Thailand’s new mandatory defined contribution (DC) scheme for formal-sector employees, which has been in the works for years, has the potential to make vast improvements over existing voluntary schemes in the country, a top executive from the Securities and Exchange Commision (SEC) has said.

These improvements could take the form of a centralised registry, better diversification of investment assets and more user-friendly features for employees.

When up and running, the mandatory provident fund will cover around 15 million employees.

Operational excellence will be key when handling the money of such a large population, according to Chatchai Thisadoldilok, director of research in the capital market policy division at SEC.

To that end, prioritising co-ordination between employees, employers and participating asset managers will be crucial to its success.

Chatchai Thisadoldilok

Speaking at AsianInvestor’s Thailand Global Investment Forum held in Bangkok recently, Thisadoldilok said lessons could be learnt from the management of the country’s existing voluntary DC plans, such as the Provident Fund (PF) and the National Saving Fund (NSF), while highlighting reform measures that he would like to see in the Thai pension system.

For instance, the Provident Fund lacks a central registry so when an employee switches jobs, it’s quite difficult to quickly move money from one company-sponsored fund to another, he pointed out.

“Even if I work for one employer, it’s not easy to switch from one asset manager to another,” he said, adding that a central registry could solve such problems.

Regulations related to the proposed mandatory DC plan are currently being revised by the Thai government. Thisadoldilok believes the new guidelines could be implemented either this year or the next.

“According to the draft, in the first year it will require 3% contribution from each side, employer and employee, and.... reach 10% in year ten,” he added.

DIVERSIFICATION

For both the proposed mandatory DC fund and existing Thai pension schemes, one sorely needed reform is more asset diversification by moving away from domestic investments.

Around THB3.5 billion ($107.4 million) is parked in total pension assets in Thailand, said Thisadoldilok. About 75% of those assets are invested in domestic fixed income, while 15% is in Thai equities. Another 10% is invested in other assets, such as alternatives or foreign investments, he said.

“Obviously we do have a kind of home bias in terms of investment allocation, and a low level of diversification. We also invest very liitle in alternative investments,” he said.

The lack of diversification in Thai pension assets is reflective of regional trends among Asian public pension funds, especially in Southeast Asia, where many are still heavily invested in domestic fixed income, according to a May report by State Street’s Official Institutions Group.

 “if we think about the upcoming scheme, I do hope they will provide a good choice of investments,” Thisadoldilok said.

DEFAULT CHOICE

The new scheme could also do with improvements in how a default investment option is set for employees, the SEC expert said.

The default option for many funds  currently is heavily tilted towards fixed income investing, where yields have been low for years, he noted.

“Right now, we are trying to...[ensure] the default choice [of the pending mandatory DC plan] is a target-dated fund, so if they [employees] don’t think about how to choose the right investment strategy, they can just stay in the default choice."

A target-dated fund is a collective investment scheme designed to become more conservative the closer it gets to a certain target date, typically by focusing on equities in the early portion of the fund and then gradually switching to a more fixed income-heavy portfolio.

The aim of making target-dated funds a default option is to address the employee’s behavioural bias, especially one that tends towards inaction, explained Thisadoldilok.

To that end, the SEC research director also wants to see auto-enrollment, auto-escalation, and auto-rebalancing features built into the upcoming scheme, he told delegates at the event.

Auto-enrollment, auto-escalation, and auto-rebalancing ensure that employees are included into the scheme by default; contribution amounts are automatically increased at set intervals; and portfolios are automatically realigned back to a target asset allocation after a certain period to minimise risk exposure, respectively.

Thisadoldilok also wants to see changes in how pension statements convey balances so that employees can better understand how those amounts play into their retirement plans.

“If someone has THB1 million ($30,826) in their balance, they might feel this is enough. But I would like to see this amount in terms of what their monthly income will be after they retire,” he explained.