Indonesian pensions find safe harbour in fixed income and higher rates

The asset allocation of Indonesian pension funds showed a flight to safety last year, but did fear outweigh the numbers? Some experts argue, in the light of local equities, for staying the course.
Indonesian pensions find safe harbour in fixed income and higher rates

Indonesian pension funds moved back to back to the safety of fixed income last year as the Covid-19 epidemic heightened risk and bit into returns, but high domestic interest rates meant they were able to sustain returns with this strategy, according to analysts

Janet Li

“From our observations, it’s mainly because some of the local pension funds were not seeing good returns due to the volatile market during the pandemic, that they moved their portfolio to more secure vehicles,” said Janet Li, Asia wealth business leader at Mercer.

“You can see that across the board: allocation to all asset classes has fallen, including equities and alternatives,” she added.

The trend was highlighted in a recent Mercer report, which showed that Indonesian pension funds increased their allocation of fixed income from 51.9% to 69.9% last year, up almost 25 percentage points since 2013.

This contrasts with just moderate increases or decreases in fixed income allocations among other growth market pension funds. On average, Mercer’s report showed growth market pension funds increased their fixed income allocations by 1.6% last year, but have overall made strides towards diversification in recent years.

Mercer surveyed mandatory government and supplementary occupational pension schemes in Indonesia with assets under management amounting to $47.9 trillion.

Asset allocation of Indonesian pension funds over time. Source: Mercer asset allocation insights report

The desire for returns steered Indonesian pension funds into fixed income rather than cash, explained Li.

“We also understand, based on our discussion of some of the pension funds, that their local managers also suggested they move into secure investments which also provide a yield,” Li told AsianInvestor.

Nevertheless, the move may have been precipitous, Li believes.

Indonesia’s markets and currency have rebounded since the lows of March 2020 with the Jakarta Composite Index closing at 6,142.71 on September 23, 2021, up from 3,911.72 in March 2020.

“If investors had continued the journey [in equities], there would have probably been some pick-up in returns. It’s at times like these that objective governing documents and strategic asset allocations should have come into play,” she said.


Despite this, being overweight in bonds seems to have paid off for pension funds, said Simon England-Brammer, senior managing director and head of Asia Pacific at Nuveen.

Simon England-Brammer

“The S&P Indonesian Bond Index returned +13.9% in Indonesia rupiah terms, versus the MSCI Indonesia which returned -7.8% in 2020. Domestic equities continue to perform poorly this year,” he said.

Indonesia has a BBB credit rating (S&P and Moody’s) and its government bonds are one of the higher yielders in the region, noted England-Brammer.

Ten-year Indonesian government bonds yielded 6.12% as of September 24, compared with the 1.42% offered by 10Y US treasuries.

BPJS Ketenagakerjaan, the country’s largest pension fund, registered an allocation of 74% bonds as of December 2020, up from 69% in 2019, said England-Brammer.

Last week, the fund revealed it had achieved returns of IDR22.35 trillion ($1.57 billion) between January and August 2021, a yield on investment of 6.5%.

“In many Asian or smaller markets, it’s very natural that the majority of investments are still domestic because domestic fixed income often has a yield that's higher than the US Treasury. So why bother to take the exchange rate risk at the same time as getting a lower yield?” added Mercer’s Li.

At 3.5%, Indonesia’s benchmark interest rate remains above many of its regional peers and significantly above the 0.25% in the US.


Investment regulation is another factor discouraging Indonesian pension funds from diversifying, experts say.

Besides a low maximum allocation to equities, private pension funds are subject to a 5% foreign investment limit and may only make direct offshore investments, which furthermore must be approved by Indonesia’s Financial Services Authority (OJK).

This stands in contrast to other regional pension funds, for example Malaysia’s Employees Provident Fund (EPF) which had 37% of its investment assets overseas as of June 2021, and Thailand’s Government Pension Fund (GPF) which had approximately 37% of total assets invested abroad as of May 2021.

“The pension funds can be better diversified if the foreign investment limit is increased,” England-Brammer said. “That would also help to better withstand market volatility.”

“Also, the contribution rates are low at 3%, which means the fund is bound to have deficits in the long run. The pensions could either increase the contribution rates (which are being reviewed) or the investment returns to manage future liabilities.”

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