Professional Documents
Culture Documents
Mukul G Asher
Professor of Public Policy
National University of Singapore
sppasher@nus.edu.sg
ADB Regional Conference on Enhancing Social Protection in Asia
Manila, April 21‐22, 2010
Disclaimer: The views expressed in this paper/presentation are the views of the author and do not necessarily
reflect the views or policies of the Asian Development Bank (ADB), or its Board of Governors, or the
governments they represent. ADB does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequence of their use. Terminology used may not necessarily be consistent
with ADB official terms.
Organization
• The Context
• Pension Reform Avenues in Southeast Asia
• Concluding Remarks
The Context
• The need for more robust social security and social safety
nets has been in Southeast Asia since the 1997‐98 Financial
Crisis. However, the rapid recovery and subsequent robust
growth meant that the Crisis did not lead to sustained efforts
to integrate social protection into economic growth
strategies.
• The current global crisis once again represents both an
opportunity for, and a challenge to, strengthening of social
protection in Asia. The term ‘social protection’ is used in this
context to denote major branches of social security such as
pensions, healthcare, work injury and social assistance.
The Context
• While demographic, institutional and fiscal challenges are
many, the current global crisis underscores the political
necessity of sustaining the process of expanding social
protection.
• The trend rate of economic growth is regarded as a singularly
important macroeconomic variable that affects the economic
security of the young, and the old. The global economic
slowdown may also impact the pace and quality of job and
livelihood creation in Asian countries, raise the cost of debt
refinancing (particularly for highly leveraged economies),
potentially lower remittance flows, and also lower the
medium term real investment return on pension assets.
The Context
• Several Southeast Asian countries have pursued aggressive
fiscal stimulation packages in which social protection has
been an integral component. There are however concerns
that overly aggressive fiscal stimulus packages, if not reversed
skillfully as economies recover, could potentially lead to
higher inflation, and reduce the real incomes of the poor.
• Higher inflation and nominal rates could also increase the
cost of servicing the internal debts of several countries such
as Indonesia, and the Philippines.
• Many of the Southeast Asian countries have established
schemes which cover traditional branches of social protection
(Table 1)
Table 1: Social Security Programs in the Region
Sickness and maternity
Old age, Family
Country disability, and Cash benefits Work injury Unemployment allowance
Cash benefits
survivors plus medical s
for both
care a
Brunei X b d X b b
Indonesia X b d X b b
Laos X X X X b b
Malaysia X b d X b b
Philippines X X X X b b
Singapore X X X X b b
Thailand X X X X X X
Vietnam X X X X X b
a. Includes Old Age, Disability, and Survivors; Sickness and Maternity; Work Injury; Unemployment; and Family
Allowances. In some countries, the rate may not cover all of these programs. In some cases, only certain groups, such as
wage earners, are represented. When the contribution rate varies, either the average or the lowest rate in the range is used.
b. Also includes the contribution rates for other programs.
c. Government pays the total or most of the cost of family allowances.
d. Contributions are submitted to a ceiling on some benefits.
Source: Social Security Association (2008)
Context
• Mere establishment of such schemes however does not bring
about high degree of coverage of population as well as types
of risks; adequacy in benefits; sustainability in financing; and
high quality services with relatively low levels of
administrative and compliance costs.
• Given the heterogeneity of Southeast Asian countries such as
in demographic trends (declining fertility rates, increasing life
expectancy at age‐60); economic and labor market structures;
fiscal constraints and effectiveness of public service delivery
systems; there is no one blue print of pension reform that is
appropriate.
The Context
• The policy choices involve how to combine different avenues
of pension reform discussed in the next section to construct a
robust, adequate and sustainable retirement income
protection systems with coverage approaching the universal
level.
• Different countries will have different priorities in sequencing
these avenues and in designing elements of each avenue to
bring about the desired pension system.
Pension Reform Avenues in Southeast
Asia
• There are several broad avenues for reforming pension
systems in Southeast Asia. The avenues encompass schemes
involving the formal sector in which there is identifiable long
term employer –employee relationship; and informal sector
where no such relationship is evident. Much of the
employment growth in Southeast Asia will be in the informal
sector.
• The avenues incorporate a wide variety of financing
arrangements ranging from traditional PAYG social insurance
based schemes, to contributory savings‐based schemes,
whether mandatory or voluntary. They also recognize
unorthodox ways to convert physical asset ownership (such as
housing) into retirement income stream.
Pension Reform Avenues in Southeast
Asia
• Each country will need to contextualize the avenues discussed
below, and combine them in accordance its objectives, and
financial and institutional capabilities.
• The transition (such as from DB to DC schemes) will need to
be carefully arranged, with explicit recognition of the costs
and duration of transition.
• The broad avenues for pension reform in Southeast Asia are
enumerated below
Pension Reform Avenues in Southeast
Asia
• Avenue1: Modernizing and professionalizing existing
formal social security organizations in performing core
functions.
• Each provident and pension fund must perform five core functions with a
reasonable degree of competence and efficiency (Ross, 2004).
1) reliable collection of contributions, taxes and other receipts (including any loan
payments in the security systems);
2) payment of benefits for each of the schemes in a timely and correct way; 3)
ensuring good financial management and productive investment of provident and
pension fund assets;
4) maintaining an effective communication network, including development of
accurate data, and record keeping mechanisms to support collection, payment
and financial activities;
5) production of financial statements and reports that are tied to providing effective
and reliable governance, fiduciary responsibility, transparency, and accountability.
Pension Reform Avenues in Southeast
Asia
• In basic record keeping and other functions of provident and
pension fund administration, Singapore and Malaysia have
reached fairly high level of effectiveness as indicated in Table
2.
• There are other Southeast Asian countries, most notably
Indonesia and Philippines, where lower administration costs
could help improve pension systems.
• Philippines however has been making considerable use of the
IT systems to improve administration and compliance with its
social security schemes. Nevertheless there is room for more
progress.
Table 2: Administrative Efficiency of National Provident Funds in
Singapore and Malaysia (~2006)
Source: Calculated by the Author.
16
Table 3:Malaysia: EPF, Real Rate of Return to Members
Year Nominal Dividend Rate Inflation Rate (CPI) Real Rate of Dividend
Source: Calculated from data from EPF (2009)
17
Figure 2: Malaysia: Investment Allocation of EPF: 1991‐2008
Note: MGS – Malaysian Government Securities; D & L – Debentures and Loans; Equi – Equities; MM – Money Market.
Source: Calculated from the Annual Reports of the EPF.
18
Pension Reform Avenues in Southeast
Asia
• Malaysia’s EPF has been permitted in the 2010 budget to
invest a portion of its assets abroad. Thus in the future
greater geographical diversification of pension assets is likely.
• Thailand’s Government Pension Fund (GPF) has however
already diversified its portfolio geographically. The asset
allocation as at December 31, 2009 is shown in Figure 3.
• The real rate of return (Figure 4) has generally been positive.
Figure 3: Thailand: Asset Allocation of GPF
Source: GPF Website, http://www.gpf.or.th/Eng/port.asp
20
Figure 4: Thailand ‐ Rates of Return from EPF,
1997‐2008
21
Source: GPF Website, http://www.gpf.or.th/Eng/perform.asp
Pension Reform Avenues in Southeast
Asia
• These initiatives could potentially lead to higher returns,
though risks have also increased.
• For the low‐income countries ‐Cambodia and Laos‐ the
priority should be to build capacities of their provident and
pension fund organizations to undertake the core functions
noted above more efficiently. Realizing the limitations of their
financial and capital markets, relatively conservative
investment policies are warranted. Greater emphasis on
record keeping functions and on reducing administrative and
compliance costs merit serious consideration.
Pension Reform Avenues in Southeast
Asia
• Avenue 2: Parametric and/or systemic reforms of some components of
existing systems (such as civil service pensions).
• Many of the provident and pension fund programs in Southeast Asia were
established in a pre‐globalization and pre‐cold war era basis. The design
details of these programs also do not reflect the current tendency
towards reduced fertility, and longer life expectancy. They also do not
fully reflect developments in financial and capital markets, and changing
labor market dynamics.
• In pension economics, there is a “tyranny of small numbers” where a
seemingly minor change, such as in life expectancy of the beneficiaries of
the provident or pension scheme, or in the real rate of return credited to
members’ accounts, could have a disproportionately large impact on
retirement income security.
Pension Reform Avenues in Southeast
Asia
• The above observations are particularly relevant for the civil
service pension schemes in Southeast Asia. With few
exceptions, the detailed provisions of these schemes have not
been rationalized to reflect the new environment. For
example, longer life expectancy suggests that the age at
which the members should become eligible for full pensions
should be increased.
• However in many of the countries such as Malaysia and
Indonesia, the retirement age for civil servants remains
between 55 and 65 years, with lower retirement age for
women (for example, in Vietnam) even thought their life
expectancy, on average, is higher.
Pension Reform Avenues in Southeast
Asia
• There are also examples of parametric reforms in other
countries in the region. Singapore has introduced a deferred
annuity scheme called CPF Life to help address the longevity
risk. Several countries such as Singapore, and Malaysia are
encouraging retired individuals to be at least partly active in
the labor market through a variety of measures.
• Many countries such as the Philippines and India are
tightening up on pre‐retirement withdrawals from their
provident and pension schemes. This will ensure that the
power of compound interest is harnessed for a longer period.
• Singapore has been experimenting with converting housing
equity into retirement income streams. Their impact so far
has been limited.
Pension Reform Avenues in Southeast
Asia
• Avenue 3: Using different types of retirement income
transfers, which do not entirely depend on formal labor
market relationships.
• These include social pensions, and co‐contributions by the
State. For poverty alleviation, social assistance targeted at
poor in all age groups may be needed. The country papers
provide several examples.
• Thailand’s 30‐Baht Scheme for healthcare (introduced in
2001) has not only been continued but also expanded with
greater state support. In stimulus packages of several
countries in Asia, there is a significant social assistance and
retirement income transfer component.
Pension Reform Avenues in Southeast
Asia
• Singapore has implemented one‐off cash payments to
citizens’ provident fund accounts. The Community
Development Councils provide some social protection to the
indigents, however this is means tested.
Pension Reform Avenues in Southeast
Asia
• Other Avenues
• Countries such as Malaysia, Thailand and the Philippines are
encouraging occupational private pension plans and/or individual
retirement accounts to broaden the sources of retirement financing
and risk sharing.
• Indonesia is encouraging the linking of pension with microfinance.
Policy makers hope that this will also assist in enhancing financial
inclusion and strengthen social cohesion. In some countries such as
Japan and Singapore, there is recognition that human capital has
similarities with a financial instrument, such as a bond, which could
enable members to earn part of their retirement needs by
participating in paid economic activity, even during retirement.
• There is a strong case for other countries, particularly the middle
income countries, to consider innovation along this avenue.
Concluding Remarks
• In addition to greater professionalism in designing, implementing,
evaluating the economic and social impact of pension systems, the
following three broad themes would need to be considered by the
policymakers in Southeast Asia. These are:
• (i) The need to Integrate Social Security Policies by viewing them as
integral part of the overall economic, social, and human resource
management in Southeast Asian countries.
• (ii) Need to take a systemic view which permits all elements of the
system to be consistent in improving retirement income benefits
and in pursuing good governance practices. The regulatory
arrangements may need to be reviewed in Southeast Asian
countries to achieve this objective.
• (iii) Need for Complementary Reforms in Other Areas such as Labor
Market, Delivery of Public Services, and financial and capital
markets.
Concluding Remarks
• ASEAN Social Security Association (ASSA) Forum is useful but
there is need for it to play a greater role in pension reform.
• It should also be a forum for empirical evidence‐based
comparative social security research in Southeast Asia.
• This will require developing disaggregated and robust
mortality and morbidity database in the region, and
strengthening indigenous research capabilities of member
countries.
• Graduate level professional programs in social security
management and pension economics merit serious
consideration of relevant stakeholders in Southeast Asia.