Thailand's Pension Fund Allocates $11.6 Billion for Global Assets
The Strategic Overhaul of Thailand's Pension Fund
Thailand's pension fund is about to embark on an ambitious new strategy aimed at transforming its investment approach. With an allocation of $11.6 billion towards global private assets, the fund is responding to pressing demands stemming from an ageing population and underwhelming performance in recent years.
A Financial Shift to Global Investments
The $77 billion social security fund, which covers healthcare, unemployment benefits, and pensions for a significant portion of the workforce, has struggled with returns consistently averaging below 3% over the last decade. This has prompted significant changes, as highlighted by investment board member Petch Vergara. She has articulated the need for diversifying the fund’s portfolio beyond the domestic focus that has dominated until now.
Understanding the Performance Challenge
Petch Vergara, who previously held a high-profile position at Goldman Sachs, noted that the over-concentration in low-risk domestic assets poses a considerable risk to the fund's sustainability. If the current strategy continues, projections indicate potential bankruptcy by 2051. The current portfolio heavily favors Thai assets, which, while seemingly safe, limit long-term potential returns.
Adapting to a Changing Demographic Landscape
The demographic shift in Thailand has been striking, with the proportion of those aged over 60 now standing at one-fifth of the population. Over the past two decades, this demographic segment has grown rapidly, doubling from 6.2 million in 2004 to approximately 13 million by December 2023.
New Leadership Drives Investment Reform
The transformation of the pension fund's approach is also supported by a new board of directors, comprising members who were recently elected for the first time. This shift away from appointments historically influenced by the military opens the door for progressive reforms. The recent elections allowed for a more diverse composition of the board, many of whom come from labor groups and advocate for comprehensive changes in fund management.
Investment Strategy Moving Forward
The board is now pursuing an investment framework aimed at gradually reducing the reliance on low-risk assets. The plan is set to start in 2025, with objectives to lower the share of low-risk assets from 70% to 60%. This will coincide with an increase in high-risk investments from 30% to 40%. Ultimately, the goal is to achieve a balanced 50-50 split by mid-2027.
Targeting Global Private Assets
In this transition, a substantial portion of funds—specifically about 15% of the total—will be directed towards international private equity, private credit, and hedge funds. This shift is designed to enhance the long-term growth potential of the portfolio, aiming to find better returns outside of the domestic market.
Examining Returns and Challenges
A report from the Thinking Ahead Institute reveals that global pension funds with a well-balanced portfolio of 60% equities and 40% bonds enjoy much higher returns—averaging 7.7% over the past five years. In stark contrast, Thailand's social security fund has underperformed with only a 2.7% return during the same period.
Addressing the Trust Deficit
Despite calls for reform, challenges remain, particularly concerning public trust. The fund's history of mismanagement and high operational costs has led to skepticism among contributors. There are currently 700,000 retirees relying on the fund, but this demographic is expected to grow, creating a situation where the outflow surpasses contributions by 2045.
Ensuring Long-Term Sustainability
Experts, including advisor Worawan Chandoevwit, stress the importance of long-term governance to ensure the viability of the fund. Good governance, coupled with strategic investment in high-return opportunities, is essential for the fund's sustainability in catering to an increasingly elderly population.
Frequently Asked Questions
What prompted the overhaul of Thailand's pension fund?
The pension fund is reacting to years of poor returns and an ageing population, necessitating a more robust investment strategy.
How much will Thailand's pension fund invest in global assets?
The fund plans to invest $11.6 billion in global private assets as part of its strategic overhaul.
What changes are occurring in the fund's board composition?
A new board has been elected, bringing a more progressive approach to managing the pension fund's investments.
What is the expected return strategy for the pension fund?
The strategy aims to increase the allocation of high-risk investments over the next several years to achieve better long-term returns.
How many retirees currently rely on the fund?
As of now, about 700,000 retirees are drawing pensions from the fund, with numbers expected to rise significantly in the coming years.
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