Last year IndonesiaÆs parliament passed legislation to establish a mandatory, national social-security programme that has not been implemented by the government. The measure is one of several attempts at reform that face opposition from multiple corners, and key aspects to how assets would be managed have yet to be agreed. Without this, however, IndonesiaÆs pension system is likely to remain marginalised, say industry executives.

The biggest hurdle is determining responsibility for contributions, with both labour groups and employers unwilling to shoulder the greater share, says Bambang Wibisono, chairman of the corporate pension fund of mining multinational Freeport and an executive of the Indonesian Pension Fund Association (known by its Bahasa Indonesian initials ADPI).

This is one of several challenges for the pensions industry, which remains small, despite dating back to 1956. As at end-2006, corporate pension plans from among 272 employers amounted to Rs77.5 trillion ($8.5 billion), or just 3.7% of the nationÆs financial assets.

Financial institutions (banks and insurance companies) look after an additional 25 employee pension funds that total an additional Rs7.5 trillion. Together, these private-sector pension funds, insurance assets and mutual-fund monies combine to only 10% of IndonesiaÆs gross domestic product, compared with assets in the banking system, which amount to 50% of GDP.

The small size reflects, in part, poverty. The ADPI calculates there are around 27 million employees contributing to a corporate pension fund, but 64% of them earn less than the equivalent of $110 per month.

Investment performance has also held growth back, in part because of asset allocation.

Until recently, some 70% of corporate pension assets were invested in bank deposits, where interest rates were high. Since interest rates have fallen below 10%, and with the introduction of secondary market trading for domestic bonds, assets have moved into bonds and equities. Deposits now account for 25% of pension fund assets.

Over the past decade, annualised returns for corporate funds have varied between 10%-20%, but despite the move of late into more aggressive asset classes, investments continue to lag inflation, says Suharsono, advisor to ADPI.

Although insurance companies can now invest up to 15% of their assets overseas, there is no sign the government will allow corporate funds to follow in the near term, so investment returns are unlikely to improve. Meanwhile the Asian financial crisis of 1997-98 showed that many supposedly funded pension schemes did not in fact pay their members if the company went under. So reform is critical.

There are two basic reforms that have been forwarded by parliament. First, since 2003 there has been proposed reforms to the Ministry of Manpower rules that sought to protect workers by requiring terminated employees receive their pension. This didnÆt make sense, however, as it imposed a pay-as-you-go assumption upon a corporate system thatÆs fully funded. It also assumed that all companies have pension schemes, when in fact they are voluntary. These discrepancies between the laws have allowed various groups opposed to the measures û particularly employers û to throw sand in the works, and the law has yet to be implemented.

Second is introducing a national programme for social security. Corporate pensions remain a voluntary system for employers. Civil servants are covered by the government fund Taspin, while there is a mandatory corporate pension plan for companies that employ more than 10 workers, run by Jamsostek. (Large companies with their own pension plan therefore contribute twice.) But there is no coverage for workers at small companies, which the national system is meant to address. It would later be harmonised with Jamsostek, should it ever get off the ground û so yet another headache awaits.

Because large companies, including many multinationals, already provide cover, they are wary of being doubly taxed, and want employees to also contribute to any mandatory scheme, says Bambang from Freeport. They also want to know how these assets will be managed. In theory a central government agency would collect contributions, invest the assets and disburse payouts. But many people fear such a honey-pot would prove irresistible to corrupt officials.

For service providers, the only way to grow retirement assets is to make the system mandatory. ôWe see potential growth in the industry but only if the government requires companies or employees to contribute,ö says Eko Pratomo, president-director at Fortis Investments in Jakarta. ôOtherwise any reform wonÆt represent a significant leap. Indonesians need to pay attention to long-term investments.ö