Newsletter
NEW PENSION SYSTEM TO TAKE EFFECT ON 1 JULY 2005
The Labor Pension Act (LPA) was enacted on 11 June 2004, and is scheduled to take effect on 1 July 2005. The main thrust of the legislation is to institute a defined-contribution pension system, under which workers will draw a monthly re-tirement pension, to replace the defined-benefit scheme currently prescribed by the Labor Stan-dards Act (LSA), under which workers receive a single lump-sum retirement payment. The main points of the LPA are as follows:
The LPA applies to all workers of ROC nationality who are subject to the LSA. In addition, any worker of ROC nationality to whom the LSA does not apply, may pay voluntary contributions and receive a pension under the LPA if the employer agrees to deduct pension contributions and pay them in according to the scheme. The LPA explicitly excludes non-ROC workers.
After the new LPA system comes into effect, workers covered under the old LSA system can choose whether to change to the new system, or continue with the old one. If a worker opts for the new system, his contribu-tions from the old system will be retained until he becomes eligible to receive severance pay or a lump-sum retirement payment under the LSA, on condition that he does not change employers. At this point his employer will pay out severance pay or a retirement payment according to the number of years’ contribu-tions retained. Alternatively, an employer may agree with a worker to pay out the re-tained contributions at a rate not less than that stipulated for retirement payments under the LSA. Where workers choose to continue with the old system, their employer must make monthly contributions to its pension reserved fund deposited in the Central Trust of China, to bring the fund up to an adequate level, as indicated by actuarial calculations, within five years after the implementation of the new system. Such workers’ applications for sev-erance pay and retirement payments will con-tinue to be handled under the provisions of the LSA.
If all of an employer’s employees opt for the new system, and labor and management agree to contributions made under the old system being paid out at a rate not less than that pre-scribed for retirement payments under the LSA, the employer will no longer have an obligation to retain workers’ old contributions, and there will thus no longer be any reason for the employer to maintain its pension reserved fund deposited in the Central Trust of China (CTC). Accordingly, the Council of Labor Affairs has made a policy decision to allow an employer that has paid off its employees’ former contributions as described above to withdraw the remainder of its pension reserved fund deposited in the CTC. It is estimated that the pension reserved funds cur-rently deposited in the CTC amount to some NT$350 billion. Allowing withdrawal in this way will provide employers with greater flexibility in their use of funds, and relieve them of the financial pressure of having to top up their worker retirement funds within five years if workers opt to continue with the old pension system.
All workers hired after the new system takes effect may participate only in the new scheme. If the employment of a worker to whom the new system applies is terminated on any of the grounds set out in the LSA for compensated termination, his severance pay should be cal-culated according to the number of year of contributions under the new system, at a rate of half of a month’s average wages per full year worked, plus a proportional amount for any part year, up to a maximum of six months’ average wages.
An individual pension account (IPA) should be set up with the Bureau of Labor Insurance (BLI) for each worker. The employer should pay pension contributions into each worker’s IPA at a rate of not less than 6% of the worker’s monthly wages. An employee may also choose to make additional voluntary contributions into the IPA of up to 6% of monthly wages. Such voluntary contributions are exempt from personal income tax. The draft contributions table published by the Council of Labor Affairs (CLA) divides monthly incomes into 61 bands, with the top band in the amount of NT$147,901. Contri-butions for all incomes above this maximum will be rated at 6% of NT$150,000. To protect workers’ pension rights, the LPA specifically provides that an employer may not substitute another pension scheme of its own for the pension scheme under the LPA.
A worker under the new system who has reached age 60 and has at least 15 contributing years under the new system may collect a monthly pension from the BLI. When a worker begins to draw the monthly pension, he must also withdraw a certain sum to pur-chase an extended life annuity, to provide continued pension payments if he lives be-yond his residual life expectancy. However, a worker who, upon reaching age 60, has a contribution record of less than 15 years will receive a lump-sum retirement payment.
The amount of monthly pension payable is calculated from the principal and accumulated earnings in the worker’s IPA, according to annuity life tables to be drawn up by the BLI, on the basis of average residual life expec-tancy and interest rates. In the case of a worker who receives a single lump-sum re-tirement payment, the amount payable is the sum of the principal and accumulated earnings in the worker’s IPA.
With the consent of its labor union or at least half of its workforce, and with the approval of the CLA, an employer with 200 or more employees may take out annuity insurance for its employees under a policy that complies with the requirements of the Insurance Act, in lieu of its duty to pay pension fund contributions under the new system. However, the premiums paid by an employer for such annuity insurance should not be less than 6% of its workers’ monthly wages.
A worker who suffers loss due to an employer’s failure to duly make monthly payments into the employee’s IPA may seek damages from the employer.
An employer that fails to report and pay pen-sion fund contributions, and fails to rectify the situation within a period specified by the competent authority, or fails to bring its worker retirement fund carried over from the old system up to the required level of con-tributions within five years, may be penalized with an administrative fine of NT$20,000–100,000, which may be repeated monthly until the situation is rectified.
If an employer fails to pay pension fund con-tributions on time and in full, an additional late payment penalty will become payable, at 3% of the amount overdue per day. If the amount remains overdue and the cumulative late payment penalty becomes equal to the amount overdue, the penalty will double. A monthly penalty that is applicable to part of a month will be calculated proportionately.