Trend of “Provident Fund”, the last resort of welfare that raises employee satisfaction in Thailand

Introduction

For a company in Thailand, the typical items of welfare benefits that raise employee satisfaction are the Providence Fund and private medical insurance. In this article, we will introduce the contents and trends of the Provident Fund along with drastic reform plan of corporate pension system in Thailand.

As you see in the chart below, Thailand is one of the countries in Southeast Asian countries where aging is expected to accelerate rapidly. According to the United Nations, the share of all people aged 65 and over in Thailand will rise to 12.9% in 2020, 19.4% in 2030, and 25.8% in 2040.

Population Forecast by Age in Thailand
Population Forecast by Age in Thailand
(TTTP created from UN “World Population Prospects 2017”)

In the drastic demographic changes, Thai government is discussing The National Pension Fund (NPF) draft bill to force all private companies in Thailand to join a defined contribution corporate pension plan, in addition to the existing Provident Fund which is a voluntary defined contribution corporate pension plan. The NPF is a compulsory pension system, but it does not replace the existing Provident Fund. Companies that have already implemented an existing Provident Fund do not have to join the NPF and can continue the Provident Fund.

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Overview of the Provident Fund

The existing Provident Fund, which is a defined contribution retirement benefit plan based on Provident Fund Act, B.E. 2530 (http://www.thaipvd.com/upload/pvd_act_180308.pdf) , already has a history of approximately 30 years.

In the existing Provident Fund, a company sets a fixed contribution rate, and the company and the employee pay contribution at half and half (can be set voluntarily between 2% and 15% of salary), and employee receive benefits in case of retirement according to the fund management result. Employees can choose not to join the fund. In that scheme, the retirement benefits shall be paid on not only on mandatory retirement, but also all early retirement due to personal convenience and company convenience. The contribution shall be stop at the age of 55. The fund is managed by a fund management company governed by the Securities and Exchange Commission (SEC) in Thailand, which is a regulatory agency, and the fund provides a combination of contribution and fund management income when an employee retires.

(1) Contribution from employee
(2) Contribution from employer
(3) Fund management income of contribution from employee
(4) Fund management income of contribution from employer

Among them, (1) Contribution from employee shall be refunded in case of any retirement. On the other hand, a refund policy of other parts ((2) (3) (4)) shall be set ad company-specific basis (ex. portion of payments shall be linked to the number of employment years).

The contribution rate is generally 3% to 5% of monthly salary (* 1). In some cases, if the number of employment years exceeds a certain threshold, the contribution rate will be changed. For example, employees with 1 to 5 years of employment shall be set as 3%, employees with more than 5 years of employment shall be set as 5%.
※ 1: There are only a few companies that are very positive in the welfare program with a contribution rate of 15%, the highest rate.

If an employee change job to another company, and in case the new employer joins Provident Fund, the employee can take over (transfer) the fund without receiving it (“Portability”).

Depending on the fund management company, the fund management can be divided into several types depending on the risk and return. “Low risk and low return” type mainly invests time deposits and bonds (corporate bonds and government-guaranteed bonds), on the other hands “High risk and high return” type increases the portion of management of stocks and stock investment trusts. “Middle risk and middle return” type is also called “Balanced” type. The types of these fund management patterns vary depending on the fund management company. Conservative companies tend to select “Low risk and low return” type.

Investment income and loss depend on the investment environment, so it can not be said in general, but in the young period, an employee may increase the high risk and high return type to invest in stocks and stock investment trusts by a certain percentage, and in the second half the employee may focus on of a pattern that protects with a conservative operation (“Low risk and low return” type or “Balanced” type). However, at first, it is important to raise financial literacy by investment education when selecting investment patterns.

If an employee joins a Provident Fund from the young age of 20’s to compulsory retirement age 55, the company will pay a half and it will be also very long-term compound interest management, so an employee can expect good investment results. For example, assuming a 30-year working period, with an investment yield of 3%, the retirement amount is approximately 3.3 times the total contribution of the employee, and totally tax-free (tax merit is described later). Therefore the Provident Fund can be said as an extremely critical item for employee welfare.

The benefits of the Provident Fund are as follows:

Company (Employer) benefits

  • Company can enhance employees’ morale and improve employees’ performance.
  • Company can increase employees’ loyalty and reduce employee turnover.
  • Company can establish good relationship between employee and employer and reduce the possibility of labor disputes.
  • Company can strengthen own identity to focus on employee welfare,

Employee benefits

  • Based on long-term planned savings and management, an employee can establish financial security for oneself and families on retirement or death.
  • Management by a qualified and experienced fund manager increases the chances of earning more than bank deposits, by gaining additional profit from interest, dividends and capital gains.
  • If an employee change job to another company, the employee can transfer the fund if new employer has joined a Provident Fund. Alternatively, the employee can choose to keep the balance in the original fund and manage it.
  • At the time of retirement, an employee may choose to hold and manage the balance as they are, rather than withdrawing as retirement benefits or pension.

Tax benefits
Provident Fund have the following tax benefits for both contribution and retirement benefit.

[Contribution]
Employer’s contribution: Full deduction for calculation of corporate income tax (upper limit is 15% of wages)
Employees’ contribution: In the calculation of personal income tax, deduction up to a maximum of 500,000 baht a year (however, the portion above 10,000 baht is within 15% of taxable income)

【Retirement benefit】
Employees’ contribution: full income deduction

Management income of employee contribution + employer’s contribution + management income of employer contribution
(1) Retirement at 55 years or older (enrollment period is 5 years or more)
Full deduction of retirement benefits
(2) Retirement under 55
Enrollment period less than 5 years: No income deduction
Enrollment period 5 years or more: Taxable income = [Benefit total amount – 7,000 Baht x Employment period] * 50%

tax benefit

Types of Provident Funds
Single fund: One company establishes one fund. The managed assets of the fund is 100 million baht or more.
Pool funds: Funds of multiple companies are combined and managed. It can be used regardless of the number of employees and the size of assets. The bigger size of managed assets will enable more efficient operation, and the fund’s operating expenses per company will be relatively low.

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Status of the Provident Fund

In this section, we will introduce current status of the Provident Fund as of the end of June 2018.
The following table shows fund management companies of the Provident Fund described in THAIPVD.com (Provident fund related information site operated by SEC : http://www.thaipvd.com/
(in descending order of the total net asset value of the fund as of the end of June 2018)

1Kasikorn Asset Management Co., Ltd.https://www.kasikornasset.com/
2TISCO Asset Management Co., Ltd.https://www.tiscoasset.com/
3MFC Asset Management PCLhttps://www.mfcfund.com/
4SCB Asset Management Co., Ltd.https://www.scbam.com/
5Krungthai Asset Management Plc.https://www.ktam.co.th/
6CIMB-Principal Asset Management Co., Ltd.http://www.cimb-principal.co.th/
7BBL Asset Management Co., Ltd.https://www.bblam.co.th/
8UOB Asset Management (Thailand) Co., Ltd.https://www.uobam.co.th/
9Krungsri Asset Management Co., Ltd.https://www.krungsriasset.com/
10One Asset Managementhttps://www.one-asset.com/
11AIA Co., Ltd.https://www.aia.co.th/
12TMB Asset Management Co., Ltd.https://www.tmbam.com/
13Thanachart Fund Management Co., Ltd.https://www.thanachartfund.com/
14Bangkok Capital Co., Ltd.https://www.bcap.co.th/
15Aberdeen Asset Management Co., Ltd.http://www.aberdeen-asset.co.th/
16Land & Houses PCLhttps://www.lhfund.co.th/

(TTTP created from statistical data of THAIPVD.com)

Provident Fund management companies can be divided into Thailand’s major commercial banks, foreign banks, and independent fund managers. TISCO is a leading fund management company that established a management company in 1992, prior to the establishment of the bank in 2005, and they has grown with the Provident Fund business as their core business. Although MFC is an independent management company, it was established by the Thai government and the International Finance Corporation (IFC) as the first investment trust management company in Thailand in 1975, and their major shareholders include the Ministry of Finance and the Government Savings Bank. Among the major Thai banks, SCB is owned by the Royal Property Management Department and the Ministry of Finance with common and preferred shares, while Krung Thai Bank is owned by the Ministry of Finance and Central Bank’s financial institution development fund.

The following table shows the amount of net assets value (NAV: 1 million baht), the ratio of net assets value to the total (%), the number of funds (No. of fund), the number of member companies (No. of company), the number of member employees (No. of members).
(As of the end of June 2018).

Fund ManagerNAV (MB)NAV (%)No. of fundNo. of companyNo. of member
Kasikorn19285217.5653731636847
TISCO15520314.1634086530169
MFC15271313.930622231871
SCB11174810.2422214420857
Krungthai960428.724639182809
CIMB848027.733799177371
BBL937668.5372013272875
UOB425993.91450571295
Krungsri398143.622765108501
One380063.567829327
AIA324162.9141182118464
TMB228902.1945385391
Thanachart153961.4665861086
Bangkok Cap132071.21120835368
Aberdeen65100.625436844
L & H 27210.253213939
Total1100686100383180393013014

(TTTP created from statistical data of THAIPVD.com)

The following chart shows ratio of net assets value of each fund management company to the total (“NAV (%)” in the above table, as of the end of June 2018). Amount of top 4 companies (Kashikon Bank, TISCO, MFC and SCB) is over 50% of the total.
ratio of NAV
(TTTP created from statistical data of THAIPVD.com)

The following chart shows the ratio (%) by investment target in the entire fund (as of the end of June 2018). The portion of bonds and government-guaranteed bonds, which are relatively safe and conservative investments, is over 50% of the total. On the other hand the portion of investments in stocks and mutual funds is approximately 30% of the total.
ratio of investment target
(TTTP created from statistical data of THAIPVD.com)

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Outline of National Pension Fund (NPF) draft bill

The chart below shows trends in the net assets value of the Provident Fund for employee number size. It is clear that a large company with more than 10,000 employees is supporting the growth of the total Provident Fund.
trends in NAV
(TTTP created from statistical data of THAIPVD.com)

Provident Funds have grown through the introduction of large companies that are proactive in employee welfare, but have not been relatively popular with SMEs. As of end of June 2018, approximately 3 million employees join Provident Fund, the share is approximately 20% of all employees of private companies across the country. And approximately 18 thousand companies join Provident Fund, the share is only 3% of all private companies across the country.

Secretary of the Securities and Exchange Commission (SEC), Mr. Sucharitakul, said that
the reasons why the fund is not widely used by SMEs are the level of financial literacy of employees of Thai companies is low and many employees does not recognize importance of own reserve fund. Mr. Sucharitakul emphasizes that it is very important for leading domestic and foreign pension specialists to continuously educate all householders about the importance of preparing for retirement (asia-first.com, 5 Sep 2017).

As mentioned above, the Present Fund is not widely spread to small and medium-sized companies, so it is not sufficient as the entire pension security system in Thailand where aging is drastically advancing. Therefore, the draft bill of the “National Pension Fund” (NPF)) is now being discussed under the following contents, as a defined contribution pension system that all private companies are mandate to join. (It does not mean that the existing Provident Fund will be modified and mandate to apply.)

[Outline of National Pension Fund (NPF) Draft Bill]

  • For all employees aged 15 to 60 (not for existing Providence Fund members)
  • Payment is from 60 years old
  • Start from the first year for companies with 100 or more employees, and BOI applicable companies
  • Start from 4th year for a company with 10 or more employees
  • Start from 6th year for a company with 1 employee
  • Employer and employee contribute the following to monthly salary up to 60,000 Baht
    • First 2 years: 3%
    • 3rd to 6th year: 5%
    • 7th to 9th years: 7%
    • 10th years: 10%
  • For employees with a monthly salary of 10,000 baht or less, only the employer pay contribution, and employee do not pay contribution.

Discussing of the maximum contribution rate to raise to 30% from 10% (Bangkok Post, 26 Jun 2018)
If the draft bill passes by the NLA (National Legislative Assembly), the Ministry of Finance will set up the establishment of the fund and the operation system over the next one to two years. After that the NFP will start.

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Should we wait for NPF to start if we are considering Provident Fund?

According to Mr. Pisit, President of the Provident Fund Association predict that, after the introduction of the NPF, the growth of fund value of existing Provident Fund may slow down, because many employer choose to join the NFP instead of joining existing Provident Fund. After the introduction of the NPF, employers can choose to join the NPF or join an existing Provident Fund. (Bangkok Post, 5 Dec 2017)

The NPF under deliberation is a compulsory pension system, but the NPF is not a substitute for the existing voluntary Provident Fund. Companies that already join a Provident Fund do not need to join the NPF, and can continue the existing Provident Fund after the NPF start. (However, if the contribution rate of the existing Provident Fund is around 2%, it may be affected by the increase of the contribution rate etc.)

It is not necessary to wait for the introduction of the NPF, which is unclear at the time of the start of the system, for companies that are considering the introduction of a Provident Fund as a part of employee welfare programs. It is possible to promote the welfare program by introducing the Provident Fund.

In the existing Provident Fund, each employee can independently select the investment type, such as “High risk and high return”, “low risk and low return”, etc. On the other hand in the NPF, each employee does not participate in investment to fund. Also, unlike the NPF, which contributes up to the age of 60, the Provident Fund ceases to contribute at the age of 55.

At present, it is unclear how the adjustment with the existing Provident Fund will be made with respect to the contribution rates, benefit starting years, and tax benefits at the start of the NPF. We will continue to provide the latest information on this web site.

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