EVOLUTION ON PENSION DESIGN AND FUNDING IN INDONESIA. Halim Gunawan. Session Number: TBR17

Transcription

1 EVOLUTION ON PENSION DESIGN AND FUNDING IN INDONESIA Halim Gunawan Session Number: TBR17

2 Agenda Brief overview on Indonesia Demography Regulatory Framework Recent Development and Challenges Interesting Finding Anticipating Short-term Trend The Evolution

3 Brief overview on Indonesia Demography Indonesia is largest economy in Southeast Asia (estimated GDP in 2011 is about US$ 834 billion with stable economic growth of 6.1% for year 2010 and 6.4% for year 2011 Estimated number of people in year 2011 is about 238 million Total number of labor force is about 117 million Employees with formal employment is about 38 million Employees participate in private Pension Fund only less than 3 million Source: WEO, Sept 2011 IMF, BPS & Indonesia Capital Market & Financial Supervisory Agency

4 Regulatory Framework Voluntary Saving Plan (Insurance) Pension Fund Mandatory Labor Law JHT Jamsostek & Social Security* * Not yet implemented

5 Social Security & JHT Jamsostek JHT Jamsostek Old Age Benefit (Lump Sum) is one of key benefit stipulated under Law No. 3/1992 In year 2010, total active employees registered for JHT Jamsostek was less than 10 million (only about 25% of employees who has formal employment) Under the Law, technically all employees should be covered by the JHT Jamsostek DC Plan in nature (employer: 3.7% while employee: 2%) National Social Security System (SJSN) Consist of health, accident, death, pension & old age benefit Quite new Law, established by Law No. 40/2004 Not yet implemented awaiting for effectiveness of the operational body called BPJS BPJS is regulated under separate Law i.e. Law No. 24/2011

6 Transformation of BPJS 1 Jan Jun ASKES (Health Insurance) BPJS I (Health) BPJS I (Health) JAMSOSTEK BPJS II (Accident, Death, Pension & Old Age Benefit) BPJS II (Accident, Death, Pension & Old Age Benefit) TASPEN TASPEN ASABRI ASABRI

7 Labor Law Benefit to be provided by company at employment termination Defined benefit based on length of service and last wages Including employment termination due to reaching retirement age Wages defined as basic salary plus fixed allowances Benefit formulation also depends on reason of employment termination Company need to define Separation Pay for voluntary resignation and major wrong doing No funding requirement Vehicles to fund this benefit has been an interesting topic discussed by many parties The Law itself integrate with existing funded plan only for benefit when reaching retirement age

8 Labor Law Service (S) Severance Pay 1) (SEV) Service Pay 1) (SVC) S < =< S < =< S < =< S < =< S < =< S < =< S < =< S < Benefit can be either (depends on reason of employment termination): Only Separation + Compensation SEV + SVC + Compensation 2 xsev + SVC + Compensation 2 xsev + 2xSVC + Compensation Compensation should at least 15% of Severance and Service Pay 8 =< S < =< S < =< S < =< S < =< S < =< S < S >= ) Multiple of Wages: Basic + Fixed Allowances

9 Pension Law Key Principles Segregation of assets Regular funding Government supervision Deferred Payment (paid at retirement and monthly) Voluntary Tax incentives Contribution are tax deductible Investment in time deposit, bonds and listed share are tax free Generally has lower tax bracket Provided via Employer Pension Fund (EPF) or Financial Institution Pension Fund (FIPF)

10 Recent Development & Challenges Pension has not yet been a popular type of reward recently Even the mandatory (JHT) benefit not being provided by several companies Only less 3% of labor force are member of private pension fund Most defined benefit under Labor Law are unfunded and need to be disclosed in company s financial statement Funding the Labor Law benefit is very serious issue to be dealt with Huge potential fund Funding generally result in better risk management Increase employee s protection Develop industry (pension fund or group insurance) Actuaries role to increase funding level is also expected

11 Funding Labor Law via DC Pension Among those rare to have pension fund, DC Plan managed by FIPF has been one of the sensible approach to fund benefit under Labor Law ( LL ) Simple to operate (most of administration and investment activities done by FIPF) Tax incentive Segregation of asset Supervision from government Key perceived weaknesses Should be paid in monthly (while severance under Labor Law is lump sum payment in nature) Immediately vested Key challenges Proper disclosure of the funding initiative in financial statement Employee s buy in Suitable documentation & communication

12 Accounting Impact of Funding LL via DPLK There are several perspectives for presenting the FIPF (funding) implication in company s financial statement Offset (with defined benefit obligation) Accumulated employer contribution considered as Plan Asset Offset is most common approach Current Projected A more standardized approach on the offset calculation is expected to be the actuaries contribution for comparable actuarial output (for accounting purposes)

13 Funding Labor Law via Insurance Saving Plan Common reasons for selecting Insurance Saving Plan Lump sum payment (align with nature of severance benefit) Flexible vesting requirement Key perceived weaknesses Lower tax incentive (compare to the one in Pension Fund) Minimum government supervision Many existing product do not meet the requirements for Plan Asset in IAS 19 Low understanding on product characteristic result in some management surprise when the accounting calculation is done Key challenges Develop a more suitable product as funding vehicles for Labor Law benefits that comply with the plan asset requirement per IAS 19 Enhance knowledge on IAS 19 requirement for sales team

14 Interesting Finding Huge long-term employee benefit disclosure without any funding initiative Pension fund is highly effective funding vehicle but not yet attractive Salary increase risk is one of the major risk in providing DB plan Many state owned companies conduct a feasibility study to convert existing DB Plan to DC Plan but very few companies able to execute it DB Plan is provided for employees hired before cut off date and DC Plan afterwards Non comparable pension scheme can be very complex Pension perceived as a more advance benefit but the most companies (except state owned, oil & gas, mining and another few big companies) provide pension at the minimum level

15 Things to be Anticipated Encouragement to increase funding level of severance benefit More moderate pension law & regulations (including possibility to provide lump sum payment at severance benefit per Law 13/2003) Pressure to streamline pension system (define benefit plan at minimum level) due to tight talent competition DB-DC conversion that should be followed by new paradigm for retirement planning

16 The Evolution ?... Regulatory Framework Pension Fund Design Tax Market Development on Funding Pension Law Jamsostek Law DB Deferred Tax for Pension Fund (both contribution and certain investment return) Growth of Pension Fund: Benefit relates to attainment of age (voluntary) should establish Pension Fund Labor Law (LL) DB for existing employees and DC for new employees Deferred tax for funding Pesangon via approved insurance saving product Steady Growth of Pension Fund Introduction of Funding Labor Law via Insurance Social Security Law BPJS Law Very low tax for lump sum pension & annuity pension Accounting Revised PSAK 24 Convergence to IAS 19 Pension Law Reform Growth on DB (at LL benefit) and DC pension Encouragement to fund Labor Law benefit (will this result in pension growth?) DB DC conversion Alignment with IAS 19

17 THANK YOU