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Indonesian Pension System Overview:Issues and ChallengesIene Muliati, FSAIVice President, International RelationsSociety of Actuaries of Indonesia
Agenda
• Background• Pension Overview• Issues and Challenges• Summary
Demography
0
50
100
150
200
250
300
2009 2010 2015 2020 2025
Mill
ions
0-14 15-19 20-24 25-44 45-54 55-59 60-64 65+
Source: Data Statistik Indonesia downloaded on 28 September 2009
Labor Force
Population age 15 and above by type of activity
0102030405060708090
100110120130140150160170
2004 2005 2006 (August) 2007 (August) 2008 (August) 2009 (Feb)
Milli
ons
Year
Num
ber o
f peo
ple
1 Population 15+ 2 Labor Force 2a. Working 2b. Unemployment
3 Not in Labor Force 3a. Schooling 3b. House Keeping 3c. Others
Source: National Labour Force Survey 2004, 2005, 2006, 2007, 2008 and 2009
GDP
Source: Asian Development Bank - Key Indicators for Asia and the Pacific 2009, 40th Edition, August 2009
2000
2500
3000
3500
4000
4500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
3
3.5
4
4.5
5
5.5
6
6.5
GDP per capita at PPP (current international dollars) Growth rates of real GDP (percent)
Other Key Indicators
Source: Asian Development Bank - Key Indicators for Asia and the Pacific 2009, 40th Edition, August 2009
02468
1012141618
2000 2001 2002 2003 2004 2005 2006 2007 2008
Year
0
2000
4000
6000
8000
10000
12000
Growth rates of consumer price index (percent)Interest rate on time deposits of 12 months (percent per annum, period averages)Interest rate on savings deposits (percent per annum, period averages)Exchange rate
Indonesian Pension Structure
• Pensions for the civil service and members of the armed forces
• Mandatory pension plan for workers (Jaminan Sosial Tenaga Kerja [Jamsostek])
• Voluntary private pension plans
• National Social Security System?
Pensions for workers
Pillar IIVoluntary Private Pension Plans
Pillar IMandatory Pension Plan •JAMSOSTEK
Non-compulsory DB or DC Plan• Financial Institution Pension
Fund (FIPF)• Employer Pension Fund
(EPF)
Pillar INational Social Security System? Labor Law 13
Mandatory Pension Coverage
Source: OECD-World Bank (2008), ADB staff estimates for Malaysia and Singapore.
Uncovered population is still large…
Replacement Rates
Source: Pensions at a Glance: Asia/Pacific Edition, OECD, 2008
Issues (1/2)
• Development of a stronger social security system is a main need
• Prior to 1992, pension programs were mostly on pay as you go basis
• Existing mandatory savings programs are generally low in coverage, fully funded, but generating relatively low long term asset accumulations
Issues (2/2)
• Retirement annuity portfolio is small in volume, partly because savings programs’ benefits are paid out as lump sums at retirements/earlier terminations
• Generous termination benefits under Labor Law 13
• Nowadays DC plans are more popular than DB plans
• Total asset of industry compared to GDP was far less than other neighboring countries
Funding Requirement
• Funding is required for pension plans under Indonesian Pension Law through Employer Pension Fund (EPF) or Financial Institution Pension Fund (FIPF).
• There was an attempt to require funding for Labour Law 13 benefits in 2007 but this is still awaiting enactment
• No requirement yet for funding for other plans, but funding can be made through insurance contracts
Reporting Requirement
• Actuarial Report– Annual technical report requirement– Standardization in reporting format – Adoption of late payment fees for any late report
submission
• Pension Accounting Report– Fully implementation of local GAAP (PSAK 24) in
2004– Ongoing discussion on potential adoption of global
accounting standards
Pension Investment Requirement
• Restriction in investments to only 13 types of investments issued by institutions established under Indonesian jurisdiction
• Restriction in total asset allocation to any single party
• Reports submission to the Ministry of Finance
Good Pension Fund Governance Requirement
• Introduction of Indonesian Good Pension Fund Governance in January 2008 to increase supervision and strengthen pension industry
• Introduction of a new approach of supervision, SPERIS-SANBERRIS, a risk management approach in June 2008
• Different level of supervisions will be made depending on the risk exposure levels
Private Pension Funds
EPF: Employer Pension Fund FIPF: Financial Institution Pension Fund
Source: 2006 Bapepam-LK Annual Report
2002 2003 2004 2005 2006DB - EPF 272 265 255 245 235DC - EPF 37 34 25 35 37FIPF 27 28 24 23 25Total 336 327 304 303 297
Type of Program
Number of Pension Funds
Net assets by type of pension programs
Return on Assets Experience of Private Pension Funds
EPF: Employer Pension Fund FIPF: Financial Institution Pension Fund
Source: 2006 Bapepam-LK Annual Report
Funding Ratio Distribution
Source: 2006 Bapepam-LK Annual Report
Funding Ratio
0
2040
60
80100
120
2004 2005 2006
Year
% o
f pen
sion
fund
s
Less than 50%50% - 75%75% - 100%More than 100%
Challenges (1/2)
• Mismatch between pensions being offered and philosophy of pensions
• Limited knowledge and expertise in retirement plan management and investment management of pension funds
• Failure to understand the effect of external changes to the future obligations of pension funds
Challenges (2/2)
• Limited public education and understanding on pensions
• Undeveloped market for defined contribution and individual savings
Summary (1/2)
• Development and implementation of national social security system are key issues
• Need stronger regulatory supervision to improve compliance of good pension governance requirement to minimise plan risks
• Need better alignment of retirement plans and their objectives and philosophy
Summary (2/2)
• Need better understanding cost impact of retirement plans and key factors affecting the retirement plans
• Investment income is a very important source for meeting future obligations. Therefore, an investment strategy needs to be developed by reference to plan liabilities and funding strategy
• Redesign the retirement scheme to the core need of ensuring future income for people
Contact Details
Iene Muliati, FSAI
Society of Actuaries of Indonesia
(Persatuan Aktuaris Indonesia)
+62 21 835-5105