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A looming test

By Goh Thean Eu  
  • Asia
  • Global
  • Thailand
Asian countries may have to raise retirement age, reform pension systems

Asia has emerged as an economic powerhouse over the past couple of decades as its fast-growing economies open up immense opportunities for investors. But in spite of the region’s growing wealth, many Asian countries face the challenge of inadequate retirement savings. Indeed, the 2019 Melbourne Mercer Global Pension Index shows that most pension systems rated “D” are in Asia.

US fund manager Capital Group shared its experience and perspective in managing retirement savings at Asia Asset Management’s Thailand Global Pension Forum on November 6. The forum at the InterContinental Bangkok brought together representatives from the Government Provident Fund of Thailand (GPF), various Thai asset managers, and academicians.

The first speaker, Win Phromphaet, president of CFA Society Thailand, provided an overview of the retirement savings and pension landscape in the country.

He said there are three major pension funds in Thailand: the GPF, with three million members from the public sector; the Social Security Fund (SSF), which is compulsory for 13 million-plus private sector employees; and the National Savings Fund, with voluntary contributions from some two million members of the informal sector, such as street vendors and drivers of the three-wheeler Tuk-Tuks.

Although these funds cover all sectors of the workforce, Mr. Win said Thailand’s retirement savings system is insufficient for the long-term needs of members. According to a 2019 report by the International Monetary Fund, the SSF may run out of reserves shortly after 2053.

Mr. Win also noted that the National Savings Plan only represents 10% of the total workforce in the informal sector. “As you can see, the pension systems are quite fragmented. So, we need policymakers to help fix this so that pension systems can be more sustainable in the future,” he said.

Philip May, director of retirement income solutions at Capital Group, then took the stage to share his views on how to build better outcomes for retirement. He said many pension systems face increasing challenges, including inflation, longevity of populations, and insufficient contributions.

“Another challenge is to have adequate replacement level. So, what is the right level? I have seen pension systems set it at 75%, and some at 50%...I think the level of two-thirds is a good place to look at,” Mr. May said.

He also said that as longevity increases and more years in retirement need to be funded, the “in retirement” asset mix and savings drawdown rate would need adjusting in order to reduce the risk of running out of money

Mr. May also observed that no single pension system is perfect even though there are a number of well-designed ones in Europe and Asia. As such, replicating a model that is successful in one country in another does not guarantee success.

“What is right for the UK or Netherlands may not be right for Thailand. This is because each pension system is a product of its own economic and social background,” he said.

Target date funds

Mr. May suggested that a target date investment strategy may be a viable solution to make pension funds more sustainable and to ensure that members have sufficient retirement savings. Target date is a large and growing presence in the US occupational pensions market, and may become more global in future and also feature in voluntary third pillar savings as well as employment-related plans.

According to Mr. May, more Asian nations, including Singapore and Hong Kong, are considering introducing target date funds into their pension systems. Target date funds are already available in South Korea.

The third speaker, Andy Budden, investment director of Capital Group, shared his views on the benefits of target date funds, which he said can help simplify the decision-making process in saving for retirement.

He said many defined-contribution pension plans offer various investment choices but this may not actually be a good idea. “At the high level, it sounds like a good thing to have a lot of choices. Choices make us feel good, and it gives us an opportunity to build our own portfolio,” he said.

He illustrated the point by citing a Columbia University study from almost 20 years ago which gauged the reaction of customers at a supermarket where two booths were set up, one offering six choices of jams and the other with 18. Although the first booth drew 40% of customers compared to 60% for the second booth, 30% of those who visited the former bought a jar compared with only 3% who made a purchase at the latter.

“So, having a lot of choices may not be the right approach,” according to Mr. Budden.

He said about half of the assets covered by defined-contribution pension plans in the US are already in target date funds, totaling around US$2 trillion.

“The expectation is that it is going to double over the next two to three years. At the moment, we are looking at over 90% of defined-contribution flow currently going into target date funds,” he said. “So, clearly, something quite significant is going on here.”

He said Capital Group’s target date funds in the US have been well received and were winners in terms of annualised total returns in various categories.

Pension challenges

After his presentation, Mr. Budden joined Mr. May and Peet Yongvanich, deputy managing director of Bangkok-based BLL Asset Management, for a panel discussion, which was moderated by Tan Lee Hock, founder and publisher of Asia Asset Management.

Mr. Peet said the majority of pension funds in Thailand are invested in bonds. He said the investment committees of pension funds were initially reluctant to grow their exposure to stocks because they were worried about being blamed for underperformance if stock markets declined.

He said he and his team advised the pension funds to raise their exposure to stocks to generate better long-term returns. “We showed them the data that if they invest heavily in fixed income, and getting a return of 2-3% annually, it won’t be sufficient to cover the members’ retirement needs. So, they started to be more open to the idea today,” Mr. Peet said.

In the US, Mr. Budden said legislation has made target date funds a “safe harbour” default strategy for pension members, which is one of the reasons why they are becoming more popular. Pension funds which were maintaining a lot of cash previously have been deploying the money into stocks and bonds since target date funds were made a default option.

According to Mr. May, pension systems around the world are expected to face a funding shortfall of $428 trillion by 2050. Although there are solutions to overcome these challenges, including pension reform and increasing the retirement age, the implementation may not be straightforward.

“It is going to require a lot of careful political manoeuvering. Pensions and retirements are very sensitive subjects everywhere. But I think that individuals will have to get used to retiring later, and that would need a degree of social acceptability,” he said.