Flipping the bug

Have you ever seen a bug flipped on its back, struggling to right itself? If it cannot flip over, it will die. With growing financial problems, Thailand's Social Security Fund (SSF) unfortunately resembles a bug in such a dire position. The Thai SSF is a mandatory fund set up to guarantee Thai employees an income in case of illness, maternity leave, injury and after retirement. The SSF falls under the Ministry of Labour and is managed by the Social Security Office (SSO).

Thailand is nearing a ‘super-aged’ society, meaning more than 20 percent of the population is above the age of 65 years. So, it is even more important that the SSF delivers on its promises. Yet, the SSO estimates that the fund’s reserves will be running out of money at exactly the wrong time. The Fund’s own projections show its reserves will decline by 2034 and turn negative by 2044. 

This disappointing performance is the result of several factors. Part of the problem is that there is a high management fee of (maximum) 10% of contributions, although the SSO claims that it only actually uses about 3%. The 3% is still 100 times higher than the 0.03% management fee of a passive index fund, and all this without delivering better results: annual returns averaged just 2.59% over the past five years, including losses on investments in companies like STARK, EA, and TU DOME. Simply put, pensioners are paying premium fees for below-average performance, and the fund is unlikely to meet its promises when Thailand needs it most. 

The usual response to cover a deficit like this would be to raise the retirement age or the contribution rate, but that is missing the point: whether the SSF can ‘right’ itself has nothing to do with how long or how much workers contribute. It is about how their money is managed. The EU sets common standards ensuring the soundness of working pensions (Solvency II and IORP II Directives), both examples of the right way to do this. Both require EU pension funds and defined-benefit insurance, like the SSF, to keep the bug on its feet (solvency), and to stop it flipping over again (governance).

Solvency: can the bug right itself?

Solvency rules would require the SSF to be liquid enough to cover its promises over the fund's entire lifetime and to calculate its obligations properly.

Such technical provisions consist of money set aside today to match what is already promised in future. IORP II requires a ‘sufficiently prudent actuarial valuation’ of what is owed to the beneficiaries. Solvency II is stricter, requiring a best-estimate-plus-risk-margin calculation, a more rigorous formula than ‘prudent basis' alone. The SSF has no such obligations.

The next question is whether SSF’s assets cover its obligations at every point in time. IORP II always requires assets to cover technical provisions, with a recovery plan if they fall short. Solvency II instead runs a two-tier test for this purpose: Minimum Capital Requirements as the hard floor, Solvency Capital Requirements as the risk-calibrated target, triggering supervisory action if either is breached. The SSF has no obligation to even notice a shortfall, let alone fix one.

IORP II also requires a solvency margin, extra capital held above the reserve, to absorb the risk that the reserve's own assumptions turn out to be wrong, benchmarked around 4% for pension-for-life business. Solvency II replaces the flat percentage with a risk-based capital charge modelled against real volatility. As opposed to Solvency II's explicit prohibition, the SSF pools short-term risks - sickness, maternity, injury - with long-term pension risks in one fund, despite entirely different timelines and claim patterns.

Governance: who will ensure it won't happen again?

Once the bug is back on its feet, good governance will ensure that it does not flip over again. 

IORP II requires a depositary, an independent custodian holding the fund's assets, to flag management decisions that are not in the best interest of the fund’s beneficiaries. Such a requirement would have protected the SSF from paying nearly double the appraised value for an office building. IORP II also requires a ‘fit and proper’ test for anyone managing an IORP’s investment; not just integrity but demonstrated competence for all aspects of a pension fund. The SSF tests only integrity. 

Investment rules provide safeguards for what the fund invests in. IORP II requires every investment decision to meet a ‘prudent person’ standard: proper purpose, no conflicts of interest, and soundness. Thai law requires a 60/40 safe-versus-high-risk asset split, rather than a dynamic and efficient investment strategy. Adopting a prudent-person investment rule would also fix the SSF's risk profile: it would separate investment portfolios by each liability's duration and risk, a requirement no rule in Thai law imposes.

Will parliament flip it back over?

MPs in Thailand hope to flip the bug back on its feet with two legislative proposals. Pheu Thai, in the government coalition, proposes to salvage SSF, patching its governance while keeping its structure (Government Bill). The People's Party's bill (Opposition Bill) aims to replace the SSO's bureaucratic control with an independent board instead. The spirit behind both bills is right, but neither gets to the heart of the problem. There are no clauses introducing a technical provision, a solvency margin, or a separation of short- and long-term risk. Even if the bug is righted, it will fall on its back again in no time. Parliament will need to work together to keep it on its feet.