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### Viewing cable 05TAIPEI383, TAIWAN'S NEW PENSION PLAN: NEW BENEFITS AT HIGHER

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05TAIPEI383 | 2005-01-31 07:21 | 2011-08-23 00:00 | UNCLASSIFIED | American Institute Taiwan, Taipei

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 03 TAIPEI 000383

    SIPDIS

    STATE PASS TO DOL AND AIT/W

    STATE FOR EB/TPP, DRL/IL AND EAP/RSP/TC

    DOL FOR ILAB

    E.O. 12958: N/A
    TAGS: ELAB ETRD TW
    SUBJECT: TAIWAN'S NEW PENSION PLAN: NEW BENEFITS AT HIGHER
    COSTS

    Summary
    -------

    ¶1.  Summary: In July 2005, Taiwan's new "Labor Pension Act"
    will go into effect.  Once in effect, Taiwan's retirement
    payment system will be transformed from a lump-sum payment
    to an annuity system that will affect 6 million employees.
    Under the new Act, each employee will have a portable
    account for mandatory retirement savings paid by employers.
    The new system is expected to cost employers NT$150 billion
    (USD 4.7 billion) every year and is likely to have some
    negative effect on wages and employment levels.  The true
    determinant of the system's success and failure, however,
    will lie in whether the fund, which is anticipated to reach
    NT$ 2.25 trillion (USD 60 billion) in 15 years, is operated
    fairly, efficiently, and free from political influence.  End
    Summary.

    Current Retirement Program - Lump-Sum Payment
    ---------------------------------------------

    ¶2.  The current retirement program is based on the Labor
    Standards Law (LSL), which took effect in 1984.  Article 55
    of the law requires the employer to pay retirees a lump sum
    retirement payment equal to two months of wages for each
    year of the first 15 years of employment and one month of
    wages for every year of employment after that.  The maximum
    retirement payment is limited to 45 months of wages.  To
    fund the lump-sum payments for retirees, the LSL requires
    employers to deposit at least two percent of each employee's
    monthly wages every month into the Central Trust of China, a
    Taiwan government agency.

    ¶3.  Under this lump-sum program, over half of the workers in
    Taiwan never receive retirement benefits.  A major reason is
    that employers who fail to meet these requirements face only
    minor penalties, such as a fine of up to NT$20,000 (USD
    597).  Another contributing factor is that the current
    system only makes employers responsible for paying the lump
    sum retirement money to employees who serve for more than 15
    consecutive years in their company and reach 55 years of
    age.  Over 95 percent of Taiwan firms are small and medium-
    size enterprises with an average employment of eight people
    and a work life span below 13 years.  As a result, most
    companies assume a large portion of their employees will not
    meet the 15 year/55 years of age requirements and therefore
    do not contribute to every worker's pension fund.  Only
    about ten percent of Taiwan's enterprises deposit retirement
    funds into the Central Trust of China in accordance with the
    law.

    New Pension System Guarantees Regular Annuities
    --------------------------------------------- --

    ¶4.  Beginning July 15, 2005, the "Labor Pension Act," will
    transform Taiwan's retirement payment system from a lump-sum
    payment to an annuity system.  The law was passed during the
    summer 2004 LY session.  The Act will affect approximately
    six million employees.  Once in effect, each employee will
    have a portable account for accumulating mandatory
    retirement savings paid by all employers.  Those accounts
    will follow employees from job to job.  At retirement age,
    employees will be guaranteed an annuity at a rate based on
    the 2-year average fixed deposit rate for 6 major banks (the
    government will be required to make up any shortfalls).

    ¶5.  While under the old system, only two percent of salaries
    were required to be set aside, employers must now contribute
    at least six percent of an employee's wages each month to
    the fund.  Employees can also make additional tax-free
    contributions of up to six percent of their income (up to
    9,000 NTD per month (USD 280).  Penalties for noncompliance
    with the new system will be substantial and will include
    fines of up NT$ 300,000 (USD 8,955).

    CLA Defends Law
    ---------------

    ¶6.  Many business associations including the Chinese
    National Federation of Industries (CNFI) and the General
    Chamber of Commerce tried to fight the law before it was
    adopted and are now urging the government to postpone
    implementation of the rule to allow more time to prepare for
    the costs.

    ¶7. Thus far, the government has not shown any willingness to
    discuss postponing the law's implementation.  Officials from
    the Council for Economic Planning and Development told AIT
    and AmCham representatives in December that implementation
    will not be delayed.  The new system was one of six campaign
    promises aimed at protecting workers made by President Chen
    Shui-bian leading up to the 2004 election.  Chairperson Chen
    Chu of the Council of Labor Affairs (CLA) praised the new
    system saying employees could finally be assured of some
    payment after retirement.  (Note:  Press reports of January
    28 cite newly appointed Prime Minister Frank Hsieh (Hsieh
    Chang-ting) as confirming that Chen Chu will retain her
    position as Chairperson of the CLA in the new cabinet.  End
    Note.)

    ¶8. In addition, the new system removes the disincentives to
    hire middle-aged people who were more likely to meet the
    pension age and length of service requirements under the old
    system.  The Ministry of Economic Affairs also argues that,
    under the new system, many companies will actually end up
    paying less than they were required (but did not necessarily
    pay) under the old system.  Comment.  Under the new system,
    in exchange for guaranteed benefits, the retirement payouts
    will be lower than they would have been under the old
    system. End Comment. Employees hired before the act takes
    effect can opt to stay with the current system.

    Annual Cost to Employers: USD 4.7 Billion
    -----------------------------------------

    ¶9.  The new legislation requires employers to make up
    shortages in retirement funds under the current system
    within five years.  This requirement will impact many of the
    approximately 88 percent of Taiwan's businesses that are in
    arrears under the old system in a bind.  These firms will
    now need both to repay past debts and set aside money to
    begin paying under the new system.

    ¶10.  As a result, the new system is expected to cost
    employers NT$150 billion (USD 4.7 billion) per year.
    Private sector estimates are as high as NT$2.6 trillion (USD
    77.6 billion) over 15 years.  By all estimates, costs will
    be substantial and employers are likely to pass these
    expenses to employees by reducing compensation or possibly
    cutting employment.

    ¶11.   Many of Taiwan's small and medium enterprises are
    short of working capital, making it difficult to meet the
    requirements of the current system.  Business Leaders
    question whether most employers have the margins to cover
    the full 6 percent per employee contributions to the new
    fund.  Due to the increased demands of the new legislation,
    Economic Minister Ho Mei-yeh asked the Small and Medium
    Enterprise Administration to provide loan guarantees of up
    to NT$ 5 million (USD 149,000) for firms that have
    difficulty making retirement fund contributions.  These loan
    guarantees should help firms cope with increased costs but
    are unlikely to eliminate the possibility of a negative
    effect on wages and employment levels.

    Scope of the Fund
    ------------------

    ¶12.  By the end of December 2004, Taiwan's pension fund
    revenue (accrued under the old system) totaled NTD 702
    billion (USD 22 billion). Estimated annual revenue under the
    new system is anticipated to reach a minimum of NTD 150
    billion (USD 4.7 billion) per year and more than NTD 2.25
    trillion (USD 700 billion) over the next 15 years.  In other
    words, under the current plan, the fund was less than 6
    percent of Taiwan's GDP and under the new system it is
    anticipated the fund will reach 20-25 percent of Taiwan's
    GDP.  Thus, the scale of this revenue makes effective
    management of the fund critical to the success of the
    program and Taiwan's economy.

    Management of the Fund
    ----------------------

    ¶13.  The government is still trying to work out how the fund
    will be managed.  Few decisions have been made.  It has been
    agreed, however, that an independent Steering Committee will
    oversee the fund; the fund will not be entirely privatized
    (although much of its management is likely to be
    outsourced); and there will be a separate independent
    regulator of the board to include representation by labor,
    industry and the government.  It has also been decided that,
    at least in the beginning, in return for a guaranteed return
    rate, individuals will not be given the ability to make
    individual choices about investments.  It is anticipated
    that that the investments will be diversified and be
    invested both domestically and abroad.  All other details of
    the Steering Committee are still under discussion.  Think
    tanks, academics and industry representatives are being
    consulted.  Once settled, the plan will need to be approved
    by first the Executive Yuan and then by the Legislative
    Yuan.

    Comment
    -------

    ¶14.  The new retirement system has engendered much
    controversy.  Close to the ninety percent of businesses that
    failed to fully pay into the old system are opposed to the
    new program, which will require both back payment of debt
    under the old system and an increase of mandatory savings
    from 2 to 6 percent of wages.  Moreover, there is great
    concern regarding the government's ability to manage the
    fund fairly and efficiently.  Former officials, think tanks
    and academics have expressed fears that the fund, which is
    anticipated to reach a value of NT$ 2.25 trillion (USD 60
    billion) in 15 years, could become a political tool.
    Whether the fund is operated fairly, efficiently, and free
    from political influence will be key in determining the
    success or failure of the program.

    PAAL

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