Thailand's pension system boasts an international class leader in the Government Pension Fund (GPF), but it cannot meet the retirement needs of the entire country. And executing changes to the asset allocation approach of other pension funds is easier said than done.

One asset manager who works with pensions in the country told AsianInvestor that the investment guidelines of some Thai retirement funds today might not allow the inclusion of alternative assets. As a result, the funds have limited internal ability to conduct effective due diligence on and invest in alternative assets and the overseas markets. 

“Changing the investment guidelines of the fund to allow for these new allocations within the portfolio is not a quick process," he said. "It involves a lot of internal education and training."

This is despite substantial evidence that adding substantial allocations helps pension funds to boost returns. Institutions such as Korea's National Pension Service, US retirement schemes and various sovereign wealth funds are doing so given that such investments have been strong drivers of performance in recent years.  

Roongkiat Ratanabanchuen

Meanwhile, investing offshore also carries issues in Thailand, including the need to deal with foreign exchange risk. "Of great concern to Asian institutions and Thai pension funds, when they start looking at global diversification, is currency risk,” the manager said.

While investment managers actively manage the foreign exchange risks of a mandate they have won from an institutional investor, such services come at a cost that is difficult to justify if the funds have insufficient capital inflow from their members. The manager declined to say how much the fees charged on such mandates would be. 

Worst of all, sometimes the set-up of the funds provides no motivation for the managers to generate better returns.

One such example is the National Savings Fund, a third-pillar voluntary defined contribution plan serving formal and informal workers. There is no incentive for fund managers to generate high returns for the fund because it only promises to return the average 12-month deposit rate offered by the biggest commercial banks in Thailand, said Roongkiat Ratanabanchuen, lecturer at Chulalongkorn Business School. The Government Savings Bank, for example, offers just 1.55% per year for a 12-month fixed deposit. 

EDUCATION DEFICIT 

Perhaps the biggest issue facing Thailand’s pension system is a lack of education about modern investment dynamics.

Man Juttijudata, GPF

That is certainly the belief of Man Juttijadata, head of risk at GPF. “Most people are afraid of risks, so they are afraid of short-term volatility, so they prefer not to have a large allocation to equity,” he said. 

“If they really knew the financial education, [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 concluded.

Investment education, increased contributions, broader coverage and a higher retirement age: these are all potential solutions for Thailand’s retirement problem. But introducing them will take political will and a willingness to endure short-term unhappiness. 

Even so, the country’s government and regulators would be wise to take swift action on this front. The longer they take to do so, the more costly meeting the needs of its growing elderly population will become. And that bomb may just go off.

This article was adapted from a feature on Thailand's pension industry that originally appeared in AsianInvestor's Winter 2019 edition.