BALL AND CHAIN:Regulations guaranteeing a minimum return on funds discourage fund managers from dropping poor-performing stocks, the president of a union said
By Abraham Gerber / Staff reporter
National pension fund reforms should include changes to management to boost returns, a teachers’ union official said yesterday.
“We hope the government will acknowledge that, because legal restrictions have kept national pension funds from performing better, fund management should be reformed simultaneously with any changes to pensions,” National Federation of Teachers’ Unions president Chang Hsu-cheng (張旭政) said, adding that the Public Service Pension Fund increased by an average annual rate of 2.76 percent over the past 20 years, well below what he said was the average of 4 to 6 percent for similar funds in other nations.
National pension funds are facing the risk of going bankrupt within 20 years, with discussions on reform ongoing at a national pension reform committee, which was formed by the Presidential Office.
Chang said that while there is no evidence that pension funds had been used to make politically motivated investments, regulations guaranteeing a minimum return on funds create perverse incentives that discourage fund managers from dropping poor-performing stocks.
“While the minimum return guarantee might seem to be only a basic requirement, in practice, as fund managers are public servants subject to Executive Yuan restrictions, the guarantee ultimately serves to bind them, keeping them from cutting losses,” he said.
“If return on investment falls below the Bank of Taiwan’s official savings deposit rate, the government is obliged to make up the difference, but this is only calculated after investments are sold,” he said. “The Directorate-General of Budget, Accounting and Statistics often requires a fund’s managing committee not to sell falling stocks to avoid having to pay into the fund, but that keeps the fund from cutting its losses.”
Chang called for reforms to allow a portion of profits from the years when the funds outperform their target growth rates to be returned to the national treasury, along with regulatory changes to allow finance professionals to be hired to manage the funds, while paying them bonuses based on performance.