On Nov. 27, Yu Nai-wen (游迺文), head of the Domestic Investment Division of the Ministry of Labor’s Bureau of Labor Funds, was detained on suspicion of accepting bribes in return for using his authority to allocate money from the Labor Insurance Fund to manipulate specific companies’ share prices. That such a thing could happen shows that the ministry appointed the wrong person to the position and that its internal controls are lax.
The statutory Labor Insurance premium paid from each insured person’s monthly salary is increasing next year to 10.5 percent from 9.5 percent last year. Given the substantial percentage that employees pay into the scheme, they are surely not content to see the fund managed by a bureau full of “loose screws.”
The total amount of money in Taiwan’s various labor funds adds up to the huge sum of NT$4.29 trillion (US$150 billion), all of which comes from workers’ toil. This would mean that the head of the bureau has been using other people’s money to manipulate shares on someone else’s behalf for at least nine years, but the Ministry of Labor has only just found out about it.
Is this not making a mockery of workers’ hard-earned wages?
The bureau is not only bad at managing itself, but its performance regarding the management of the labor funds is also poor. The Labor Insurance Fund has averaged a 4.03 percent annual rate of return over the past 25 years, while the Labor Pension Fund has averaged a 4.21 percent annual rate of return over the past 15 years.
The 37 member countries of the Organisation for Economic Co-operation and Development (OECD) include most of the world’s advanced economies. The US has 214 times more money in its pension funds than Taiwan and yet it averaged a 7.1 percent annual rate of return over the past 10 years.
Among countries closer to Taiwan, South Korea averaged an 18.1 percent rate of return over the past 10 years.
Colombia averaged a 15.5 percent annual rate of return, while Latvia averaged 16.1 percent and Turkey 30.3 percent.
These countries all have rates of return two to seven times better than Taiwan’s. Capital markets became globalized a long time ago, so surely these countries cannot have invested in hidden markets that Taiwan cannot reach.
Is Taiwan’s economy smaller than Latvia’s? Are Taiwanese less talented than Colombians and Turks? Or could it be that the bureau’s poor 4 percent performance stems from outdated modes of operation?
A comparison of the bureau’s labor funds with OECD countries’ pension funds reveals huge differences. Taiwan’s Labor Pension Fund invests 14.3 percent more in relatively high-risk equities, while OECD countries’ pension funds invest 16.8 percent more in relatively low-risk bonds.
Taiwan’s labor funds emphasize investing in high-risk, high-yield assets, while OECD countries prioritize investing in low-risk, low-yield assets. Yet, OECD countries averaged a 9.9 percent rate of return over the past 10 years — more than twice that of Taiwan.
The US’ S&P 500 index has averaged a 16.2 percent annual rate of return over the past 10 years, while US government bonds have averaged 4.5 percent.
Combining all of these factors — risk tolerance, investment instruments and rate of return — Taiwan’s labor funds should have averaged an 8.6 percent rate of return over the past 10 years, and the OECD countries only 6.3 percent.
Although their investment objectives are somewhat different, that would not change the iron rule that equities have a higher rate of return than bonds.
However, the labor funds’ performance is only half of what one would expect, while the overall average for the OECD countries is 50 percent higher than the expected rate.
This shows that the bureau’s problems are not just a matter of someone taking bribes to manipulate stocks. The main problem is that its fund performance is not even half as good as OECD countries.
Even though the OECD countries invest less money in equities, they have performed more than twice as well as the bureau. So what has the bureau been doing all of this time, other than fooling around?
David Sun is a professor of finance at Kainan University.
Translated by Julian Clegg
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