Pension funds play a fundamental role in various aspects of the financial sector. First, the accumulation of pension fund assets is expected to potentially promote both the depth and liquidity in the capital markets. The industry is also peculiar given the nature of asset accumulation and the length of liability. This gives pension funds flexibility to invest more in illiquid and long-term assets that yield higher returns and thus provide a long-term supply of funds to the capital markets.
This privilege is not always the case for other financial industries such as banks or insurances that have to play around with the matching between asset and liability management.
Qualitatively, the pension funds industry is also a strategic industry that can spur financial innovation, improvement in financial regulations and corporate governance, modernization in the infrastructure of securities markets, and an overall improvement in financial market efficiency and transparency. Such impacts should ultimately higher long-term economic growth, according to the study by Meng and Pfau in 2010.
As an industry that provides a source of long-term financing, pension funds play important role as a potential source of funds for targeting sustainable national economic development. The larger the pension fund asset, the greater likelihood that an economy becomes less dependent on foreign funding especially on the portfolio investment which is more prone to capital flights and hence short-term fluctuations.
Unfortunately, Indonesia is lagging far behind in the pension funds industry development. Based on the data in 2020, pension fund assets in Indonesia are still relatively low compared to other developing countries.
The penetration of public pension fund assets (excluding state-owned social insurance firm Asabri and state-owned insurer Taspen) was recorded at 2.73 percent of GDP. This level is well below compared to several other developing countries such as India (7.20 percent), Thailand (12.74 percent), Brazil (14.97 percent), and Malaysia (61.42 percent).
This indicates that the assets of pension funds in Indonesia might be below their potential and hence the impact on driving long-term financing is still less optimal.
Are all doors closed?
Thankfully, many avenues can be introduced to improve the performance of Indonesia’s Pension Funds. Among others is to realize better governance in the industry. Good governance is the foundation of a well-run pension scheme that can play significant roles in minimizing risk and maximizing opportunities.