Amendments to the pension system for civil servants are set to introduce a floating interest mechanism with a maximum interest rate of 9 percent, halving the 18 percent preferential rate previously enjoyed by retired civil servants, an Examination Yuan official said yesterday following a Cabinet meeting on Saturday.
According to the Chinese-language United Evening News, an Examination Yuan official said on condition of anonymity that a tentative agreement had been reached whereby the 18 percent preferential rate for retired civil servants, public school teachers and military personnel would be replaced with a floating interest rate to be calculated by adding a certain figure to the two-year certificate of deposit (CD) rates at the Bank of Taiwan.
The 18 percent preferential rates, formally known as the Preferential Saving Rates for Retirement Pension of Military Officials, Civil Servants, and Educators (軍公教退休優惠存款), were introduced in 1960, a period when the average income for the three professions was lower than for most other careers.
Amid the financial difficulties of recent years, there have been numerous calls by the public for reform of the system, which some consider unfair.
Changes were made to the preferential interest rates in 2006 and 2010, placing a ceiling of NT$2 million (US$68,450) for lump sum deposits utilizing preferential savings interest and limiting monthly interest rates to no more than NT$30,000, with lower-ranking civil servants only getting NT$10,000 per month from preferential savings interest, the Ministry of Civil Service (MCS) said.
According to statistics from the ministry, about 420,900 people benefit from the preferential savings rate, of whom 190,000 are retired military personnel, 120,000 retired civil servants and 110,000 retired educators.
Most of the retirees make NT$30,000 per month from the saving rates, but individuals who were in more senior positions when they retired, and had a pension lump sum exceeding NT$3.3 million, could make more than NT$50,000 a month from savings, the ministry said.
Sources that attended the meeting between the Presidential Office and the Executive and Examination Yuans on Saturday said that a tacit agreement had been reached to propose reforming pensions to a “three-pillar system” and implementing the “rule of 90,” adding that the latter may need to set an Income Replacement Rate (IRR) of lower than 80 to protect employees in certain sectors.
The ministry said the three pillars system refers to the division of pension payouts to the public sector.
The first pillar of the proposed three-pillar pension system guarantees retirees basic income after they stop working and would be distributed under the National Pension Program or other government insurance schemes.
The second pillar would be the provision of flat employment-related benefits, the ministry said. It added that the third pillar would be an assortment of government-offered investment packages, which would be entirely voluntary.
However, to prevent retirees from manipulating third pillar packages as if they were stocks, the ministry said that it was mulling limiting changes in investments in the third pillar to four per year.
The rule of 90 would make civil servants, military personnel and public-school teachers eligible for retirement benefits if their age and years of service add up to 90.
For example, a civil servant who is 65 years old and has been working for 25 years would qualify to receive retirement benefits.
The source said that since all those present at the meeting agreed to an IRR of between 75 percent and 80 percent, any retiree choosing a monthly payout would not be eligible for the 18 percent preferential savings rate and therefore no specific number should be set to minimize public confusion.
The source added that the tentative agreement was the ministry’s attempt to tie the interest rate to floating rates and put the ceiling at 9 percent.
It was also decided that the Labor Pension Fund’s income IRR would remain at its current 1.55 percent level, and that the government would allocate NT$20 billion to fill the credit gap in the Labor Pension Fund starting in 2016, with an additional NT$5 billion to be provided each following year. A maximum of NT$85 billion is expected to be injected into the fund.
A ING Securities Investment and Trust Co (ING SITC) vice president reportedly cost the Labor Insurance and the Labor Pension funds more than NT$100 million collectively in losses on investments in Ablerex Electronics Co — a power supply equipment supplier — through dummy accounts in November last year, stoking fears among employees over the safety of their pensions.
Ministry officials said that the only reform that would absolutely be enacted was that individuals who retire before the new system was implemented in July 1, 1995, would not be affected as they had lower incomes in the earlier years of their careers. They added that anyone who retired soon after the new system was implemented would also not be affected.
The group of workers that will be most affected are those in between the new and old systems who did not take out their pension in lump sums, but opted for monthly installment payouts, the ministry said. It added that there was as yet no consensus in the government as to how the system would be tweaked for this group.
Meanwhile, Chinese Nationalist Party (KMT) Legislator Sun Ta-chien (孫大千) said that the government should not seek to change the pension system in one go and should take the review by incremental stages.
The current 75 percent IRR for military personnel, civil servants and educators is too low and any new pension system should involve a mechanism that change the IRR rates at different stages, Sun said.
It is important to consider that the reviews are being made when the pension system is at its worst and the data generated do not do justice to the system, Sun said, adding that the standards applied to the system were inappropriate.