Thailand's aging society means that it needs to make some rapid reforms to its retirement industry. One important step will be to improve the country's second and third pillar pension funds, which are largely private sector operated. But a lot of work needs to be done. 

According to the Securities and Exchange Commission, Thailand’s second pillar is comprised of 387 provident funds, which cover three million employees – less than one-fifth of the country’s 16.8 million formal sector workers.

Private sector participation in the provident funds is voluntary, and as a result the funds are typically used as an “additional benefit that employers offer to attract talents,” said Wina Appleton, Asia Pacific retirement strategist for JP Morgan Asset Management.

In its latest Melbourne Mercer Global Pension Index (MMGPI) report, Mercer said Thailand could increase its overall retirement savings by introducing “a minimum level of mandatory contributions into a retirement savings fund,” as well as broadening coverage and providing minimum support for the poorest aged individuals. 

The government hasn’t been blind to the issue. It has proposed creating a new mandatory defined-contribution fund called the National Pension Fund (NPF), which would target employees whose employers do not offer a provident fund. But the process to launch it has dragged in for over a decade. 

Roongkiat Ratanabanchuen, lecturer at Chulalongkorn Business School, said in the Spring 2019 issue of the Nomura Journal of Asian Capital Markets that many aspects of the NPF are still under debate, including the structure of the fund management process, the minimum contribution rates by the employees and how much the employers need to match that. 

The good news is that the bill to establish the NPF has already received cabinet approval last year. It is now pending the final approval of the National Legislative Assembly.

DOMESTIC FOCUS DANGERS

Even if reforms are enacted, the NDF gets launched and pension contributions do increase, the country’s pension funds also need to drastically re-think how they invest the assets they receive. 

A key issue is how best to deal with inflation. If workers’ payouts are not linked to inflation, they would still end up with a smaller sum of savings. The old-age allowance, for example, is only subject to inflation adjustment every five to 10 years.

The SSF, the first pillar retirement fund that is overseen by Thailand’s Social Security Office, has a pension monthly payout – which is around THB4,000 to THB5,000 ($132 to $165) today. Ananchai Utaipatanacheep, secretary general of the SSF, has said that sum will quickly become insufficient if inflation is factored into the amount. 

One way to deal with this is to ensure funds are invested in a manner that compensates for inflation. The country's Government Pesion Fund (GPF) does exactly this. Man Juttijadata, chief risk officer at GPF, noted that his pension fund maintains a target return of 2.5% over consumer price index inflation, where the additional amount is the “real return” the fund aims to achieve for its members. However, GPF plans to revise this target down to 2% over CPI soon, due to slowing global growth.  

If pension funds are to follow GPF’s example and offer payouts that take both inflation and real returns in account, they will need to rethink their asset allocation strategies.

For example, the asset allocation of SSF has been mostly limited to domestic investments and fixed income. As of September end, it has THB1.6 trillion, or 79% of its AUM, in “high-security” investments, and THB421 billion, or 21%, in “risky” investments.

“That asset allocation is very conservative. In 2017 it had 78% in bonds and deposits, only 11% in equities and about 11% in unit trust,” said Appleton. 

While taking advantage of a steady income stream from fixed-income investments makes sense for pension funds, the domestic market-heavy allocations of Thai pension funds are unlikely to produce sufficient returns. 

This problem could fester in an economic downturn with rising correlations between domestic equity and domestic fixed income. 

“Normally fixed income would provide some relief in these downturns, but with interest rates at low levels, this presents a challenge,” a Singapore-based executive said, adding that a high correlation between domestic equity and fixed income could undermine the diversity of pension funds’ portfolios.

SIGNS OF PROGRESS

One way to resolve this (and encourage pension funds to look outside of fixed income) is to introduce target date funds. These funds invest mostly in relatively risky assets when individuals are young, then shift them towards safer fixed-income assets as an individual nears retirement. 

GPF is one pension fund to do this. It is looking to make its default plan to a target date fund, and is waiting for parliamentary approval to do so.

“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.

In addition, GPF, and increasingly the SSF, are seeking to develop more sophisticated portfolios. AsianInvestor understands the SSF is looking to allocate its assets overseas. The SSF did not respond to emailed questions about its plans. 

The Singapore-based executive said that Thai pension funds are particularly targeting global stocks and alternative assets, based on his conversations with them.

GPF’s Man added that his fund is interested in asset classes that can generate higher returns, in particular alternatives, corporate bonds and equities.

“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,” he said. 

He believed that alternatives, including real estate, infrastructure and private equity, present a “much better” risk-return trade off than fixed income and public equity. 

“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 towards corporate bonds and absolute returns strategies.

Another benefit of pension funds allocating more to domestic real estate and infrastructure is that these investments help to prop up the local economy and meet development objectives, the Singapore asset manager executive added.

“There’s a benefit to supporting your economy and social development goals.”

The story was adaptd from a feature on Thailand's pension industry, which originally appeared in AsianInvestor's Winter 2019 edition.