GLOBAL PENSION ATLAS

Transcription

1 Multiplying investment and retirement knowledge GLOBAL PENSION ATLAS LOCAL EXTRACT The notion of pensions is not new to Thailand, but in recent years, the country has made impressive strides in extending their coverage. However, vigilance is needed as demographic changes could financially overwhelm the system. By David Fried, Regional CEO, SE Insurance Management Asia Pacific Thailand has other issues to worry about at especially because Thailand has the third-lowest per the moment. The country desperately capita income of the countries covered in the craved calm, even peace, after the Global Investors Pension Sustainability Index (PSI). political violence of recent times. What it received However, like other Asian countries, Thailand instead was the worst flooding in 50 years. Late faces changes that could see the nation rapidly age last year, intense monsoon rains fell; Rivers and threaten its pension system. During the last swelled and burst their banks and inundated the century, Thailand s population was one of the central plains and parts of the capital. Some fastest growing in Asia. In the 1970s, the National 700,000 homes were destroyed and 270 people Family Planning Program attempted to reduce high killed. As the country desperately mopped up, fertility rates. Fertility rates fell from 6.1 children economic forecasts were revised downwards. per woman in 1960, to 3.4 in 1980, and to 1.6 today. In such an environment, pension reforms This plus increasing life expectancy are causing the understandably take a lower priority. Yet, despite old-age dependency ratio to rise considerably. This the ravages of disasters both natural and is expected to worsen from 13 today to 41.4 in man-made, Thailand has work to do to extend its The PSI shows Thailand has a system under system and ensure it remains sustainable. extreme pressure. In addition to a rising OAD ratio, it is hampered by a low retirement age (55), while RESOLUTE PENSION REFORMS the average life expectancy at birth is currently 74.4 Over the last fifteen years, Thailand had resolutely years. Despite its efforts the system also only developed its pension system. Among Asia s provides sporadic coverage of its citizens. emerging markets, it is the only one with a comprehensive and mature public pension pillar, at THE WORLD BANK MODEL least in the private sector. This is remarkable, The first pension system in Thailand was? 1

2 FOCUS enacted in 1902 by King Rama V to provide for the welfare of government officials after retirement. Pension legislation was enacted numerous times since, but it was not until a complete restructuring took place in the 1990s that the beneficiaries extended beyond civil servants and military personnel. The first (public) pillar now comprises of a Social Security Fund (SSF) (a mandatory defined benefitlike state pension scheme for the private sector employees and temporary government employees) as well as a variety of smaller arrangements for other civil servants which are being phased out. The SSF is financed by the employer and employee who equally share a 6% contribution rate, while the state pays an additional 1% into the fund. A minimum contribution period of five years is required for eligibility. The replacement rate is 15% of average wage of the last 5 years plus 1% for every additional year beyond the 5 years. It will begin paying out in 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. Permanent government employees (approx. 0.9 million), employees of state enterprises and government related organizations have compulsory provident funds. Employer contributions must exceed employee contributions. The introduction of the National Pension Fund (NPF), a mandatory defined contribution pillar for private sector employees, in May 2012 will further stimulate retirement savings for up to 13 million workers. It is expected to supplement the old age pension with another 15-20% of average pay for a total replacement rate of 50-55%. 1 DAVID FRIED Regional CEO SE Insurance Management Asia Pacific The third pillar consists of voluntary mutual retirement savings funds that enjoy tax exemptions. Contributions must be between 3% and 15% 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. THE TASK AHEAD Since the 1990s, and against a timeline that included the Asian financial crisis of 1997 and the global financial crisis, Thailand has taken impressive steps in establishing and extending its modern pension system. Yet, the Asian Development Bank noted (2009), While Thailand has a well-developed social protection system, a fragmented structure and weak legal and regulatory framework hamper it from fully realizing its objectives. 2 With the implementation of the NPF, Thailand will have a system largely based on the World Bank multi-pillar model. However, some 23 million workers in the informal sector will remain uncovered and this will remain an issue on the political agenda for years to come. The way the system now stands, it falls well short of being fully implemented. In particular, old age poverty in the countryside is a problem. A government program of targeted emergency social pensions exists for such elderly people, but only 300,000 benefits are paid amounting to 6% of the population over 60. The pensions themselves amount to $10 a month, which fails to meet basic needs. 3 There are also concerns about the sustainability of the SSF. While the fund is currently in surplus as it is yet to begin payouts, as far back as in 2000 the World Bank calculated that a contribution rate of 13% would be required to meet pension promises. The current contribution rate is only 7%. 4 1 Reforming the Pension System in Thailand, Asian Development Bank 2 Social Protection Project Briefs: Reforming the Pension System in Thailand, Asian Development Bank (2009) 3 Pension reform in times of crisis, International Labour Office May Cited in Population and Ageing and International Development (Peter Lloyd-Sherlock, 2010) 2

3 FOCUS PENSION SUSTAINABILITY INDEX RANKING Thailand s appearance in the Pension Sustainability Index is a tribute to the country s steadfast development of a pension system since the 1990s; its low ranking in the PSI, an indication of how much still needs to be done. The country rated No. 41 on the 2011 listing (adjusted No. 34). Thailand s 2009 result was also No. 34, which places it in the band of countries under most pressure to reform. Thailand is slightly ahead of China in the PSI, but the differences between the two Asian countries in terms of sustainability are negligible. * In both countries, large sections of the system are still missing to make it truly comprehensive, while extending coverage will be a challenge. This is one of the main reasons for Thailand s overall ranking, along with the extremely low retirement age of 55 years of age. On the positive side in terms of the indicator is the fact that the replacement rate is very low. However, an extremely low replacement rate implies there is a risk of the living standard of retirees falling below the poverty level. In this case, the state may need to provide welfare assistance which will burden public finances (scores negatively). FISCAL PERFORMANCE Thailand has a low fiscal burden and this is expected to remain so into the future, which scores positively. The overall debt level is also low, another plus. As previously noted, while the country currently has a young population, Thailand is part of Aging Asia and the old-age dependency ratio is expected to rise from 13 to 41 in This is not as dramatic as many other countries, but will still stress the system if not addressed. ALLIANZ GLOBAL INVESTORS 2011 PENSION SUSTAINABILITY INDEX Scale from 1 to 10: 1 minor need for reforms, 10 high need for reforms Source: Global Investors * Refer to the Global Pension Atlas 2011 for full details. #41 Thailand 3

4 FOCUS GLOBAL RETIREMENT LANDSCAPE : DEMOGRAPHICS AND MACROECONOMICS Population [m]: 81.6; 2050: 74.8; 2100: 70.4 Population 65+ [%] : 20.4; 2050: 30.9; 2100: 28.4 Old-age dependency ratio [%]: 30.8; 2050: 56.5; 2100: 51.7 GDP [US$]: billion GDP per capita [US$]: GDP growth (av. in % p.a.): 1.18 GDP growth (av. in % p.a.): 1.84 Gross National Savings [% of GDP]: Unemployment rate [%]: 6.9 Data from 2010 or latest available year Timeline of Introduction of Funded Pension Schemes 1950s CANADA s 1964 DENMARK 1970s 1974 USA 1981 CHILE FOCUS 1980s 1990s 2000s 1985 SWITZERLAND AUSTRALIA 1991 ITALY SLOVENIA 1997 MEXICO 1999 POLAND LUXEMBURG SWEDEN HONG KONG 2000 HUNGARY PORTUGAL 1998 ESTONIA GREECE BULGARIA CROATIA 2002 LITHUANIA ROMANIA CHINA INDIA 2004 NORWAY N. ZEALAND GERMANY SLOVAKIA UK S. KOREA LATVIA TAIWAN TURKEY JAPAN 2003 BELGIUM FRANCE IRELAND AUSTRIA SPAIN RUSSIA USA EUROPE CANADA USA CHINA INDIA HONG KONG JAPAN SOUTH KOREA TAIWAN MEXICO SOUTH AFRICA AUSTRALIA CHILE Less than 10% pension hardly changing Less than 10% pension mostly DC or substantial shift towards DC 10 to 50% pension hardly changing 10 to 50% pension changing towards DC 10 to 50% pension mostly DC or substantial shift towards DC More than 50% pension hardly changing More than 50% pension changing towards DC More than 50% pension mostly DC or substantial shift towards DC NEW ZEALAND GREECE Less than 10% pension changing towards DC LUXEMBOURG BULGARIA CROATIA CZECH REPUBLIC ESTONIA INDIA LATVIA LITHUANIA ROMANIA RUSSIA SLOVAKIA SLOVENIA TURKEY 4 N/A GERMANY NORWAY AUSTRIA CHINA HUNGARY ITALY MEXICO NEW ZEALAND POLAND PORTUGAL SPAIN N/A BELGIUM CANADA FINLAND FRANCE JAPAN NETHERLANDS SOUTH KOREA 5 AUSTRALIA CHILE DENMARK HONG KONG IRELAND SOUTH AFRICA SWEDEN SWITZERLAND TAIWAN UNITED KINGDOM UNITED STATES Further information on the logic of this map can be found in the Global Pensions Atlas 2011, available at

5 REGION SUMMARY ASIA: AGING QUICKER THAN YOU THINK Asia may have escaped the financial crisis relatively unscathed, yet there is a challenge building in the East that has gone largely unnoticed by the West. The population in emerging Asian economies, although still young, will age so fast that, within the next decades, many Asian nations will become older than the West. Developed Asian countries already face unfavorable demographic changes. In fact, Japan is the oldest society in the world and South Korea among the most rapidly aging. But, countries such as China are also aging and at an astounding rate. China can expect to be old within one generation. By 2050, the median age there will be higher than in the United States. More strikingly, by 2035, one single cohort in China, those 60 and over, will be larger than the entire US population. Aging is not the only factor having a major impact on Asia s pension systems. Industrialization FURTHER READING China s New Age of Growth, Global Investors Capital Market Analysis (July, 2011) China: Driving Global Growth, Global Investors Capital Market Analysis (February, 2011) Asia on the move gravitational centre of the 21st century? Global Investors Capital Market Analysis (June, 2010) Pension Trends in Emerging Markets The Rise of DC Plans and Its Consequences, International Pension Papers 2/2008, Global Investors Asia-Pacific Pensions 2007 Systems and Markets, International Pension Studies 2007, Global Investors and urbanization play an important role, particularly in emerging economies. Both developments have uprooted traditional, family based structures of old-age provision. In the past, a retiree s children provided a substantial part of retirement support in many countries. As this informal system of old-age support came under pressure in recent decades, Asian governments sought ways to compensate. Yet, the demographic and social changes created a set of challenges for Asian pensions that are distinctly different from Western industrialized countries. While aging in the West set in when retirement systems were mature and well established, retirement systems in emerging Asia, like those in central and eastern Europe, are a more recent creation. In fact, some countries only recently started from scratch and are racing to build up sustainable systems before the nation becomes old. While Singapore created its Central Provident Fund in 1955, South Korea introduced its public pension system only in the late 1980s and reformed its corporate pension system in China introduced public pensions in 1997 and a new corporate pension system in 2004, while Hong Kong established the Mandatory Provident Fund scheme in Taiwan completely restructured its corporate pension system in 2005 and reformed the public system in Pension system design in the wider Asia-Pacific region differs from country to country; there is no single coherent model in operation.* However, it can be said that there is a widespread trend towards the multi-pillar model advocated by the World Bank, even though each country has a different starting point and approach, although all (with the * For instance, with regard to the combinations of public, occupational and private pillars and the degree of involvement (mandatory / voluntary) and the degree of insurance coverage. ** Demographic Pulse (August 2010) 6

6 REGION SUMMARY SHAPE OF ASIAN PENSION SYSTEMS Country Public pensions Occuptional pensions Social insurance Multi-purpose Provident Fund Mandatory occupational pensions Voluntary occupational pensions Tax-favored voluntary pension savings AUSTRALIA Means tested CHINA HONG KONG Means tested INDIA Means tested JAPAN SOUTH KOREA TAIWAN Voluntary contributions to superannuation, Retirement Savings Accounts Life insurance Voluntary contributions to MPF Public Provident Fund Mainly life insurance Supplementary Retirement Scheme Private Personal Pension Plans Life insurance Retirement Mutual Funds exception of New Zealand and Korea) are almost exclusively DC in nature. OUTLOOK With regard to pension market size, the mature markets in the Asia-Pacific region are clearly Australia, Japan and Singapore, whose pension assets exceed 50% of GDP. India also stands out, but for a different reason. There, pension assets are negligible, amounting to far less than 10% of GDP, since the majority of the population is still unable to save for retirement. In between are other Asian countries, such as China and Korea, that are intent on building up their pension assets. This focus can be expected to increase retirement assets. According to Global Investors projections, assets in the Asian emerging markets could grow by up to 17% per year between now and The growth rates in China and South Korea may be up to 20% yearly, mainly due to the introduction of new occupational systems. Public pension systems makes it likely that public pension benefits will remain moderate in emerging Asia. Future pensioners will need to build a nest egg and will depend heavily on funded retirement savings for their well-being in old age. The Taiwanese retirement market is projected to achieve 15% growth per year, while the more mature systems of Hong Kong and Singapore may see a yearly increase of 9% and 6%, respectively. ** The Global Investors Pensions Sustainability Index, which measures the sustainability and need for further reform of pension systems, mainly in terms of fiscal sustainability, shows that Hong Kong, with its strong reliance on the fully funded Mandatory Provident Fund, has the soundest pension system among this group of countries, along with Australia. Reform pressure in Taiwan, South Korea and Singapore is in the medium range, while China and India come last. The main reason is the sparse coverage offered for the rural population. 7

7 For further information, please visit FURTHER READING Global Pension Atlas 2011, Global Investors Pension Sustainability Index 2011, International Pension Papers, Global Investors (forthcoming) Retirement assets on the rise again, International Pension Papers 3/2010, Global Investors Demographics in Focus: Ageing, International Pension Issues 2 /2010, Global Investors Pension Trends in Emerging Markets The Rise of DC Plans and Its Consequences, International Pension Papers 2/2008, Global Investors PROJECT M Our Rare Earth, #07, 1/2011 The New World Disorder, edition #05, 1/2011 CONTACTS Publisher and Editorial Office, International Pensions Seidlstrasse 24-24a Munich Germany Copyright: The contents of this brochure are protected by copyright law. All rights reserved by AG. Cautionary Note Regarding Forward-Looking Statements The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Group s core business and core markets, (ii) performance of financial markets, including emerging markets, and including market volatility, liquidity and credit events (iii) the frequency and severity of insured loss events, including from natural catastrophes and including the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/ or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures, and (xiv) general competitive factors, in each case on a local, regional, national and/ or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The company assumes no obligation to update any forward-looking statement. No duty to update The company assumes no obligation to update any information contained herein. Photo Credits p. 4-5 Timko+Klick/Thomas Porostocky Printed: 2012