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

ienemuliati@hotmail.com