Provident funds are literally a timely preparation for the future, in which employers join with their employees to make regular contributions that protect families against death or disablement of a breadwinner and provide security in an employee's retirement.

They are the darling of Western governments no longer able to pay pensions from inadequate state coffers as the proportion of elderly retirees soars.

Until recently, provident funds in Thailand had observed their functions with scant imagination, adopting a "take it or leave it" regard for their membership. However, a principle - more like a product - called "employee's choice" has appeared on the Thai market over the past few years, dragging the conservative provident-fund business into the reality of modern investment, spreading risks, enhancing investment portfolios and creating a win-win game for both members and funds.

Unfortunately, recognition of the newcomer is deathly slow, even among the small percentage of Thai companies that have joined conventional provident funds.

Tisco Asset Management's deputy managing director, Araya Thirakomen, who is also deputy chairman of the Provident Fund Business Group, says there are about 400,000 companies registered with the Commerce Ministry. Of these, only 8,000 have joined the provident-fund programme.

Tisco has 1,900 provident-fund customers, and only 50 of them have joined the new employee's choice programme.

Traditionally, all provident-fund members (or contributors, or investors - call them what you might) have shared the same investment portfolio: one company, one group of members, one investment portfolio.

However, employees vary by age, sex, family responsibility, financial capacity and ability to take risks. It's therefore unfair to those who can take high risks to park their provident fund contributions in government bonds. Similarly, those who can ill-afford risks should not be expected to gamble their contributions in a high-risk, but high-return, portfolio.

Literally speaking, employee's choice is precisely what it says. It offers provident-fund members the opportunity to decide where their contributions should be invested. Four asset-management firms - Kasikorn Asset Management (KAsset), Tisco, TMB Asset Management and SCB Asset Management - are promoting the idea to employers' fund committees.

In the conventional sense, provident funds are jointly and voluntarily established by the employees of a company and their employer. The fund consists of the contributions of the employees, who are regarded as members of the fund, and contributions from the employer. The money is invested by a fund manager with the objective of providing security to members and their families in the case of death, disability or retirement.

Employees' contributions are deducted from their wages and paid directly to the fund. The employer at least matches the contributions of its employees.

Individual contributors can claim a deduction of up to Bt10,000 per year from their taxable income for provident-fund contributions. In addition, payments from the funds for death, disability, or retirement - provided, in the latter case, a member is at least 55 years old and has been a member for at least five years - are exempted from personal income tax.

Provident funds are allowed to invest in commercial bank deposits, debt instruments or treasury bonds, certificates of deposit, promissory notes, bills of exchange, debentures and equity instruments like shares, warrants to purchase shares, investment units of equity funds and equity-linked instruments like convertible debentures and derivative warrants. The list provides a wide range of investment risk.

Because employee's choice is new to the Thai market, it has not yet attained an "ideal" condition. However, in the belief that doing something is better than nothing, fund managers are offering single and pooled structures for setting up new provident funds.

A single fund comprises only one employer. The appropriate size should be at least Bt100 million, to obtain benefits from investment diversification into various financial instruments and in many financial institutions, thereby providing a greater opportunity to lower risk and earn a high return.

A pooled fund comprises small- and medium-sized companies that join together in one fund. Its main objective is to provide long-term capital appreciation for its members by combining their separate funds under management into a single entity. The main rationale behind pooled funds is to take advantage of economies of scale to achieve greater risk diversification, higher yields and lower expenses.

However, these are not an "ideal" employee's choice fund, and according to Araya, an ideal fund is probably too difficult to be true. Internationally known as a "fund manager sponsored fund", the ideal should comprise many single investment funds, including a pure equity fund, a pure government bond fund, a pure corporate debenture fund, and others investing in pure derivatives and other investment tools, all of them separately set up.

Then, employees could choose how much, from a notional Bt100 contribution, should be invested in which funds, blending the investment tools themselves. Their return would be as good as it gets, following their investment style.

There is a significant, but unseen, advantage in employee's choice.

At present, fund committees comprising representatives of the employer and the employees must set investment policies that are believed to be in the best interests of members. The committee enjoys no credit if the provident fund's return is good, but is blamed if the fund's performance dives south.

With employee's choice, the committee will no longer bear the brunt of complaints that returns are not good enough. Its role will become one of listening to fund managers and educating members.

However, the slightest raised eyebrow in a fund committee will doubtless have a fund manager knocking on the door within hours.

Our thanks go to Tisco and KAsset, for information about provident funds adapted from their websites.

Piyarat  Setthasiriphaiboon

The Nation