Changing times for pensions in Taiwan – Aberdeen Standard Investments
Changing times for pensions in Taiwan
Jamie Jenkins, Head of Global Savings Policy
As Taiwan considers how to encourage greater savings into work-based pensions, it’s helpful to look at some of the challenges and successes in other countries, particularly the UK, which has undergone profound change in recent years.
Like most other countries around the world, Taiwan has an ageing population which has the potential to build pressure on the economy. And for people themselves, living longer creates a challenge in saving enough to fund their own retirement.
One of the major challenges is finding a balance between state funded retirement provision (‘pillar I’) and private work-based pensions (‘pillar II’). An overly generous government pension is in danger of discouraging people from making their own savings, placing all the burden on the state. But if the government pension is too low it risks leaving people in poverty, often meaning they rely on other types of state support.
Taiwan’s mandatory 6% employer contribution compares favourably with many developed countries around the world – including the UK – but only around 7% of employees are making voluntary contributions on top of that, meaning the overall savings level remains low.
No country in the world can truly claim they have solved this problem once and for all, nor that they have the perfect balance. The Netherlands, Denmark and Australia can certainly claim to have done more than most in stimulating work-based savings, but none has a mature system where everyone has adequate savings, or where there are no remaining challenges.
The Netherlands is facing challenges with its ‘collective DC’ approach with threats of reducing pensions in payment and accusations of inter-generational unfairness (current taxpayers partly fund current pensioner increases). Denmark is going through the uncomfortable process of resetting growth expectations after a decade of low interest rates. Even the much-admired Australian system has just undergone a highly critical review of its ‘Superannuation’ industry, in the form of its Royal Commission.
In the United States, only around half of people actually have access to a work-based pension through their employer, despite the country holding more the half the world’s pension assets.
India is trying to encourage greater levels of invested savings, but with only a minority of people formally employed, there are huge challenges providing the infrastructure and governance to make this work. At a practical level, it has over one million people each month reaching adulthood, seeking employment or further education and – at some point – needing to start saving for their retirement.
The UK has its own retirement challenges, of course.
It still suffers from widespread under-saving for retirement among lower paid workers, and more work needs to be done in supporting people with their decisions when they reach retirement.
However, the UK has achieved a lot in recent years and has a very stable, affordable system of retirement saving in place which will serve the youngest people in society well.
The State Pension has been simplified to a single, flat rate income in retirement payable at about 1/3rd of average working wages. Anyone paying tax for 35 years will receive the full amount, and it will be uprated each year by wage inflation, price inflation or 2.5%; whichever is highest. At a cost of around 6% of GDP, it can be controlled through steady increases in the age at which it can be claimed; currently 65 for men and women, rising to 66 in 2020 and planned increases again to 67 and 68 over the following 20 years.
Automatic enrollment has near doubled participation in work-based pension saving since it was introduced in 2012, with 10 million savers added. Contributions are currently only 5% of salary, but rising to 8% in April this year and many large employers are already paying much more than this.
The government incentivizes retirement saving through relief of Income Tax (at marginal rates) on any payments made by the employee and with relief of Corporation Tax for payments made by the employer. This is still subject to some debate and it could change in future years to re-balance the benefits towards lower paid employees, but there is widespread agreement that some up-front incentive must be provided.
While State Pensions can’t be accessed before age 65, private pensions can be taken from age 55. This means people can access their funds even if they are continuing to work, allowing them to repay debt, pass money to dependents or simply enjoy the holiday of a lifetime. For many, this isn’t about ‘retiring,’ but about making some use of their retirement funds early.
When people do finally slow down or stop working, they can take their private pensions in any way they choose. In theory, this means they have options ranging from taking it all as cash through to securing an income for life by purchasing an annuity. In practice, few people do either of these initially, because taking it all as cash incurs a significant tax charge, and buying an annuity ties people in to a relatively inflexible income. Instead, we see most people leaving the money invested, with options to make regular withdrawals as and when required.
State Pensions are managed by government and are largely paid for through current taxation, but work-based pensions are almost exclusively invested through solutions provided by asset managers. There is a healthy mix of active and passive options available, all wrapped up in well-governed, charge-capped default funds. The vast majority of the 10 million people automatically enrolled have been placed in the default fund chosen by their employer or pension provider and have not moved since.
Naturally, this encourages a lot of scrutiny from regulators to ensure default funds are suitable and well managed for those investing in them. A number of industry commentators have published comparative reports showing charges and performance between different providers.
Lately, many people are starting to report on the Environmental, Social and Governance (ESG) processes employed by asset managers. Regulators have embraced this growing trend and are mandating trustees to report on such considerations, starting this year.
In retirement, while there is no single default fund for people to use, the regulators are proposing that there should be ‘investment pathways’ for people to choose from. There will likely be four such options, ranging from one which suits someone who wants to draw all their money in the coming few years, through to those who want to try and make it last right through retirement. While performance remains a key consideration for investment funds in retirement, volatility plays a much bigger role and so is considered of equal – or even greater – importance.
The UK system isn’t perfect, but it’s stable and affordable. Above all, it provides a solid framework for people to build a good level of retirement savings, with help from government and employers along the way.
As Taiwan looks to make changes to its system, it’s informative to look at how other countries are adapting their own strategies. Retirement systems need to be built to last through generations, but flexible enough to adapt as the world changes around us. Challenges don’t come much bigger than that!
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