LP Interview: Taiwan's Bureau of Labor Funds

Taiwan's pension fund industry is aiming big. Six months ago, the silos separating six public labor fund schemes were broken down to create a single investment department - the Bureau of Labor Funds (BLF). With more than NT$2.48 trillion ($80 billion) in pension and insurance assets to draw upon, the BLF has the ability to allocate larger mandates to managers. It is also considering boost alternatives exposure.

The BLF recently committed $200 million to global infrastructure under a former pension scheme and plans to invest a further $200 million in listed global real estate securities.

"Given the current low interest rates and slow-growth economy, we will increase our allocation to alternatives in 2015," says Chao-Hsi Huang, BLF's director general. "We currently have specific interests in real estate investment trusts (REITs) and listed infrastructure securities."

Prior to the structural reforms, the Labor Pension Fund Supervisory Committee (LPFSC) was responsible for two labor pension funds, the Labor Retirement Fund and the newer Labor Pension Fund. The former is defined benefit and the latter defined contribution. It has now absorbed four labor insurance and reimbursement schemes formerly controlled by the Bureau of Labor Insurance Department.

"Before forming the BLF, each scheme was regulated by its corresponding department and they couldn't share resources between them," Huang explains. "The creation of a combined platform allows us to make better use of investment expertise across the funds to take on diversified investment strategies and make effective investment decisions."

Rising allocations

By the end of 2015, the Labor Pension Fund - the biggest of the six funds with NT$1.17 trillion in assets as of the end of June - will see its allocation to alternatives increase to 8% from 6%. A year ago it was just 4%. The older Labor Retirement Fund, meanwhile, with NT$610 billion in assets, will see its allocation jump to 4% from 3%; and the NT$583 billion Labor Insurance Fund will move to 5% from a current level of less than 1%.

"Compared to traditional stocks, alternatives could effectively diversify portfolio risks," says Huang.

He cites Towers Watson analysis of seven global developed market pension funds that have decreased their exposure to public securities, bonds and cash deposits every year since 1995, while increasing alternatives allocations from 5% to 18% last year. This substantial turnaround was achieved by increasing the alternatives allocation a very manageable average of 0.7% every year. The BLF will use international players as a reference point in deciding how to scale up its alternatives allocation.

The bureau has no plans to invest in private equity, although there aren't any regulatory restrictions preventing pension funds from having exposure to the asset class.

None of major pension fund systems in Taiwan - the BLF-run Labor Pension Fund or the Labor Insurance Fund, Postal Savings Fund and Public Service Pension Fund - have made investments in private equity. This is largely due to the lack of established investment teams, although there is also a residual discomfort with illiquid assets, long holding periods and a lack of information transparency.

"High liquidity and a high level of information disclosure do matter to us," Huang explains. "Although investors could generally obtain higher returns from private equity investments compared to buying stocks, this type of investment might not be what we favor right now."

Real assets rule

The Labor Pension Fund started investing in alternatives in 2012 and has generated a return of 24.8% on $1.25 billion committed. Exposure includes REIT products managed by Invesco, Cohen & Steers, and EII Capital Management.

"REITs provides high dividends, high liquidity, easy access to different geographies, and other characteristics such as giving investors information updates every day," Huang says. "If you look at developed market pension funds and university endowments, they have enhanced their flexibility to invest in real assets, such as commodities, infrastructure and real estate, to mitigate risk when the portfolio is too centralized in stocks and bonds."

BLF has two investment teams, one covering domestic markets and the other international markets. Under the current rules, fixed income should be accounted for more than 50% of the whole portfolio, while debt and equity should be 30-40%. Asset allocation strategy is reviewed at the beginning of each year.

For the first six months of this year, the BLF secured an average return of 4.63%, accumulating NT$109.1 billion. The Labor Retirement Fund returned 5.46%, beating the Labor Pension Fund, which returned 4.73%. Meanwhile, the Labor Insurance Fund notched up its highest return for five years at 4.38%.

Industry participants expect that BLF will ultimately start allocating capital to private equity through the newer Labor Pension Fund. As a defined contribution vehicle - responsibility for providing a pension lies with the employee, not the employer - it has greater flexibility and fewer existing liabilities.

However, this is unlikely to happen any time soon, with Huang equivocal on the matter. "As our fund size gets bigger, we might add private equity into the portfolios and also build a professional team," he says.

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• Topics
• Greater China
• LPs
• Taiwan (China)
• LPs