Thailand’s underperforming $77 billion Social Security Fund (SSF) has announced a strategic overhaul to inject $11.6 billion into global private assets, according to a senior executive, in a move designed to address the fund’s stagnant returns and the looming demographic challenge posed by the country’s aging population.

The SSF, Thailand’s largest state fund, which provides pensions, healthcare, and unemployment benefits for approximately 25 million workers, has struggled with poor performance, posting an average return of just 2.7% over the past decade. This underperformance has raised concerns about the fund’s long-term sustainability, especially as Thailand’s population ages rapidly.

Petch Vergara, a newly appointed board member and former Goldman Sachs executive, described the fund’s current asset allocation as overly conservative, with a heavy reliance on domestic and low-risk investments. “At this rate, the fund could go bankrupt by 2051,” Petch warned, underscoring the urgency of a shift toward more diverse, global, and higher-yielding assets.

Shifting from Domestic to Global Assets

The planned diversification marks a significant departure from the SSF’s traditional approach, which has long focused on domestic bonds and low-risk investments. Currently, the SSF allocates 70% of its assets to low-risk investments, a strategy that may protect capital but offers little in terms of long-term growth.

The SSF’s new plan, effective from 2025, aims to reduce the proportion of low-risk assets from 70% to 60% and increase its exposure to higher-risk, higher-reward investments, including global private assets such as private equity, private credit, and hedge funds. The target is to achieve a 50-50 split between low-risk and high-risk investments by mid-2027, with $11.6 billion specifically earmarked for global private assets over the next two-and-a-half years.

Vergara explained that the shift is designed to tap into global growth markets, which offer higher potential returns compared to Thailand’s slower-growing domestic market. “The idea is to make the portfolio more global to find more returns in the long term,” she said. “If we do not take action now, the growing demand from Thailand’s aging population will put enormous pressure on the fund’s sustainability.”

Thailand’s Aging Population: A Looming Crisis

Thailand’s demographic landscape is changing rapidly, posing significant challenges to its social security system. One-fifth of the country’s 66 million citizens are now over the age of 60, compared to just 10% two decades ago. The number of retirees drawing from the fund is expected to rise sharply in the coming years, further straining its resources.

According to data from the Ministry of Social Development and Human Security, Thailand’s over-60 population doubled from 6.2 million in 2004 to 13 million in December 2023, and this trend is expected to accelerate. The sharp increase in the number of retirees eligible for pensions—currently around 700,000—will create a significant imbalance between those contributing to the fund and those drawing from it. By 2045, independent studies predict that the SSF will experience a clear deficit, with more money being withdrawn than contributed.

Political Shifts and Reformist Influence

The SSF’s strategic pivot toward global assets coincides with political changes within the fund’s leadership. In December 2023, a majority of the SSF’s 21-member board was elected for the first time, marking a departure from the previous practice where most board members were appointed by the military government that took power following the 2014 coup.

The newly elected board members, many of whom were nominated by labor groups and backed by the progressive party that won Thailand’s general election, have strongly advocated for a more aggressive investment strategy. While the party was blocked from forming a government by conservative lawmakers aligned with the military, their influence on the SSF’s new direction is apparent.

The new investment framework, which has received broad approval from the board, is set to make the SSF more adaptable to the changing needs of Thailand’s population. “The current leadership understands that the old model is no longer viable,” said a senior analyst at Kasikorn Securities. “This reformist approach to the fund’s management is not only about getting better returns but also about restoring public trust in the fund.”

Global Pension Fund Comparisons

A 2023 study by the non-profit Thinking Ahead Institute examined pension assets across 22 major markets, revealing that funds with a 60-40 mix of global equities and global bonds earned an average annual return of 7.7% over the past five years. In stark contrast, Thailand’s SSF earned just 2.7% during the same period. The performance gap underscores the need for Thailand’s pension fund to diversify beyond its domestic investments, especially as many other pension funds around the world have shifted toward global assets to capitalize on higher returns.

“Thailand’s Social Security Fund is lagging behind global trends,” said financial advisor Patchara Somchai. “The SSF has the potential to boost returns significantly if it follows the lead of other major funds by increasing exposure to international markets and higher-risk assets.”

Governance and Transparency Issues

Despite the planned reforms, analysts remain concerned about the SSF’s history of poor governance and mismanagement. The fund has faced criticism for its lack of transparency, high operating costs, and limited public accountability. Without addressing these governance issues, some experts fear that even the most well-intentioned investment strategy may not succeed.

Worawan Chandoevwit, an advisor on social security at the Thailand Development Research Institute, emphasized that effective governance is key to ensuring the long-term viability of the fund. “High returns are essential to meet the growing demands of Thailand’s aging population, but that cannot be achieved without good governance,” she said.

Worawan also noted that trust issues have plagued the fund for years, with many members of the public skeptical of the SSF’s ability to manage assets efficiently. “There’s a history of underperformance and mismanagement that needs to be addressed head-on,” she said. “Only through transparency and public trust can the SSF build a sustainable future.”

A Roadmap for the Future

The SSF’s new strategy represents a bold attempt to secure the financial future of Thailand’s aging population. With the shift toward global investments and a focus on higher returns, the SSF is positioning itself to meet the challenges of an aging population head-on. However, the success of this strategy will depend on more than just asset allocation. Long-term governance reforms, improved transparency, and restored public trust will be critical factors in ensuring the fund’s viability well into the future.

As Thailand navigates the complexities of an aging society and a rapidly evolving global economy, the SSF’s leadership must strike a delicate balance between risk and reward. For millions of Thais relying on the fund for their retirement, the stakes could not be higher.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

30th September, 2024