EMPLOYER ACTION CODE: ACT

Efforts to introduce an occupational mandatory provident fund (MPF) to the Thai benefit market are long-standing: Draft plans for a defined contribution MPF for retirement savings have circulated around government ministries for years but never were approved by parliament. The cabinet has now approved the introduction of an MPF regime starting in 2018, but the bill must still be submitted to the Council of State and the National Legislative Assembly for formal approval. Details are still unclear, as it will take some time for parliament to consider and finalize the changes. The move is the latest in a series of initiatives to encourage both public and private sector employees to save for retirement. Separately, the cabinet proposed amendments to the Labor Protection Act (LPA) that set a statutory retirement age of 60 when an employer has not specified a retirement age in its internal rules. The proposed amendments would also clarify that severance is payable at retirement and eliminate the obligation for companies with 10 or more employees to submit their work rules to the Department of Labor Protection and Welfare.

KEY DETAILS

Proposed MPF:

  • A phased implementation is expected, starting with companies with 100 or more employees in 2018, with a gradual rollout to all employers over seven years.
  • Employers and employees would each be required to contribute 3% of salary up to 60,000 baht per month for the first three years after implementation. Employer and employee contribution rates would gradually increase to 10% each 10 years after implementation. (Only the employer would contribute for workers earning under 10,000 baht per month.)
  • Companies that already provide a voluntary provident fund program offering equivalent or better benefits would not be required to participate.
  • The MPF may be managed by a centrally controlled government organization or by privately run asset management companies; details of how the MPF will be managed are yet to be confirmed and finalized by legislation.

Proposed changes to statutory retirement age, severance entitlement and submission of work rules:

  • There are currently no statutory provisions governing retirement age or statutory retirement indemnities. Normal retirement age has traditionally been covered in company rules of employment or individual employment contracts. At retirement, employees are entitled to severance benefits, as, by prevailing legal standards, retirement is generally interpreted as termination of employment. However, if the process for retirement has not been specified by the employer or contract, entitlement to severance at retirement may be less clear under certain circumstances. Proposed amendments to the LPA would stipulate that retirement would be considered termination of employment with attendant entitlement to severance. A statutory retirement age of 60 would apply in all cases where it was not stipulated in the work rules or employment contract.
  • Changes to work rule requirements for companies with 10 or more employees would remove the obligation to submit the rules to the Department of Labor Protection and Welfare for approval and registration. Employers would still be required to prepare, distribute and maintain the rules, which would have to be available for workplace inspections.

EMPLOYER IMPLICATIONS

MPF implementation details and the outlook for passage remain uncertain, but it is important for employers to be aware of the proposed changes and their potential impact on benefit plans and costs. For one thing, the target aggregate contribution rate on full implementation of the MPF is roughly double current market practice for the funding of voluntary employer retirement plans, at the median.

Although previous MPF proposals weren’t realized, continued fiscal and demographic pressures on the social security system are driving the government to strengthen employer-based retirement savings. According to the latest World Bank estimates from 2016, approximately 25% of the Thai population will be age 65 or older by 2040.

Willis Towers Watson’s Global Benefit Attitudes Survey 2015/16 indicated 43% of employees in Asia Pacific are concerned about their financial futures, reflecting similar attitudes in Thailand. If enacted, the mandatory MPF would bring about the most substantive change to the Thai pension market in a generation. Discussion and debate around the proposal will also provide employers with an opportunity to review their existing arrangements and adequacy to support employees’ long-term financial needs.