Those of you that have been following the on going saga between the Office of Council of State and the Supreme Court about vesting schemes of registered provident funds, there is good news and bad news. As for those of you who are not familiar with the case in point, “vesting schemes” are basically terms and conditions set out by employers that employees must work for a certain minimum number of years before they are entitled to receive the portion of the employer's contribution in the provident fund when they resign from the fund. The norm ranges between 3-15 years of service; the longer you serve the company, the higher the portion you shall be entitled to receive when you resign.

The whole saga began when the SEC seek an opinion from the Office of Council of State about the fairness of one employer who imposed a 35 years vesting scheme in its provident fund charter. The reply from the Council was more than what the SEC had anticipated. The Council is of the opinion that vesting schemes are not only illegal but the whole concept of employer's provided provident fund should be made voluntary as well, meaning that employers can not force employees to join a provident fund scheme against their wishes and they can resign from the provident fund even though, they are still employed by the employer. As a result of this “opinion” of the Council, the whole provident fund industry went into a mini panic, fearing that there will be a sudden exodus by needy employees to resign from their provident funds so that they can get their hands on their retirement savings before retirement age and certain employers just want to abolish their provident funds altogether because of the lack of vesting schemes, even in the case of fraud committed by employees against the employer. Then the Supreme Court entered into the fray with a landmark ruling that employers have the right to impose vesting schemes since the money is still officially theirs and employees are not entitled to that money unless and until the conditions set have been fulfilled. Anyway, the good news is that the current stalemate will be resolved in the near future and it looks as if the Supreme Court will win the day. The opinion of the Office of Council of State that employers can not impose any vesting schemes on the company's contribution in their provident funds proved to be highly unpopular among many companies. Moreover, the matter is made worse when the ruling only applies to newly registered funds and is not retroactive to existing funds. This is clearly a case of double standards and cannot last in the long run.

According to my “inside” sources, it looks like a compromised solution will be reached whereby employers can keep their vesting schemes in both new and existing provident funds but there will be terms and conditions attached to make it fairer for the employees. As for the bad news, even though the new ruling will be greatly welcome but it still does not solve the many inadequacies facing many employees who are unlikely to meet their retirement goals due to lack of investment choices and “portability” when they change jobs. In this column, I would like to share some of my views on the evolution of the provident fund industry based on what works and does not work in other markets.

The whole vesting schemes saga, in my opinion, is just a storm in teacup. When employees want to change jobs, vesting schemes in their provident funds do not rank that highly in their decisions and they only act minor deterrence for employers. People change jobs over higher pay rather than better fringe benefits. Therefore, in my opinion, it is desirable to have vesting schemes but I think a more pressing issue for retirement savings is to do with employee's choice and pension “portability”. Although, the restrictions on investment guidelines for registered provident funds have been lifted for quite sometime now but the vast majority of provident funds still offer no choices to their members. This may be due to the fact that people still think of provident fund as a safety net of as resort and it should be invested as conservatively as possible. The sad truth is that given the low interest rate that we are in coupled with a highly volatile stock market, many people won't be able to retire comfortably. In fact, several people have absolutely no idea at all about how much they will need in order to retire in comfort.

This is where a bit of foresight and planning come into play. In a typical provident fund, comprising of several members with widely different age groups from new hires, age 22 to senior management, age 50+, a single portfolio will not fit all and the burden of looking after the performance of provident funds in most companies rests with the fund committee, whose members represent both employer and employees. The biggest pitfall about management by consensus is to go for the “safe option”, which quite often means doing nothing too adventurous. Since most fund committee do not get paid any extra for their responsibilities, therefore, in a good year when the fund performs well, at best they will get is a pat on the back but when things are not doing so well, they will get the blame for it and it is no fun in a companies with strong labour union.

In more developed countries, such as the US and the UK , the responsibility of retirement savings has shifted from that of employers to the employees whereby instead of having one big portfolio for everyone, investment choices are offered on an individual basis. In fact, Thailand is also moving in that direction with the introduction of Retirement Mutual Funds (RMF). In several countries, most companies do not set up provident funds anymore, instead they let employees choose their own RMFs and the company simply matches employee's contribution. In this way, it is a lot less administrative work for the personnel department and the employees get to make their own asset allocation decisions. This is something that should be seriously considered in Thailand since RMFs already exist, the only hurdle to overcome is to make it ‘portable” in the sense that you can take your retirement savings with you as you change jobs. However, right now the Revenue Department still does not allow employees to shift their savings from registered provident funds into a RMF of their choice.

In addition to the “portability” aspect of this scheme, “investment choices” at the individual level is critical to the success of achieving comfortable retirement. Younger workers enjoy the luxury of longer investment horizon, therefore, they should make the most of it by using “dollar cost averaging” technique of regular saving and allow compound interest to do the rest. As one grows older the asset allocation mix will naturally change and this can only be done at a individual level and not on a company-wide level for a simple reason that we are all at different stages of our lives ranging from age, risk profile and personal constraints and needs.

At this point in time, the concept of pension “portability” and “individual choices” may be a bit new for Thailand since the vast majority of employees may not be adequately prepared and knowledgeable enough about investment matters and asset allocation strategies, but the trend is moving towards this direction and the sooner we embrace the change the better off we will be. In fact, there is another interesting concept called ‘life cycle” retirement savings. This approach removes the burden of asset allocation away from the employees. The only decision they need to make is to remember their own birthday and the year they want to retire, the rest is taken care of by the fund managers, who will readjust your portfolio in line with your age profile.

So can portable pension work in Thailand ? My own opinion is a resounding yes. The sooner the better! Since we are not getting any younger and demographically speaking, Thailand is in a much better shape than Japan and Europe where pension costs are spiraling out of control and there are not enough young people to take up the burden of financing retirement costs of the older generation. Although, there will be obstacles along the way in terms of public education an awareness campaigns but it is better to learn from other people's mistakes and try not to repeat them!