Assessing the Potential of Socially Responsible Investments in Asian Pension Systems

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Assessing the Potential of Socially Responsible
Investmentsin Asian Pension Systems

• Priti Shokeen,
• Kingston Business School, UK
• Kobboon Chotruangprasert,
• Schulich School of Business.
• Dan Li
• Schulich School of Business

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Overview of 3 Asian CountriesChina, India and
Thailand
Securities and Exchange Board of India, 2006
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Overview of Global SRI Funds (USD)
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Overview of China Pension System-1

• Three-Pillar Model
• Pillar I mandatory, DB personal account
• Pillar II employer-sponsored voluntary pension,
  DB or DC
• Pillar III voluntary savings
• Estimated replacement ratios are 60, 20
• and 10 respectively.

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Overview of China Pension System-2

• Enterprise Annuity (EA)
• Introduced in 2000.
• DC.
• Trust.
• Investment not less than 20 in money market, up
  to 30 in investment-linked insurance products,
  stocks and equity funds.
• Non EA occupational pension plan -- 7 million
  people, USD 6.4 billion by the end of June 2004.

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Overview of China Pension System-3

• National Social Security Fund (NSSF)
• Provide financial support to pillar I
• Assets USD 261 billion by 2005, 4.16 for 2005
• Investment can be invested in equities, 34.48
  managed by 10 domestic money managers.

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Potential of SRI in EA

• Government Initiatives to promote good corporate
  governance and environment protection
• Enterprises active adoption of socially
  benevolent and environmentally responsible
  practices
• Awareness of environmental issues by general
  population.

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Challenges

• Limited knowledge and misconceptions of SRI by
  fund managers
• Lack of links between investment returns and SRI
  strategy
• Absence of interest in and support to SRI by
  regulators
• Lack of investor education
• Lack of information of listed companies on SRI
  issues.

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Recommendations

• Educations of investors and fund managers to
  eliminate misunderstanding
• Speed the reform of security market to improve
  transparency, corporate governance and develop
  proxy voting guidelines
• Improve corporate information disclosure related
  to CSR
• Track the performance of SRI to attract investors

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Overview of Indian Pension System-1

• Limited Coverage- 11 of working population
• For organised private sector (establishments with
  more than 20 employees)- EPF and EPS
• National Old Age Pension Scheme
• For government employees- GPF
• Investments allowed only in government securities

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Overview of Indian Pension System-2

• New Pension System (NPS)
• Move towards DC- individual retirement accounts
  (IRA)
• Currently open to civil servants only
• Full implementation pending on approval of
  Pension Fund Development and Regulatory Authority
  (PFDRA) Bill
• Will allow investments in other instruments such
  as equities.
• Moving towards privatisation of pension sector
• Companies gearing up to offer products and
  services upon passing of the bill.

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Potential of SRI in NPS-1

• Embryonic stage-easier to orient now than change
  later
• Entry of private fund managers- more choices in
  products
• The onus of retirement provision and investment
  choices on the individual, thus, more space for
  values and ethics
• High Potential for SRI products, if, privatised.

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Potential of SRI in NPS-2

• Increasing sensitivity to development and
  corporate social responsibility
• Increasing individual participation in the
  capital market
• A society in change

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Challenges

• Slow consensus process between the minority
  government and the Left parties on privatisation
  of pension sector
• Lack of pension education in general
• Lack of awareness of capital market mechanisms
  and how these could be leveraged for common good
• DC model manifests lack of capital ownership,
  thus, sidelining any ownership obligations

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Recommendations for Government

• A faster pace to privatise the pension sector
  with an effective regulator
• Create educational programmes for its
  constituents to equip them for making informed
  choices
• Create mechanisms to enhance stability of Indian
  capital market
• Create legislation to protect the individual
  retirement account holder such as fiduciary
  responsibility and due diligence (non-existent in
  current discussions) of fund managers
• Devise proper grievance reporting mechanisms for
  the constituents

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Recommendations for Future Service Providers

• Customise SRI pension products to local issues
• Provide full disclosures on investments to
  clients

Recommendations for CSR and other civil society
organisations

• Educational programmes vis a vis CSR and SRI
• A participatory, vigilant and active
  approach towards pension issues

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Overview of Thai Pension System

• Three-pillar model
• Old Age Pension Fund (OAPF) and Government
  Pension Fund (GPF)
• GPF
• Provident Fund and Retirement Mutual Fund (RMF)
• A large part of population not covered under
  social safety net

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Social Security (OAPF)

• 7 benefits sickness, maternity, invalidity,
  death, child allowance, old age pension,
  unemployment
• Fund size 370,577 M Baht (CAD11 billion) in
  June 2006
• Number of members 8.74 million
• Contribution rate 5 of wages from employers and
  employees 2.75 from the government

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OAPF Investment Portfolio
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OAPF SRI Potential

• Low potential for SRI
• Relatively small investment in common shares
  (gt60 must be invested in highly secured
  assets)
• Foreign investment in government bonds with AA to
  AAA ratings only
• No evidence of SRI considerations

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Government Pension Fund

• Fund size THB 287 billion (CAD8.6 billion) in
  December 2005
• Number of members 1.17 million
• Contribution rate 3 of salaries from employees
  3 2 from employer (government)

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GPF Investment Portfolio
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GPF SRI Potential

• High potential for SRI
• A signatory of the UN Principles for Responsible
  Investment
• Written SRI policies
• Foreign investment in both fixed income and equity

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Provident Fund

• Net asset value THB 346 billion (CAD10 billion)
  in December 2005
• Number of members 1.7 million
• Number of certified asset management companies 20

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Provident Fund Investment Portfolio
As of 31 Aug. 2006
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Provident Fund and RMF SRI Potential

• Medium potential for SRI
• SRI practice currently non existent
• No domestic SRI research companies
• Foreign equity investment allowed (max. USD40
  million per fund).
• SRI as potential marketing niche for asset
  management companies

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Important Considerations

• Political instability
• Low labor standards
• Little public awareness of SRI
• Pension industry growing in size and
  sophistication
• High awareness of corporate governance
• More Thai companies reporting on CSR

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Recommendations

• Education of both pension system and SRI to
  investors, general public and university students
• Working with NGOs (e.g. Thai Investors Club, SVN
  Asia)
• Cooperation from Buddhism organizations
• Promoting SRI as a localized concept related to
  corporate governance

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Conclusions!
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Questions