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Asia - success or failure?
Provident funds governance
Many Asian countries rely on provident funds to finance retirement. Globalisation,
rapid ageing, a need for fiscal consolidation and more individualistic
preferences have increased the significance of provident funds, but substantive
reforms in their governance are needed to realise their full potential.
Provident funds collect mandatory contributions, with the investment
risk being borne by the plan member rather than by the plan sponsor. Provident
fund accounts move through two main phases (Figure 1).
In an initial accumulation phase, provident fund account balances expand
as pension contributions grow with compound interest. This requires that
pre-retirement withdrawals be minimised and that positive real rates of
interest are earned. In a second phase, the funds accumulated over the
working years are used during retirement. During this phase, longevity
risk (the risk that a person may outlive his or her resources) and inflation
risk (the risk that the real value of fund balances decline) must be addressed.
Norm of centralisation
In both phases, investment policies and performance are of crucial importance.
As provident fund contributions are in the nature of contractual long-term
savings, their investment in profitable projects can increase fund balances
and enhance long-term rates of economic growth. With the exception of
Hong Kong, centralised investment management by the provident fund authorities
has been the norm in Asia.
The pension literature draws attention to the importance of governance
issues in fund investment. These concern
- responsibility for trusts, i.e. balancing risk and returns in investing
the funds
- tractability, i.e. ensuring that all dealings of the provident fund
are undertaken in a transparent manner
- accountability, i.e. establishing procedures to hold provident fund
management responsible for the fund outcomes.
Managing investments
In all Asian countries, investment policies and performance are in need
of substantial improvement. In high income but rapidly ageing Singapore,
a government investment company whose operations are by law non-transparent
and non-accountable is ultimately responsible for the investment of provident
fund balances. This has led to a highly regressive large tax on provident
fund wealth and to low replacement rates. In others, such as Thailand,
Malaysia, and Sri Lanka, international diversification of provident fund
assets is lacking. As their domestic financial and capital markets have
limited depth, there is an overemphasis on government securities and other
government guaranteed assets in their portfolio. Lack of independence
from the political authorities has complicated the investment function
in Asia.
In most developing countries, performing the core administrative tasks
of provident funds satisfactorily remains a major challenge. There is
also a need to review periodically the relevant laws, regulations, organisational
structures and procedures, and design details of various schemes of the
provident funds. Some Asian countries, such as Malaysia and Singapore,
have been fairly successful in undertaking core administrative tasks effectively
while others, such as India, Indonesia, and Sri Lanka, need to make substantial
progress in this area.
Strategies for change
Consideration should be given to setting up national regulatory agencies
for the pensions sector. Such agencies, staffed by independent-minded
and competent professionals, could help ensure greater professionalism
and educate stakeholders on the importance of governance issues. Strategies
for changing the organisational culture of provident funds are also required.
Encouraging research on pension issues within each country may assist
in developing more informed and locally relevant pension programmes and
strategies. Complementary reforms in the financial and capital markets
and in corporate and state-owned enterprise governance are also essential.
In the final analysis, there is no substitute for creating a policy environment
in which provident funds can pursue good governance.
Mukul G Asher
Public Policy Program
National University of Singapore
mppasher@nus.edu.sg
See also
'Social Security Institutions in Southeast Asia after the crisis', in
Reconfiguring East Asia, M.Beeson (eds), London: Routledge Curzon, pp.83-98
by M. G. Asher, 2002.
'Reforming Pensions: Myths, Truths, and Policy Choices', International
Monetary Fund, Fiscal Affairs Department, WP/00/139, Washington, D.C,
by N. Barr, 2000
'Building Pension Institutions: Administrative Issues' in Proceedings
of the Third APEC Regional Forum on Pension Fund Reform, 120-132, Bangkok,
by S. G. Ross, 2000
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In most developing countries, performing the core administrative tasks
of provident funds satisfactorily remains a major challenge
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