Provident funds in Asia: Some lessons for pension reformers

As the British were dismantling their empire in the 1950s, they generally left behind a pension legacy consisting of two elements. One was a conventional defined benefit pension scheme for government workers, basically budget–supported. The other was a provident fund for those in the industrial and urban formal sector. Some components of the empire chose to ignore London’s advice to create a provident fund — notably Hong Kong, which only recently has created an employer–based system for its workforce. Three features traditionally define state provident funds: central management (with some contracting–out exceptions), a formal structure of individual accounts, and lump sum withdrawals. The term has begun to migrate, however. In Hong Kong, the new mandatory system is called a mandatory provident fund, though it works on a very decentralized basis through employers and requires workers to make their own investment choices. The term is also used in Thailand to describe various schemes that apply to government workers and some private sector firms, along with an evolving pensions system. This paper will concentrate on the four “classic”, colonial–era–derived provident funds of Singapore, Malaysia, India and Sri Lanka.