Thailand’s pension systems in transition
Employer provided “retirement” benefits in Thailand come in two guises; the Provident Fund and Severance Pay. The systems complement each other well giving Thailand a relatively effective system. However, two separate reviews are underway which look to change the status quo. On the Provident Fund side the government is looking to increase employer participation and provider competition whereas for Severance Pay improved accounting and governance is the driver of the review.
The intention is to complete both reviews within the next 12 months with implementation following soon after. Providers and employers are following the reviews closely and will almost certainly lead to action items for all parties involved in the retirement industry.
Thailand currently operates a voluntary pension system based around the use of “Provident Funds”. This is a funded Defined Contribution pension system with the assets being held with authorized fund managers. Employees must contribute at least 2% of basic salary and the employer is required to at least match the employee contribution levels - subject to a cap of 15% of basic salary.
Although voluntary, Provident Funds are popular - with nearly 2 million employees and over 80% of companies using the system. Provident Funds are very tax advantageous to employees with contributions, investment returns and benefits all exempt from income or capital gains tax.
On the asset management side, there is currently around THB 441billion invested in the Provident Fund system, split between 19 authorized fund managers. The market is dominated by the top 5 providers who manage almost 50% of the assets in the system - see figure 1. Typically most Provident Funds are invested in Government Bonds although the legislation does provide scope for significant equity investment - see figure 2 for the investment breakdown.
The fees associated with the Provident Funds are mainly charged via an annual management charge. The charges vary by provider and investment product but and are typically in the range of 0.4% - 1.0% of the total fund value per annum. Other fees apply (including; annual custodian fee, annual administration fee and initial set up fee) but the majority of the providers profits come via the management fee.
Although the system works relatively well, the government is keen to maintain its effectiveness and in January 2008 new rules were issued which aimed to improve the flexibility. Employees are now allowed to leave their funds in an employer’s Provident Fund after leaving employment and they have also been given the option to receive their benefits in lump sum format or as a series of installments.
The next big idea for the Thai government is compulsion. Although 80% of employers already have a Provident Fund, the government is keen to get the significant minority of non-participating companies into the system.
From an asset management point of view, compulsion presents a big opportunity to pick up the associated inflow of new money. It’s likely that compulsion will make the industry more competitive and, with 19 authorized asset managers, the market looks ripe for consolidation.
From an employee point of view, compulsion is likely to be good news. Those employees currently without a Provident Fund stand to benefit most greatly and even those already in the system should gain from increased fund management competition.
Severance Pay - International Accounting Rules
A system of mandatory Severance Pay also operates in Thailand. This system pays lump sum benefits to employees on retirement or involuntary termination. The benefits are highly valued by employees and the benefit terms are approximately one month of final pay for every year of service - up to a maximum of 10 years.
Under the current Thai accounting system these benefits are “expensed as cash” at the point of payment to the employee with no reserve being held in the balance sheet. The government is currently reviewing the whole Thai accounting system and an output of this review is that the current treatment of these benefits is likely to change dramatically.
The intention is to transition the Thai accounting system to International Accounting Standards and once this is complete all companies will be required to hold a balance sheet reserve for their Severance Pay plans. This will be “bad news” in the short term for employers as it will effectively mean putting “new” liabilities onto the balance sheet.
The size of the reserve will depend on the demographics of each company’s employees but typically the reserve would be equivalent to about three months of a company’s total payroll. The exact calculations of the reserve must be outsourced to a professional actuarial firm on an annual basis.
In terms of timescales, the government has already published a draft of the new accounting standard and companies are being encouraged to comply as soon as is practical - although very few companies have taken this lead. A date for full implementation has not yet been set and the government is hoping that it will be within the next 12 months.
Taken as a whole, the new accounting standards are likely to provide improved transparency and governance to the Thai accounting system along with improved consistency with other countries. In some areas - and the Severance Plan is one of these - the new accounting standards will mean short term adjustments and companies should begin looking at these issues as soon as possible.