Indonesia’s BPJS Ketenagakerjaan, the social security agency that manages $16.8 billion in retirement assets for private-sector workers, plans to double the domestic equity allocation of its relatively new defined-benefit (DB) scheme to 20% from 10%, to seek higher returns.

The DB scheme is the smaller of its two plans, having been launched in July last year. It has 15 years to maturity, so can afford to be more aggressive in its investments, said Pramudya Iriawan Buntoro, head of the actuarial division.

BPJS Ketenagakerjaan has run a $15.8 billion defined contribution (DC) scheme since 1992 and a $1 billion DB scheme since July last year. 

Both are mandatory, with both employers and employees making regular contributions. The only difference is that the DB scheme covers only large and medium-sized companies; small firms are exempted from having to make contributions to this scheme.

"The DB scheme can put up to 50% of their assets in stocks. However, according to our internal tactical asset allocation, the target is to invest up to 20% of total pension assets [in the DB scheme] in equities,” he added.

Buntoro did not comment on whether BPJS would hire external managers to manage the bigger allocation.

Indonesia pension funds are not yet allowed to invest offshore.

Tino Moorrees, chief executive for Hong Kong at BNP Paribas Investment Partners, who lived in Indonesia for nine years as head of the firm’s local business, said domestic investors had no urgent need to invest overseas. Onshore bond yields are still higher than offshore ones, he noted.

Indonesia's 10-year Treasury was yielding 7.238% on November 2, according to Asiabondsonline.com. 

Despite this, the growth of the pensions industry in Indonesia and the relatively limited capital market has meant that there is growing pressure for retirement funds to invest overseas, said Moorrees. He noted that any change in the investment regulation theoretically would need legislative approval.

Improved coverage

BPJS added the DB scheme to improve the retirement coverage of workers. Some members felt the long-established DC scheme might provide insufficient funds for their retirement purposes, noted Buntoro.

In a DC scheme, payouts depend purely on the return on the funds invested, while in a DB scheme, the sponsor must make up any shortfall in investment returns.

BPJS Ketenagakerjaan’s DB scheme has eight million members, and its current asset allocation mix is: 57% in government bonds, 22% in time deposits, 10% in equities and the remainder in mutual funds. Approximately 10% of assets are outsourced to external managers.

Workers receive a monthly pension when they retire, provided they have been members for at least 15 years. If they are members for a shorter period,, they will receive a lump sum upon retirement.

The DC scheme has 30 million members and the following asset allocation: 65% in government bonds, 17% in equities, remainder in mutual funds, bank deposits and property. It outsourced 6% of its assets to mutual fund managers, which invested the money in mutual funds. 

The agency has no plans to increase the DC scheme's allocation to equities, said Buntoro. The two funds have 16 external fund managers between them – all of which are domestic players, but some of which are the local operations of foreign firms.