actuarial study on the new pension scheme (bpjs … · 2017-03-22 · bogor, 7th march 2017 nuno...
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Actuarial Study on the new pension scheme (BPJS Ketenagakerjaan)
Bogor, 7th March 2017Nuno Cunha – Senior Social Protection Specialist
Scope of the Actuarial Study
– Assess the financial sustainability of the new pension system that has been in place since 1 July 2015
It’s not a magic crystal ball
3
Income security for old ageOverview of the current system
Coverage
• Different schemes for civil servants, army and police
• Very limited coverage for informal economy workers
• Cash transfer targeting the “vulnerable” elderly (part of PKH): very limited coverage
• Majority of the elderly still depends on family and other available support
4
Income security for old ageOverview of the current system
Benefits
• Labour Law (Severance and service reward pay): lump sum
• Severance Pay (UP)
• Reward for Working Time (UPMK)
• Compensation Fee (UPH)
• Provident Fund for private-sector workers: lump sum
• Pension for civil servants: periodical payments
• New pension scheme for private sector employees
Labour Law No. 13/2003
UP – 9 months of salary for more than 8 years
UPMK – 10 months of salary for more than 24 years of services
UPH – 15% of the amount of UP and UPMK
Ex: worker >24 years of service2XUP +15%X(2XUP+UPMK)(2X9+10)X1.15Xmonthly salary
= 32.2 X monthly salary
If an employer contributes to a private pension plan total amount is lower (does not includes UP)
Provident Funds
• Contribution rate – 3.7% employee’s
– 2.0% workers
– Possible to withdraw 30% of the amount accumulated for housing plus 10% for other purposes after 10 years of contribution
On former PT Jamsostek 75% of all the funds were withdraw before reaching retirement age
Pension
• 15 years of contributions• Retirement Age: 56 until 2019
– Increase to 57 in 2019 and then 1 year increment every 3 years
• Formula – 1% X number of years of service X average career index salary
• Contribution rate: 3% (2% E / 1% W)• Insurable earnings:
– Ceiling is 7 million Rp.– Adjustable to annual GDP growth
• Maximum Pension – 3.6 million Rp. (adjusted to inflation)• Minimum Pension – 300 000 Rp per month (adjusted to
inflation)
8
Income security for old age: Overview of the current system
Finance
• Labour law: employers’ direct compensations
• Provident Fund: external, individual accounts
• Pension: external, collective financing (redistribution)
(some) Key assumptions used
Total Fertility Rate
0
1
2
3
4
5
6
Expected to decrease to 1.9 by 2045 and to
be kept constant
Life expectancy at selected ages
Men Women
Year
At 0 At 20 At 60 At 0 At 20 At 60
2010 66.4 49.6 15.2 70.5 53.3 17.8
2035 70.1 52.1 16.5 74.9 56.4 19.4
2060 73.6 54.8 18.0 78.4 59.1 21.1
2085 77.6 58.2 20.1 81.4 61.7 22.9
12 300 0007 300 0002 300 0002 700 0007 700 000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80-84
85-89
90-94
95+
Ag
e
Year : 2010Males Females
12 300 0007 300 0002 300 0002 700 0007 700 000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80-84
85-89
90-94
95+
Ag
e
Year : 2060Males Females
12 300 0007 300 0002 300 0002 700 0007 700 000
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Ag
e
Year : 2035
FemalesMales
12 300 0007 300 0002 300 0002 700 0007 700 000
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Ag
e
Year : 2085
Males Females
• Average age is 28.8 years old (2010) - will increase to 42.5 years(2110)
• Total population will increase to 325,952,588 (2073),then willgradually decrease
Demographic Projections Indonesia
• Dependency Ratio 15-64/65+– 2015 – 12.8– 2060 – 4.3– 2110 – 2.7
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110
0-14 15-64 65-
Proportion of formal-sector workers and self-employed persons
2004 2005 2006 2007 2008 2009 2010 2011 2012Proportion of workers in the formal sector 30.3 30.7 31.1 31.0 30.4 30.7 33.1 37.8 39.9Proportion of workers that are self-employed (WB) 68.1 66.4 66.1 66.0 67.4 66.6 64.6 60.6 N/A
2013 2063 2113
Population (no. of persons)
Total 246,951,012 325,135,290 311,871,998
Population aged 15−69 (no. of persons)
Total 169,668,855 229,573,409 206,808,045
Labour force participation rate (%)
Males 85 84 83Females 53 66 65Total 69 75 74
Unemp. rate (%) 6.3 5.0 4.9
Formal sector (%) 40.4 58.7 58.0
Labour Market Balance
Inflation, real salary increase and real GDP growth
0
1
2
3
4
5
6
7
8
20
14
20
17
20
20
20
23
20
26
20
29
20
32
20
35
20
38
20
41
20
44
20
47
20
50
20
53
20
56
20
59
20
62
20
65
20
68
20
71
20
74
20
77
20
80
20
83
20
86
20
89
20
92
20
95
20
98
21
01
21
04
21
07
21
10
21
13
Inflation Real Salary Real GDP
Schedule of increase in pensionable age
50
52
54
56
58
60
62
64
66
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
21
08
21
11
Projected PAYG rates (in per cent of insurable earnings)
GAP – 10,2%
0
5
10
15
20
25
20
15
20
19
20
23
20
27
20
31
20
35
20
39
20
43
20
47
20
51
20
55
20
59
20
63
20
67
20
71
20
75
20
79
20
83
20
87
20
91
20
95
20
99
21
03
21
07
21
11
PAYG – 22.5 (2015)
With a ratio reserve/expendi.
of 5%
Projected benefits and reserve in relation to GDP
• Until 2043, annual contributions are sufficient to pay for all annual expenditures
• From 2044 to 2049, annual investment income from the reserve must be partly used to pay for annual expenditures
0.0
0.5
1.0
1.5
2.0
2.5
3.0
20
15
20
19
20
23
20
27
20
31
20
35
20
39
20
43
20
47
20
51
20
55
20
59
20
63
20
67
20
71
20
75
20
79
20
83
20
87
20
91
20
95
20
99
21
03
21
07
21
11
Benefits to GDP Reserve to GDP
• From 2050, the reserves will be used to pay for annual expenditures.
• The reserves will be depleted during the year 2058
MAIN RECOMMENDATIONS
http://theletmebefrankguy.com/life-transformation-411-day-1/
Introduction of Universal Pension
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
20
36
20
38
20
40
20
42
20
44
20
46
20
48
20
50
20
52
20
54
20
56
20
58
20
60
20
62
Age 60, adjusted to inflation Age 65, adjusted to inflation
Age 60, adjusted to salary Age 65, adjusted to salary
Granting past service to initial
members near retirement
• Problem identified– During 15 years nobody will receive a pension– Long time before pensioners will be able to receive
35 per cent of their average insurable earnings• Risks the relevance with political implications
• Policy Solution - Providing a certain number of years of service to the initial insured members for calculating benefits
How could it work?
• Those aged:– 56 in 2015 and over would be awarded with 15
years of service;
– 55 would be granted 14.5 years of service,
– 54 would be granted 14 years of service, and so on.
– Recognition of past service can be conditional to having contributed to the scheme for at least a given number of years.
Granting past service, PAYG, in per cent
0
5
10
15
20
25
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
21
08
21
11
21
14
Granting past service Base Scenario
Granting past service, Replacement ratios by benefit type
0
5
10
15
20
25
30
35
40
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
21
08
21
11
21
14
Old age pension - Granting service Invalidity pension - Granting service
Survivors pension - Granting service Old age pension - Base
Invalidity pension - Base Survivors pension - Base
Better alignment with C102 principles
Adequacy
Sustainability
Predictability
A Old Age Pension that better fits
Convention 102
• Replacement rate for 30 years of contribution must be at least 40 %
• The current annual accrual rate - 1 %
• The revision of the accrual rate for the first 30 years of contribution may be considered
• Annual accrual rate should be at least 1.33% for the first 30 years
A survival pension scheme that fits Convention 102
• Replacement rate for 15 years of contribution must be at least 40 %
• Currently is only 15%
Sensitivity analysis: Minimum ILO standards
Scenarios GAP
(%)
PAYG 2115
(%)
Year reserve = 0
Base 10.2 22.5 2058
ILO standards 12.6 27.4 2053
Alternative - reallocate money from other social security scheme, including labour protection programmes – ensure periodical payments
Estimated income replacement level
for a male, retirement age at 56
with 30 years of services
Labour Law
Real return on assets (%)
Real salary increase (%) 2 3 4 5 6
2 13 14 16 18 20
3 13 14 16 18 20
4 13 14 16 18 20
5 13 14 16 18 20
6 13 14 16 18 20Provident Fund
Real return on assets (%)
Real salary increase (%) 2 3 4 5 6
2 8 11 15 19 25
3 7 10 12 16 21
4 6 8 11 14 18
5 6 7 9 12 16
6 5 6 8 11 14Pension Benefits
Real return on assets (%)
Real salary increase (%) 2 3 4 5 6
2 30 30 30 30 30
3 30 30 30 30 30
4 30 30 30 30 30
5 30 30 30 30 30
6 30 30 30 30 30Total
Real return on assets (%)
Real salary increase (%) 2 3 4 5 6
2 51 55 61 67 75
3 50 54 59 65 71
4 49 53 57 62 68
5 48 52 56 60 66
6 48 51 55 59 64
Adoption of a scaled premium
contribution rate• PAYG contribution rate (100 years) 22.5%• GAP – 10.2%• Increasing the contribution rate by 2 % every 10 years starting in
2025 is shown for considerations
0%
5%
10%
15%
20%
25%
20
15
20
19
20
23
20
27
20
31
20
35
20
39
20
43
20
47
20
51
20
55
20
59
20
63
20
67
20
71
20
75
20
79
20
83
20
87
20
91
20
95
20
99
21
03
21
07
21
11
PAYG Base scenario Scaled premium
Evolution of the reserve ratio
-60
-50
-40
-30
-20
-10
0
10
20
30
40
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
20
55
20
60
20
65
20
70
20
75
20
80
20
85
20
90
20
95
21
00
21
05
21
10
Scaled premium Base scenario
Indexation of the contribution ceiling and the maximum and minimum pensions
• Average annual wage increases are expected to be higher than inflation
• The indexation of maximum annual pension in line with CPI will result in problems in the long run– Gradual share of the scheme replacement rate will go down
– No incentive to declare
• The average insurable earnings required in 30 years to obtain the maximum will be 75% lower than the maximum insurable earnings in 2115
• Recommendation: Index Max annual Pension with average wage growth
Replacement ratescurrent law and base scenario
0
5
10
15
20
25
30
35
402
01
5
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
21
08
21
11
21
14
Old age - Law Invalidity pension - Law Survivors pension - Law
Old age pension - Base Invalidity pension - Base Survivors pension - Base
Projected PAYG rates, current law and base scenario
0
5
10
15
20
25
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
21
08
21
11
21
14
Current law Base scenario
Funding PolicyIn order to:
– Explain the type of funding
– formalize the long-term funding objectives of the scheme, for example defining: • The equilibrium period
• Minimum level of reserves over the long term. This objective is a major driver of increasing the contribution rate;
– better understand the risks and advantages of financing options
– enhance scheme governance by increasing transparency.
Funding PolicyShould include:
• Contribution rates
• Risks faced by the scheme and how these risks can be managed
• Funding objectives (like contribution stability or improving the funding ratios)
• Frequency of actuarial valuation, method of actuarial projection
• Goals related to intergenerational equity
Long Term Investment Policy
• Well-documented investment policy should be implemented
• Based on risk management principles and international guidelines
• Proper balance between higher investment returns and the long-term stability
• The choice of the financing strategy will affect considerably the level of assets to be held in the fund and the level of assets will affect considerably the future level of contribution rates.
Funding and Investment PolicyImportant Questions
