Is the Undo Act a threat to the stock exchange?

There is, however, still doubt about the main reason for that sharp drop, apart from a decline in world oil prices. How far down would the Thai stock prices go was the question. The Stock Exchange of Thailand stated later that there was nothing unusual disturbing the Thai stock market and that the drop was in line with regional markets. 

But investors had another question: Would the SET Index be put under further pressure from the unloading of stocks from the Government Pension Fund (GPF) over the next eight to nine months in response to the Undo Act?

Recently, the Undo Act Bill – a return to using the rights granted under the original civil-servant Government Pension Act of 1951 – was passed by the National Legislative Assembly. 

Under the act, the old members of the GPF who were in the public service before March 27, 1997, will be given a chance to quit the fund and return to using the rights granted under the original civil-servant pension fund act of 1951.

The GPF was set up in 1997 – during a financial crisis – mainly to help reduce the burden on the government. All civil servants were asked to decide whether they would become GPF members.

Over the past 17 years, the GPF has recorded an average annual rate of return of 7 per cent, except in 2008, when the fund lost 5 per cent because of the global financial crisis that began in the United States.

Some members protested against the GPF, as they wanted to return to receiving their monthly payment after retirement under the Government Pension Act of 1951. 

However, now the members of the old fund who want to leave the GPF must decide by June 30 if they want to revert back to the original system and receive the benefits in October. 

In the base case scenario, the GPF expects 200,000 members – from a total of 700,000 who were in the public service before 1997 – will wish to leave, accounting for Bt40 billion. In the worst case, it projects a 50-per-cent figure that translates into Bt65 billion worth of refunds. 

Those who intend to quit are mainly police and military – a combined 25 per cent of the 700,000 old members – who are given a longer work period on which to calculate their pension funds when retiring. Under the Pension Act of 1951, those who retire will be paid monthly, using their last month’s salary multiplied by the working period and then divided by 50, or not more than 100 per cent of their final month’s salary. 

By this formula, they believe they will receive more monthly funds than from the formula under the pension fund of 1997. That would pay out not more than 70 per cent of the last month’s salary.

The remaining 500,000 members who were in the public service after 1997 will have no rights under the Undo Act.

The GPF, with Bt700 billion in assets under management, said that even the Bt65-billion figure would not be a problem. If the fund unloaded some Thai shares responding to the 11-per-cent portion it weighs in, it would need to unload around Bt6.5 billion of those stocks or Bt1 billion a month over the next six months. 

What if the GPF divests its investments in Thai shares? Though the GPF is confident this would be manageable, there is doubt as to how resistant the Thai stock market would be to that action.