Indonesia’s funds industry hopes to benefit from reforms to be implemented in 2013 that will create a much bigger public pension fund. Whether this leads to changes in how public assets are managed has yet to be determined.
From next year, the $16 billion social insurance fund, Jamsostek, will make mandatory corporate pension contributions, according to the Social Security Providers Law passed by parliament earlier this year.
The contribution rate for the organised sector of the workforce is 6.25% of monthly salaries, but companies are not required to participate. Many do not report their true number of workers, nor their salaries, and nor do they always deduct contributions into Jamsostek’s coffers.
That is meant to change as of next year, when corporate contributions are to be mandatory nationwide. Jamsostek is also to merge with Taspen, the $10 billion fund for civil servants, and the smaller social insurance organisation, Astek.
Some fund managers estimate the new incorporated organisation could reach $40 billion in size. They are eager to see that translate into mandates.
But it remains to be seen how that turns out. First of all, Jamsostek’s new CEO, Elvyn Massassya – who was promoted to the post this summer after serving as CIO – has indicated the new Jamsostek will enter into the investment business itself.
It intends to set up Jamsostek Investment Company in partnership with Islamic Development Bank, with each side holding 50%, although this has yet to be approved by the board of trustees (which probably requires parliamentary approval).
Jamsostek has improved its internal capacity over the past few years. It now invests in bonds and equities, and in some domestic mutual funds, but on a very limited basis: of four international fund houses interviewed in Jakarta, only one says it runs money for the organisation. Jamsostek is banned from international allocations. It does not have any portfolio construction skills.
As a result, the most likely destination for its money is direct investments such as local real estate, say fund managers.
However, the scale of the new organisation will attract a lot of attention, including from overseas, possibly making Jakarta another important destination for international banks and fund houses, along with the likes of Brunei or Kuala Lumpur.
Moreover, the local capital markets are way too small for an institutional investor of this size, so it is likely that the investment office will push regulators to let it diversify overseas, as has happened in Malaysia and Thailand (but not successfully in the Philippines).
This assumes that the integration of three institutions occurs relatively smoothly. Fund executives report that Jamsostek employees are nervous. They are going to be required by 2014 either to retire or to accept a new contract as private-sector employees. Jamsostek is also looking to hire technocrats from the private sector; Evyln, for example, comes from banking, not government.
However there is a risk that incorporation will be resisted or even derailed by the rank and file.
There is also the need to implement the mandatory contribution system. Indonesia, with its weak institutions, poor infrastructure, low education and fragmented geography, is an easy place for companies to get around regulation.
But as fund managers point out, at least mandatory contributions are the law of the land. With Indonesia’s youthful and big population (officially 240 million, possibly bigger), Jamsostek could evolve into one of Asia’s most important public pension funds.