More education is needed on the importance of investment and savings for old age.
Taiwan will soon join the ranks of “super aged” societies, with one in five Taiwanese 65 years old or older by 2025. Among the factors regarded as contributing to Taiwan’s extremely low birth rate are stagnant wage levels, which have made young people less likely to start a family.
As the working age (15-64) population declines and the elderly (65 and over) population increases, the dependency ratio – the proportion of non-working people dependent on those in the workforce – is skyrocketing. In 2016, the ratio was 18 elderly for every 100 working-age people. The National Development Council predicts that in 2060, every 100 working age individuals will need to support 74 elderly people. The problem is intensified by longer lifespans; the retirement age is 65, and life expectancy now averages 80 years.
Coping with Taiwan’s aged will require a concerted effort that includes comprehensive pension restructuring by the government, calculated savings and investment strategies by the aging and elderly, support from the working-age population, and coordinated measures from Taiwan’s financial-planning industry.
In June, a survey by American investment management firm Legg Mason, Inc. found that the “retirement plan” of roughly half of Taiwanese is simply to “not retire.” A mere 13% of respondents said they expected their pension to be sufficient, while upward of 85% did not believe their pension income would be enough to live on.
As Louis Yen, Managing Director of Aon Taiwan, notes, income from the government-run pension system is not intended to cover all post-retirement financial needs. “Government-sponsored benefits can only cover part of financial need after retirement,” he explains. “Employee- and government-sponsored benefits make up what is called income replacement ratio (IRR) and ideally can cover about 50% of financial need after retirement.”
Yen adds that while the IRR for government employees (teachers, civil servants, and military personnel) can be quite high – often around 80% and sometimes even over 100% – private-sector employees find themselves struggling to make ends meet. “A private-sector worker can receive old-age benefits from the labor-insurance system which can account for 15-20% of the income replacement ratio, and the pension income from the Labor Standards Law or Labor Pension Act probably covers another 20-25% of the IRR, so the total equals 35-45%,” says Yen.
Saving early, saving smart
Not enough Taiwanese are properly planning for retirement through savings and investments. Increased longevity exacerbates this issue, says Christine Jih, Chairman and CEO of BNP Paribas Investment Partners Taiwan. “If you live longer, you’ve got to prepare more money. You have to work earlier, retire later, and start saving and planning your retirement earlier.”
At the same time, as discussed by AmCham Taipei’s Insurance Committee in the 2017 Taiwan White Paper, further efforts are needed to gear the domestic life-insurance market more toward protection products. Taiwan is regarded as facing a serious “protection gap” – the disparity between the amount of insurance consumers need in order to be adequately covered in the event of a serious issue such as critical illness, accident, or death, and the amount they actually have purchased.
“The financial industry is highly regulated, constraining financial institutions from providing a variety of choices in terms of retirement vehicles/products to offer the population,” explains RGA Global Reinsurance Co. Ltd. in a written statement to Taiwan Business TOPICS. “Furthermore, existing policies governing retirement savings and labor insurance offer consumers minimal tax incentives for saving for retirement.”
“A significant portion of the public prefers not to take investment risk, even if their circumstances permit, and does not appreciate the concept of insurance risk pooling,” adds RGA. “This steers financial institutions’ energy and effort toward developing products with guaranteed investment return and minimal insurance risk. Consequently, it indirectly limits potential avenues for those in lower-income groups to fully fund their retirements.”
In the current pension system, all contributions made by individuals and their employers are pooled into the Labor Pension Fund, and investment is managed by a supervisory committee. Leo Seewald, Managing Director of BlackRock Investment Management (Taiwan) Ltd., notes that while people have the tax-incentivized option to contribute up to 6% of their income on top of mandatory employer contribution, less than 6% of Taiwanese choose to contribute that amount.
The root of the problem, says Seewald, is a financial mindset lacking personal responsibility. The solution, he maintains, is a member-choice pension scheme.
“You want people to get skin in the game; you want people to want to contribute that 6% to their retirement,” says Seewald. “If you implement a member choice where people actually can decide what to invest in, you get them to take part in their retirement. The minute people think government is responsible for their retirement, they just relax. That’s what we are seeing now.”
BlackRock’s 2017 Investor Pulse survey for Taiwan found that while 76% of Taiwanese have started saving for retirement, on average they save only 10% of their monthly income for retirement, the lowest monthly retirement savings in Asia.
Many financial-planning sector leaders interviewed by Taiwan Business TOPICS support the move to a member-choice system. A senior banking executive who requested anonymity observes that the issue has been discussed for years, and ascribes the holdup to bureaucracy surrounding the pension system. “The government’s pension track record is not great, and in about 15 years, they’ll probably go bankrupt,” he asserts. “They cannot deliver their promise of achieving 2% returns. A lot of the Ministry of Labor’s pension people don’t have a financial background. If you can’t do the job, why do you still insist on doing it?”
BNP Paribas’ Jih notes that Taiwanese people tend to invest their money in trading-oriented investments. “Taiwanese are not used to long-term planning, long-term investment,” she says. “It’s very sad, because people never win if they are trading-oriented. Sooner or later, you will lose.”
Jih attributes this tendency in large part to the structure of Taiwan’s financial system. Since banks earn a front-end commission, they continuously advise their customers to buy different products, whether mutual funds, insurance, structured notes, or whatever. “Then you see the churning – it’s almost like monthly trading,” she observes.
In addition, the current financial framework has popularized high-dividend products. “A high monthly dividend is the basic requirement in Taiwan when it comes to fixed-income fund investments, but the obsession with high dividends can in fact harm investors,” says Jih. “The monthly dividend rate can be as high as 9-10% or more, but when people stretch demand for dividends too far, it can hurt their capital principal.”
Particularly with regards to retirement planning, the fixation with high dividends is fool’s gold, warns Jih. “In the pre-retirement stage, the most important thing is to accumulate your wealth, not to consume. People are so interested in high dividends because they want to spend the payments and increase consumption, not because they are reinvesting the dividend proceeds. People should be focused on sustainable returns and long-term growth, but with the investment practice and investment style I’ve seen in Taiwan, I don’t feel comfortable that people can achieve that.”
According to the 2016 Allianz Global Wealth Report, Taiwan is set to replace Japan as the nation with the highest net per capita financial assets. But the high level of liquidity in Taiwan is not translated into an adequate level of investment. “People are sitting on huge cash positions and they don’t dare invest in other things,” notes BlackRock’s Seewald. “Given the low interest rate we have in Taiwan and globally, that’s a mistake – particularly when the interest rate is so low that the return you get from cash in the bank will not outpace the inflation rate. You think you’re being conservative and safe but you’re actually losing money every day.”
Seewald finds that many Taiwanese have a paradoxical mindset about financial planning. On the one hand, they’re reluctant to invest and instead hold their assets in cash. On the other hand, when they do invest, they expect unrealistically high yields. “People definitely need to adjust their expectations for returns for their retirement portfolios,” he says. “That’s a fundamental issue that only education by our industry and by our government can resolve.”
Whether your retirement is five years or 50 years away, it’s never too late to positively impact your retirement, says Seewald. You just need the right financial knowledge and tools to do so. “Getting more people out of those cash positions and into investments will be the opportunity to help Taiwan’s people save for their retirement,” he argues. “Right now, there’s not enough education to do that – the government doesn’t have the manpower or the ability. But if you were to open up the retirement segment to the industry, I believe all the industry players would be out there helping with that education process, telling people, ‘Look, you’ve got to start investing this 6% – or whatever it’s going to be – into your retirement. You’ve got to start saving now.’”
Life insurance for savings
With bank interest rates at a low 1.5%, many Taiwanese use life insurance as a savings tool, because they can garner higher interest rates of around 2%. While this trend has led to Taiwan being one of the world’s most highly penetrated insurance markets, in reality people are still acutely under-protected, because they are buying savings products, not protection insurance.
Moreover, people are not able, through the pension system, to create enough wealth for their retirement, says Société Générale Group Country Head Godwin Chang. “Why the local insurance industry is so vibrant is because your pension is not sufficient, the amount you’re allowed to invest in your government pension fund is very little, and the amount you’re going to get after you retire is very little. The only way you can supplement that is to buy life insurance as a savings vehicle. I don’t foresee any huge changes in the coming years, so insurance companies and banks will continue to play a big role in people saving money for retirement.”
Danny Lam, President and CEO of Allianz Taiwan Life Insurance Co. Ltd., cites the low interest rate environment as a key obstacle impeding the development of a robust retirement planning landscape in Taiwan. “There’s a strong demand for retirement planning, but we still face key challenges in providing retirement planning solutions. Because the interest rate in Taiwan is low and has been low for a long time, it’s difficult for us to offer attractive NT dollar retirement planning products to customers. Long-term savings products in NT dollars were quite popular before, but now the rates are not attractive.”
Lam says that savings products have boomed in the last few years as pension reform has become a contentious and agonizing debate, and as people have become increasingly aware of the need to fund retirement with their own private resources.
“Yes, a lot of people who buy life insurance in Taiwan do so for savings purposes,” says Lam. “Some products actually don’t have a lot of insurance protection, just guaranteed return. Such a product, of course, is very easy to sell, because interest rates are very low and the product offers guaranteed returns. But in the end it’s the customer’s decision.”
Timothy Shields, General Manager and CEO of Cigna Taiwan, expresses concern about the protection gap. “There are 37 million insurance policies in Taiwan but only 23 million people; however, the average sum assured is only [the equivalent of] US$40 and the protection gap is still huge in terms of future needs for protection, illness, etc.”
Public healthcare coverage is under pressure, a factor which will further complicate the retirement landscape, notes Shields. “The NHI [National Health Insurance], up until recently, has been in surplus…but looking forward, as the population ages, with less growth and tax revenue changing, NHI expenditure will have to have a cap on it…What we’re seeing now is out-of-pocket expenses are growing.”
BlackRock’s 2017 Investor Pulse survey for Taiwan found that of the financial priorities surveyed, paying for healthcare saw the highest year-over-year increase in importance (+13%), driven by older investors aged 55 to74. Cigna’s 2017 360° Well-being Score found that of 1,001 people in Taiwan surveyed, 50% do not have sufficient insurance to cover post-retirement medical costs.
The development of broad, accessible financial-planning education and a culture of personal responsibility may be necessary first steps in helping Taiwanese – both the elderly population and the young workforce that will one day have to support them – prepare for the future.