US embassy cable - 05TAIPEI383

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