka contends. “The traditional mix isn’t always going to get you to your goal.”

Insurance balance sheets tend to be heavily regulated pools of long-term capital. As a result, allocators opt for fixed income and other vanilla investments in the hopes of maintaining stability over many decades. Poutsiaka says that with the advent of new financial instruments and technology, insurers should consider new asset classes and a more outcome-oriented allocation model.

EDI works by adopting many of the same principles institutional investors use for outcomes-based portfolios and adapting them for insurance. Poutsiaka notes that insurers tend to run into significant portfolio design challenges because of the long time horizon associated with insurance portfolios. Allocations are made with a one-size-fits-all approach, leaving the portfolio vulnerable to changes in market, regulatory, and business conditions. With EDI, allocators prioritize a specific set of financial goals and design the portfolio and its performance metrics accordingly. “Customization begins with insurance business segments and ends with circumstances specific to each company,” Poutsiaka says. “Creating this picture is critical to the formation of an investment strategy.”

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Investment horizons should also be capped; rather than investing for a nebulous “long term”, portfolios should be designed based on clear cut durations such as three or five years. By aligning outcomes, performance metrics, and duration, more consistency is embedded into the investment process and allocators set up fixed points in time for reevaluation. These conditions make it more feasible to invest across asset classes, capturing medium-term yields alongside long-term return.

Poutsiaka says there is a unique opportunity for EDI right now given the level of change and innovation underway in the business of risk transfer. “In the world of risk transfer, there is a lot going on, we are even starting to see growth in start-ups,” he explains. “These changes create opportunities to improve results when they are managed through a comprehensive and systematic management process like EDI.”

The full paper is available here.

Tags: EDI, enterprise-driven investing, Hedge Fund, insurance, insurers, portfolio customization