Thailand is on track to become a super-aged society in about 15 years’ time, with close to a third (30.2%) of its population aged 60 or over.

Knowing this isn't something local pension funds can escape from, Thailand’s Government Pension Fund (GPF) has been devising ways to cope with the expected rise in demand in retirement benefits.

“When the members live longer, the projected minimum lump sum that they want to use in each year is larger, so we have to make sufficient returns to meet that minimum lump sum target,” Man Juttijudata, chief risk officer of GPF, told AsianInvestor.

Man Juttijudata
Man Juttijudata

With assets under management of Bt956.5 billion ($31.7 billion), GPF operates under a defined contribution model catered specifically for government employees, who each contribute between 3% and 15% of their salaries. The government tops that up with a further 5% to 8%.

Complicating matters is a difficult investing environment in which global economic growth has slowed, bond yields have dropped to rock-bottom and political uncertainty is high.

Having reviewed its strategic asset allocation, the pension fund is expecting flatter investment returns and higher market volatility over the next five to 10 years, GPF’s Man said. Specifically, it is expected revise down its inflation-adjusted target return to 2% from 2.5%, he said. 

And to achieve even that reduced real return having a more sophisticated portfolio is key.

“We need to tolerate the short-term volatility in order to achieve the longer-term return. That's why we need to adapt our [strategic asset allocation] to achieve that goal as well,” he said.

TWEAKING ASSET ALLOCATIONS

Man said his fund was interested in asset classes that can generate higher returns, in particular alternatives, corporate bonds and absolute-return strategies.

He believes alternatives such as real estate, infrastructure and private equity present a “much better” risk-return trade-off than fixed income and public equity. While the pension fund has said that it is proceeding cautiously with private market investments, Man said the fund doesn’t expect to experience liquidity issues with alternatives as they come with a constant stream of revenue.

As a result, the target allocations for these assets have been raised to nearly 20%.

“Five years ago, we started at 5% [for alternatives], now we almost reach 15% already, and we are going to increase more,” Man said, adding that GPF will also shift more towards domestic and global corporate bonds.

Courtesy of the current low interest rates, a smaller chance of corporate defaults has boosted Man’s confidence in these assets.

“We will increase allocation to corporate bonds, as well as loan structures like [mortgage-backed securities, commercial mortgage-backed securities] … because it will be a better yield-enhancement than pure government bonds at the moment,” he said.

It’s not hard to see why, with delegates at AsianInvestor’s Institutional Forum Thailand just last month predicting yields of less than 1.5% by the end of 2020 on 10-year Thai government bonds.

Still, that doesn’t mean the fund would compromise the risk-profile of its portfolio.

“We still have a requirement for very good investment grade or above for sure. We don't go below the investment grade,” Man said.

TARGET DATE FUND

Ultimately, for members to enjoy a higher retirement savings they will have to be in a return-seeking plan to start with. So GPF has proposed to make a target date plan the default option for its members.

“The one that we have promoted is a lifecycle plan. We start with a high equity portion of 65% for age less than 45, and then we gradually reduce the equity portion down to 10% at age 60,” Man said, and noted that having the target-date plan in place could better correspond to the risk appetite of GPF’s members in different age groups.

The pension fund is now waiting for parliamentary approval to make the changes official.

“We have a current default one, which has an equity allocation of 20% to 25%. We have the default plan since the beginning of GPF 23 years ago. And everybody will stay in the default [plan] whether they are 20 or 50 or 60,” Man said.

He added that members are usually reluctant to change plans once they are slotted into the default fund.

Members' education will also play an essential role in improving Thailand's pension system, 

“Most people are afraid of risks, so they are afraid of short-term volatility [and]... prefer not to have a large allocation to equity,” he said.

If they were more financially educated they would understand “that in order to reduce the risks in the long term to achieve sufficient returns for retirement, they have to tolerate short-term volatility,” Man said.