Asia may have escaped the financial crisis relatively unscathed, but there is a challenge building in this region that has gone largely unnoticed by the West - rapidly ageing populations that put the sustainability of pension plans in doubt.
Over the past 15 years, Thailand had resolutely developed its pension system. Among Asia’s emerging markets, it is the only one with a comprehensive and mature public pension pillar, at least in the private sector. However, like other Asian countries, Thailand faces changes that could see the nation rapidly age and threaten its pension system.
In addition to a rising old-age-dependency ratio, it is hampered by a low retirement age (55), while the average life expectancy at birth is currently 74.4 years. Despite its efforts, the system also only provides sporadic coverage of its citizens.
The first (public) pillar now consists of a Social Security Fund (SSF) – a mandatory defined benefit-like state pension scheme for private-sector employees and temporary government employees – as well as a variety of smaller arrangements for other civil servants that are being phased out.
The SSF will begin paying out next year. Together, the SSF and civil-servant schemes provide coverage for 11.5 million of Thailand’s 34.5 million workers.
The second (occupational) pillar consists of a defined contribution Government Pension Fund (GPF) for civil servants.
This is a fully funded defined-contribution scheme designed to replace the Government Pension Scheme.
Provident funds, which are generally voluntary, are mandatory for a few types of employees.
The introduction of the National Pension Fund (NPF), a mandatory defined contribution pillar for private sector employees, last May will further stimulate retirement savings for up to 13 million workers. It is expected to supplement the old-age pension with another 15-20 per cent of average pay for a total replacement rate of 50-55 per cent.
The third pillar consists of voluntary mutual retirement savings funds that enjoy tax exemptions. Contributions must be between 3 and 15 per cent of income. The high threshold for income-tax payments means this is of limited value for low- and middle-income earners in the formal sector.
Since the 1990s, and against a timeline that included the Asian financial crisis of 1997 and the global financial crisis about a decade later, Thailand has taken impressive steps in establishing and extending its modern pension system.
However, according to an analysis by global financial-services firm Allianz, the current system falls well short of being fully implemented. In particular, old-age poverty in the countryside is a problem.
There are also concerns about the sustainability of the SSF. While the fund is currently in
surplus as it is yet to begin pay-outs, as far back as in 2000 the World Bank calculated that a contribution rate of 13 per cent would be required to meet pension promises.
The current contribution rate is only 7 per cent.