Jakarta-based Taspen has posted annual returns on its Rp33.5 trillion ($3.76 billion) old-age insurance fund of 11% to 13% since 2006, but may find such performance harder to come by in the years ahead.

As a result, the state institution – which manages Indonesian civil servants’ old-age insurance and pension programmes – plans to raise its equity exposure to boost its returns, says director of investment Taufik Hidayat*.

“For this year, we forecast a return of 12.3% for the old-age insurance fund, but it will be harder next year,” he says. “We see 10.5% as more likely in 2011, as the opportunity for growth is likely to be slower.”

The yield on long-term Indonesian government bonds – those with maturities beyond 10 years – is currently around 8% and for time deposits around 7%, says Hidayat, which is below Taspen’s annual return targets for both funds. As recently as 2008, Indonesia’s benchmark interest rate had been 12.75%, but has stood at 6.5% for the past 15 months.

“So next year we will rely more on equities,” he says. “That may include mutual funds, or reksa dana, which we sometimes use for benchmarking.”

Last year, Taspen raised its equity allocation to 10% of its overall portfolio; the allocation had been 3% for 2008, with the remainder in bonds (77%) and time deposits (20%). It cut the allocation to 6% this year after a sell-off to take profits following strong stock market performance, says Hidayat, but plans to raise that exposure back to 10% next year “when the market momentum returns”.

However, that equity allocation will be entirely domestic, as Taspen cannot yet invest in offshore assets. Moreover, it doesn’t yet use any external asset managers, although that may be something for the future, says Hidayat.

Meanwhile, the Rp28.3 trillion pension programme cannot invest in equities, being restricted to government bonds and time deposits. However, Taspen hopes the government will at some stage allow it the flexibility to buy a wider range of assets including equities, like the old-age insurance fund.

* See the December issue of AsianInvestor magazine for an in-depth interview with Taufik Hidayat about Taspen’s investment strategy and structure.