Pension Fund: A Key Driver for Indonesia’s Vision 2045

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.

A study by Kowalewski (2010) used a hand-collected data set on governance factors in the pension industry and found many interesting insights on the roles of governance and the competence of pension fund management.

The study shows that internal governance structures such as board composition, board competencies, and board structure affect the Pension funds’ performance.

Good governance ensures selecting motivated, knowledgeable, and skilled people to manage the pension fund company and the industry. A greater competence forms the right structures and processes to enable effective, timely decisions and risk management and provides clear scheme objectives. The comprehensive improvements in the governance system will produce well-integrated programs and create a large and sustainable accumulation of long-term funds.

The study conducted by IFG Progress, where a comparative analysis of pension fund governance in various countries using the Organization for Economic Cooperation and Development (OECD) Pension Funds Governance guidelines, corroborated the finding. The study found a strong correlation between better governance and pension fund performance.

Better governance can be translated into several indicators such as robust internal governance mechanisms such as risk-based internal controls, reporting, and disclosure of the activities. The transparency of the annual report is also important to allow the public to access it through the website.

In addition, qualified human resources are also drivers. Management should be represented by various and diverse stakeholders and professionals who have strong independence recruited through a qualified fit-proper test. It is also important that the governing body is given the authority to supervise all activities.

To conclude, financial sectors play an important catalyst in realizing the dream of Indonesia’s Vision 2045. The role should be proportionally weighed between the functions of banks and non-bank financial institutions.

Non-bank financial institutions, especially pension funds, take a special task to anticipate the increasing government financing due to the growing dependency ratio. In the case of the pension funds industry, better governance and competence will altogether influence the outcome of the industry.

The Financial Service Authority (FSA) might strengthen the governance in the industry to ensure a better outcome of pension funds that vault the stability in the financial sector in the longer-term horizon.

(This article is written jointly by Senior Research Associate Ibrahim Kholilul Rohman and Research Associate Nada Serpina from IFG Progress, a leading Think Tank established by the Indonesia Financial Group. The views expressed in this article belong to the writers).