This chapter describes the financial protection gaps relating to retirement savings in Indonesia and the additional challenges the asset-backed pension system faces to delivering expected outcomes in retirement. It looks at the protection gaps relating to the rules of the system, the availability of appropriate savings instruments and payout vehicles, and the population’s uptake of these vehicles. It then discusses additional challenges relating to the investment of pension funds, their solvency and sustainability, and the harmonisation and complementarity of the different components of the system.
Addressing the Challenges for Asset-backed Pensions in Indonesia
Abstract
Financial protection gaps related to retirement savings may arise from a number of drivers. The first is the extent to which the regulatory framework establishes the appropriate savings vehicles and allows for individuals to save adequately for their retirement given the limits in place. This relates to how the rules of the system can deliver desired retirement outcomes for the population. The second driver is the extent to which providers offer the savings vehicles established in the regulatory framework for the population to use. This relates to the availability of appropriate savings instruments and products. A final driver relates to the extent to which the population makes use of the available savings vehicles to adequately prepare for their retirement. This relates to the population’s uptake and use of the instruments at their disposition to save for retirement. While these factors are the main drivers of pension protection gaps, several other challenges contribute to the system falling short in delivering expected outcomes.
This chapter describes the features of the Indonesian pension system as they relate to the three dimensions of protection gaps driven by rules, availability, and uptake. It then discusses key additional challenges relating to the investment of pension funds, their solvency and sustainability, and the harmonisation and complementarity of the system.
The capacity of the system to deliver adequate retirement savings depends on the rules of the system. The rules dictate to what extent individuals have access to savings plans and how much they can contribute, as well as at what age they can retire and how they can use their savings to finance retirement.
The Indonesian pension system comprises various components that cover different groups of the population.
The tax-financed social assistance programme with a focus on assisting the elderly, Asistensi Rehabilitasi Sosial Lanjut Usia (ATENSI LU), in place since 2020.
The tax-financed, means-tested social pension, Program Keluarga Harapan (PKH Lansia), paying quarterly benefits to persons aged 70 and over.
The pension programme for armed forces and military personnel, Asabri, a mandatory pay-as-you-go defined benefit (DB) pension plan for all professional military personnel, civil employees of the Ministry of Defence and the police force. It is managed by PT Asabri and financed by the state budget.
The mandatory pension programme for civil servants managed by Taspen, a state-owned enterprise. All employees contribute to the DB component, Taspen-JP. Contributions are invested and benefits are financed by government revenues since 2009. Since 2017, all employees are also required to contribute to the THT, a DC scheme.
The mandatory pension programme for private sector employees established in 2015, managed by Badan Penyelenggara Jaminan Sosial (BPJS) Employment. It comprises a defined benefit (DB) component, Jaminan Pensiun (JP), which invests contributions net of benefit payments, and a defined contribution (DC) component, Jaminan Hari Tua (JHT), which invests contributions in a collective investment fund.
Voluntary occupational pension plans introduced in 1992, which can be DB or DC. Employers providing a DB pension plan can set up their own pension fund (DPPK PPMP), either as a single-employer or as a multi-employer fund. Employers providing a DC pension plan can set up their own plan (DPPK PPIP) or join a pension fund provided by a financial institution (DPLK). DPPK pension funds can include both DB and DC pension plans.
Personal voluntary pension plans available to all individuals regardless of their employment and provided by a financial institution (DPLK).
This report focuses on the asset-backed components of the pension system in Indonesia. Figure 1.1 presents them; they are all those in which contributions are invested, earn investment returns, and assets accumulated finance retirement.
Note: The pension plan for armed forces and military personnel, Asabri, also includes a DC component. This plan is not included here.
1.1.1. Access and contributions to retirement savings plans
Private-sector workers now have better access to retirement savings since the introduction of the mandatory BPJS pension schemes in 2015. Nevertheless, informal workers have fewer opportunities to save for retirement. Table 1.1 summarises the types of pension plans available to different types of workers, and indicates whether participation is mandatory or voluntary.
Note: M = mandatory; V = voluntary; NA = no access. Table excludes armed forces.
Source: OJK.
Civil servants are well-covered by the system, with participation in the Taspen scheme being mandatory. All civil servants contribute 4.75% of their salary to the Taspen JP defined benefit plan in which benefits accrue by 2.5% of final basic salary per year of service, up to 80%. Since 2017, contributions of 3.25% of salary to the THT defined contribution plan are also mandatory.
Private sector employees contribute to the BPJS scheme, but contributions are not mandatory for all types of employees, and not all workers can contribute to both schemes. The JP defined benefit scheme is open to employees across all business scales – including micro, small, medium, and large enterprises. Nonetheless, under prevailing regulations, participation in the JP scheme is mandatory only for medium and large enterprises. The scheme is financed by employee contributions of 1% of wages and employer contributions of 2% of wages, subject to a salary cap. Benefits accrue at 1% per year, adjusted for inflation. Those having 15 years of contributions – that is from 2030 – will receive lifetime income payments. Those not having contributed for at least 15 years will receive a lump sum. Benefits are subject to a minimum and maximum benefit and are indexed to prices.
The BPJS-JHT defined contribution plan is available to all workers and is mandatory for workers in large, medium and small enterprises. The scheme guarantees a minimum return of one year tenor of bank deposit interest. Contributions are 2% from employees and 3.7% from employers. Contributions to this scheme are voluntary for informal workers, including the self-employed who may contribute 2% of their wages. The amount that migrant workers can contribute depends on their salary levels.
Voluntary occupational pension schemes are available primarily to employees of large and medium enterprises. These plans can be DB or DC in nature. DB plans must be set up within an employer pension fund (DPPK). DC plans can be offered within an employer pension fund (DPPK) or set up through a financial institution (DPLK). Employer contributions are required for these plans, but employees do not necessarily have to contribute. In principle, any employer could set up a voluntary occupational plan, but in practice micro and small enterprises are not likely to have the resources to do so. There is no legal limitation for contributions to voluntary occupational schemes.
Access to personal pension plans is universal. All individuals regardless of employment status are allowed to contribute to a personal retirement savings plan provided by a financial institution.
The rules relating to the access to pension imply that a large proportion of the population over the age of 15 will only have access to a personal pension plan. Only working individuals in Indonesia will have access to the BPJS-JHT scheme, meaning that over 30% of the working-age population will not have access to the scheme. The total workforce in Indonesia is 143.7 million people, of which 5.9% are unemployed. The workforce represents 68.6% of the population over the age of 15 (Table 1.2). This is higher than the OECD average labour market participation rate (ages 15 and over) of 61% (ILO, 2025[1]).
Source: BPS-Statistics Indonesia (2023[2]), Labour Statistics, https://www.bps.go.id/en/statistics-table?subject=520.
Women are less likely to participate in the workforce than men, meaning that they will have lower coverage by the pension system. The rate of female participation in the labour force in 2022 was only 53.4%, compared to 83.9% for men (BPS-Statistics Indonesia, 2023[2]). This is in line with the OECD average female labour force participation rate (ages 15 and over) of 53% (ILO, 2025[1]). While all workers in Indonesia have access to a BPJS-provided pension, most are not required to participate in any retirement savings arrangement. Informal workers, who are not mandated to contribute, make up nearly 60% of the working population (Table 1.3).1 Additionally, women are less likely to be required to contribute because they are more likely to work in informal jobs that do not require them to save for retirement than men. Sixty-four per cent of employed women were working in informal jobs in 2022, compared to 56% of employed men (BPS-Statistics Indonesia, 2023[2]).
Note: Split of public/private sector not available, and public sector workers and the armed forces and military are included in the count of large/medium enterprises.
Source: BPS-Statistics Indonesia (2023[2]), Labour Statistics, https://www.bps.go.id/en/statistics-table?subject=520.
Even among formal workers, a significant portion will not be able to contribute to both the BPJS-JP and the BPJS-JHT schemes. Seventeen per cent of formal employees are working in small or micro enterprises and do not contribute to the BPJS-JP scheme.
Expected replacement rates vary across different types of workers. Civil servants can expect very high replacement rates. This is mainly driven by an expected replacement rate of 80% from the DB pension plan after 32 years of contributions. In addition, public servants also contribute to a DC scheme, resulting in an additional replacement rate for public servants of 11.6% for males and 10.0% for females from Taspen-THT assuming 40 years of contributions.
Expected replacement rates are reasonable for workers in medium and large enterprises, but only when assuming an unrealistically optimistic scenario, and replacement rates for other workers are lower. The maximum replacement rates for average-earning private sector employees are 33.1% from the BPJS-JP and 20.4% from the BPJS-JHT, for a total expected replacement rate of 53.5% for employees covered by both schemes. Because of their longer life expectancies, women have a lower total replacement rate of 50.6% (OECD, 2023[3]). These figures represent a maximum because this calculation assumes that an employee enters the labour market today and contributes for a full career to the age of 65. The benefits from the BPJS-JP plan are subject to a minimum and maximum amount of IDR 350 700 and IDR 4 207 200, respectively, meaning that the lowest-income employees will receive higher replacement rates, and highest-income employees will have a lower one. The minimum pension represented 12.3% of the gross average wage in 2020 (OECD, 2022[4]). However, the lower threshold is not currently triggered for workers earning at least 50% of average earnings, and the higher threshold is just triggered for those earning 200% of average earnings (OECD, 2023[3]). Employees of small and micro enterprises, who cannot contribute to the BPJS-JP, can expect a much lower maximum replacement rate of only 20.4% for men and 17.5% for women coming from the BPJS-JHT.
The Indonesian Ministry of Finance calculates a replacement rate from these schemes based on a more realistic scenario of 32 years of service, which results in lower replacement rates. Under this assumption replacement rates for private sector employees are 14.5% from the BPJS-JP and 12.6% from the BPJS-JHT (Kementerian Keuangan Republik Indonesia, 2024[5]). However, potential replacement rates for civil servants remain high, because workers can receive the maximum replacement rate from the DB scheme after 32 years of contributions.
Replacement rates for private sector workers should increase over time as the schemes mature and people contribute to the system for longer periods of time. Meanwhile, actual maximum replacement rates will be lower than the full potential as the BPJS schemes have only been in operation since 2015. The first worker that will be able to contribute for 40 years will not retire until 2055. Further, those retiring before 2030 will not reach 15 years of contributions and therefore will not receive any lifetime income from the BPJS-JP scheme, but will instead receive a lump sum.
However, even when the system is mature, actual replacement rates are likely to be below the maximum potential because many people tend to have short active lives and large rates of informality. Table 1.4 summarises the maximum replacement rates from the mandatory schemes for different types of workers based on both the OECD’s methodology and the estimates of the Ministry of Finance that assumes a shorter contribution period.
Note: *Assumes 32 years of contributions compared to 43 years for OECD calculations.
Source: OECD (2023[3]), Pensions at a Glance 2023: OECD and G20 Indicators, https://www.oecd.org/content/dam/oecd/en/publications/reports/2023/12/pensions-at-a-glance-2023_4757bf20/678055dd-en.pdf; Kementerian Keuangan Republik Indonesia (2024[5]) and OECD approximations.
Additionally, the indexation of the cap on benefits for the BPJS-JP scheme presents a risk that this scheme will not deliver the same level of benefits in the future. While the cap on benefits is not currently restrictive, going forward it will be indexed to prices. However, individuals contribute as a percentage of their wage, and if wages grow faster than prices the cap could become more restrictive. The World Bank estimates that if wages grow at 5% and inflation at 2%, everyone earning an average wage and over would be subject to the cap on benefits by 2060, and the benefits received would no longer have much of a link to the contributions made (Holmemo et al., 2020[6]).
1.1.2. Retirement ages
Retirement ages differ across the system leading to individuals retire at the earliest possible age and resulting in more years of retirement that retirement savings will need to finance. The normal retirement age for the BPJS-JP plans is gradually increasing from 58 in 2022 to 65 in 2043. However, the retirement age for the BPJS-JHT is not increasing in parallel. As a result, most people are still retiring earlier at the age of 56.
People retiring at 56 will have to finance a much longer period in retirement. In 2019, life expectancy at age 56 was 20.7 years, compared to 14.2 years at age 65 (United Nations, 2022[7]). However, the maximum replacement rates shown in Table 1.4 assume a retirement age of 65 in 2065, when life expectancy at age 65 is projected to be 17.3 years (United Nations, 2022[7]).2 So not only do retirees need to finance a retirement period longer than that estimated for the calculations in Table 1.4 if retiring at age 56, people retiring today will have saved in the BPJS-JHT system for less than 10 years, instead of the 43 years of savings assumed. Replacement rates will therefore be much lower than the estimated maximums.
1.1.3. Allowed payout options
The BPJS-JP scheme will only provide members with income in retirement when the system becomes more mature. Individuals will have to have contributed for 15 years before receiving lifetime payments from the BPJS-JP scheme. Those who have contributed for a shorter period, which includes those retiring before 2030, will receive their benefits as a lump sum.
Benefits from the BPJS-JHT plan are paid as a lump sum and not as a retirement income. Additionally, it is very easy for members to withdraw their money before retirement, as the current rules allow for full withdrawals when changing jobs after only five years of contributions. Between 2016 and 2018, an average of 1.5 million people per month withdrew their savings from the JHT because they left their job, which was the main reason for withdrawals from the scheme. A smaller proportion withdraw because of job-loss (as opposed to resignation), and around the same amount was withdrawn when a member reached retirement age (Ministry of Finance, 2024[8]).
The allowed timing for withdrawals from voluntary plans is more restrictive. Individuals can only take benefits from voluntary occupational funds five years before the normal retirement age of 55. Prior to Law 4/2023, employees could take benefits ten years from the retirement age established by their employer.
Additionally, there are more restrictions around taking lump sums from voluntary plans. For voluntary DPPK DB plans, benefits can be paid as a lump sum if the lifetime income benefits are less than IDR 1.6 million per month or if the present value of benefits calculated at retirement is less than IDR 500 million. Otherwise, members can take only 20% of their benefits as a lump sum, with the rest taken as periodic payments paid by the pension fund or as a life annuity with a minimum duration of ten years from a life insurance company.
For voluntary DC plans (DPPK and DPLK), benefits can be paid as a lump sum if savings are less than IDR 500 million. Otherwise, members can take only 20% of their benefits as a lump sum, with the rest taken as a periodic payment with a minimum duration of ten years, paid by the pension fund as a drawdown or as an annuity by a life insurance company. Members of DPLK plans may also take their savings as a lump sum if they can prove financial hardship, have been diagnosed with a critical illness, have changed their Indonesian nationality, or are a foreign citizen no longer working in Indonesia.
Taxation of pensions is largely in line with international practice, though the taxation of withdrawals tends to favour lump sums over periodic payments. Contributions to voluntary pension funds and any earned investment income are tax exempt, while withdrawals are subject to taxation. There are no limits to the tax-deductibility of contributions.
While the rules of the system provide a minimum availability of pension schemes to accumulate retirement benefits, the availability of voluntary occupational schemes may be more limited. In addition, lifetime income vehicles are not always available for the decumulation of retirement savings.
1.2.1. Accumulation of retirement benefits
All individuals in Indonesia have a pension plan available to them. The introduction of the BPJS-JHT scheme in 2015 ensured that all workers can access a retirement savings scheme. In addition, any individual can access a personal retirement savings plan provided by a financial institution regardless of their employment status. There are currently 25 life insurers and banks offering DC pension plans, and now asset managers are also allowed to offer plans (OJK, 2024[9]).
Employers commonly make voluntary occupational pension plans. In 2015, 62% of companies provided an occupational pension plan, with 20% of these providing DB plans and 83% providing DC plans. Employer contribution rates to these plans are normally around 6-8% of salaries. While employee contributions are normally not required, if they are they are usually around 3% (Rosedewayani, 2017[10]).
However, since the introduction of the mandatory BPJS schemes, there has been a trend to close employer pension plans. Indonesia decided not to allow employees to opt-out of participating in the mandatory scheme if their employer pension plan offered better benefits. As a result, many companies closed their plans and contributions went instead to the BPJS schemes. The number of DB employer funds (DPPK PPMP) decreased from 164 in 2018 to 138 in 2023, and the number of DC employer funds (DPPK PPIP) decreased from 44 to 36 (OJK, 2024[9]; OJK, 2022[11]). In 2022, 96 DPPK closed to new members. Employers can also convert their DB plans to DC plans with the agreement of employees. The number of DPLK funds have remained more steady, with 25 funds in 2023 (OJK, 2024[9]). Some stakeholders are concerned that the proposal to introduce additional mandatory contributions for those with higher incomes could lead to further closures because there will be less capacity for voluntary savings.
1.2.2. Decumulation of retirement benefits
Life insurance companies generally do not offer products or vehicles paying lifetime incomes. The products previously offered allowed individuals to surrender their product and receive a cash value rather than continuing to receive payments for life. The new legislation therefore introduced the requirement for the payout of retirement savings to be over at least ten years to ensure these products provide a regular income.
Even though individuals may have access to pension plans, they still may not make use of the vehicles available to save for their retirement. A lack of uptake of retirement savings can lead to lower-than-expected coverage. Low levels of voluntary savings also lead to lower replacement rates, even for those contributing to a plan.
1.3.1. Coverage
A large proportion of formal workers do not contribute to a pension plan, despite it being mandatory. There were 21.6 million members of mandatory pension schemes (excluding military) in 2024, representing around 11% of the population aged 15 to 65, and around 15% of the labour force (OJK, 2024[12]). Only around 38% of formal workers participate in a mandatory pension programme, implying a non-compliance rate of 62%.
Women are less likely to participate in a BPJS scheme, though this is simply reflective of their participation in the labour market. Women make up around one third of active members in both the BPJS-JP and BPJS-JHT schemes, but they also make up around one third of the formal labour market.
Voluntary participation in the BPJS scheme is extremely low. Only around 0.5% of informal workers participate in the BPJS-JHT scheme.
Participation and coverage of occupational and personal plans is also very low. There were around 1.25 million participants in DPPK in 2024, or around 3% of the employees of large and medium enterprises.3 There were around 3 million participants in DPLK plans in 2024, representing around 2% of the total workforce.4
1.3.2. Contributions
Average income levels vary widely across different population groups, which can also determine to what extent individuals have the capacity to contribute to pension plans after meeting basic expenditure needs. The average monthly net income of regular employees as of August 2023 was IDR 3 178 227. The average net income of the self-employed was 63% that of regular employees. The average net income of informal workers was less than 50% of the net income of regular employees (BPS-Statistics Indonesia, 2024[13]).
Comparing expenditure to income can indicate the capacity for individuals to save additional sums for their retirement. The average monthly expenditure on food in all of Indonesia was IDR 711 282 in 2023, or 22% of the average net monthly income of a regular employee, and nearly 50% of total consumption, including non-food (BPS-Statistics Indonesia, 2024[13]). This implies that average employees may have some additional capacity to save more.
The Indonesian pension system faces three additional key challenges that will be important to address to achieve desired retirement outcomes. These challenges relate to the investment of pension funds, their solvency and sustainability, and the harmonisation and complementarity of the system.
1.4.1. Investment in appropriate long-term strategies for financing retirement
The mandatory BPJS schemes and the voluntary occupational schemes both face challenges with respect to implementing appropriate long-term investment strategies to finance retirement. For the BPJS-JHT scheme, the rules in place impede investment in growth assets and assets with a longer duration, and there is a lack of transparency around investment performance. The investment of voluntary occupational schemes lacks rules and incentives to facilitate and encourage diversified investment strategies. For both types of schemes, the governance framework does not require sufficient technical and investment knowledge to develop and supervise an appropriate investment strategy.
BPJS’s investment
The asset allocation of the pension funds managed by the BPJS in 2022 was heavily weighted towards fixed income instruments and deposits. In addition, most assets are also of short maturities (Kementerian Keuangan Republik Indonesia, 2024[5]). Over 50% of the portfolio for the JHT scheme is invested in government bonds and other bonds, with an additional 17% invested in Islamic Bonds. Another 12% of the portfolio is invested in deposits, leaving only 18.5% of the portfolio invested in other investments including mutual funds and equities. Asset allocations for the JP scheme are slightly more tilted towards fixed income and deposits, with 65% invested in government bonds, 12% invested in Islamic Bonds, 8% in deposits, leaving around 15% for other investments. The composition of assets for the JHT and JP schemes in 2022 is shown in Figure 1.2.
Source: OJK (2022[14]), Indonesia's Social Security Statistics.
One reason for the concentration of fixed income instruments in the BPJS’s investment strategy has been an anti-corruption law which effectively prevented investment managers of public institutions from selling any assets that had declined in value, and thereby realise the investment losses, because the auditors would be obliged to report this as a potential crime (the ‘cut loss’ problem). Investing primarily in short-term fixed-income securities minimised the potential need to sell at a loss, thereby mitigating the liability that the investment managers could face. The legislation passed in 2023 now explicitly allows investment managers to realise investment losses, so going forward they should have more flexibility to adjust their portfolio and asset allocations.
Another impediment to investing in longer-duration assets is the volume of early withdrawals from the JHT plan. Individuals are able to withdraw all of their assets from the scheme when they change jobs once they have made five years of contributions. In 2018, withdrawals from the JHT for all reasons totalled IDR 22.3 trillion, representing just under half the amount of contributions received that year. However, the gap between withdrawals and contributions has been shrinking rapidly over time. In 2022, withdrawals from the JHT plan represented over three-quarters of the contributions coming in (OJK, 2022[14]). This implies that contributions may not be sufficient to cover withdrawals in the near future, and eventually assets may need to be sold to cover liquidity needs.
While the asset allocation for the JHT scheme seems overly conservative and under-diversified for the long-term objective of financing retirement, their investment returns are not readily available. The BPJS does not report its investment performance, but only the total change in asset values, which makes it difficult to measure and assess the investment and asset allocation decisions they make.
To address this problem, the government is revising regulation relating to the asset and liability management of the BPJS, including rules on assessing performance using benchmarks weighted by asset class.
Nevertheless, moving towards better matching the duration of investments with the long-term horizon to invest for retirement remains a challenge due to a lack of long-term investment opportunities in the market, and there are few instruments available for funds to hedge retirement-income related risks.
Another challenge to implementing adequate long-term investment strategies is a lack of sufficient expertise in the governing body of the schemes. The governing body of the BPJS is made up of seven board members. Two are appointed by the government, one each from the Ministry of Labour and the Ministry of Finance. There are also two representatives each from the unions and employers, along with a single independent expert. The government must put 10 candidates forward to Parliament for the non-government representatives. The Parliament then chooses 5 candidates to appoint of these 10 . The only candidate necessarily having a technical knowledge of pensions is the independent expert. In practice, the body has a memorandum of understanding with OJK to oversee some financial aspects of the BPJS pension funds, but OJK does not have any power to intervene as a supervisor (The World Bank Group, 2024[15]).
Voluntary occupational pension funds’ investment
The rules and incentives in place have contributed to a significant lack of diversification of pension funds’ investment strategies. They deter voluntary occupational pension funds from investing in an appropriate long-term strategy to finance retirement. The investment limits are a key driver of this. Voluntary pension funds must invest a minimum of 30% in Indonesian government bonds, and are effectively not allowed to invest abroad.
In addition to a lack of diversification, the asset allocations of voluntary pension funds also tend to be very conservative, even though domestic investment in equities is not overly restrictive. The employer pension funds (DPPKs) follow similar asset allocations as the BPJS, with just over 60% of assets allocated to bills and bonds, and around 10% in cash and deposits, leaving around 30% for other investments, including 10% investment in equities by DPPK DB plans and 15% by DPPK DC plans. However, pension funds managed by financial institutions (DPLKs) are significantly more conservative in their investment. On average in 2023, these funds invested over 50% in cash and deposits, 40% in bills and bonds, and only 10% in other investments, of which only 2% in equities (Figure 1.3).
Source: OECD (2024[16]), Pension Markets in Focus 2024, https://www.oecd.org/en/publications/pension-markets-in-focus-2024_b11473d3-en.html.
Nevertheless, DPLKs have managed to achieve similar real investment returns as DC DPPKs, at around 2.5% on average over the last decade, though this is behind the 3.8% return achieved by the DB DPPKs (Figure 1.4). While these returns compare positively to the performance of pension fund investments in OECD jurisdictions, this is mainly driven by the relatively high yield that Indonesian government bonds have enjoyed over the last decade.
In %
Note: Data for Australia are from June to June.
Source: OJK and OECD (2023[17]), Pension Markets in Focus 2023, https://www.oecd.org/en/publications/pension-markets-in-focus-2023_28970baf-en.html.
A key driver in the conservatism of the investment strategies of voluntary occupational pension funds is the requirement for firms to pay a severance payment to employees leaving their employment due to retirement, death or disability. Employers must recognise the liability of severance payments owed to their employees on their balance sheet. While there is no requirement for these liabilities to be funded, employers offering pension plans to their employees can use the assets from those plans to offset their severance liability on their balance sheet. In addition, employers funding their severance liability through pension funds can enjoy tax-deductible contributions, and benefits are subject to a lower pension tax. Employers can therefore make the same contributions to a pension plan as they would have had to make directly to finance severance benefits for employees, but enjoy additional tax benefits. The investment objective is therefore not to maximise retirement outcomes for their employees, but rather to invest with as little risk as possible to be sure that their contributions to finance the severance benefit will not lose value.
In part to address this problem, the recent legislation reduced the severance benefits that employees are entitled to, and going forward will require that employers send contributions to the JHT scheme to fund the liabilities for employees earning less than IDR 10 million. However, employers will still be able to use occupational pension funds to finance their liability to employees earning over this amount.
Lifecycle funds were introduced in 2017 for voluntary defined contribution plans to better align the investment strategy of pension funds with the retirement objective. However, these strategies are still required to invest a minimum of 30% in government bonds. Furthermore, they are only mandatory for individuals’ contributions – whether in occupational plans or personal plans – and therefore the majority of pension fund investment does not follow a lifecycle strategy.
An additional challenge is that the Supervisory Board of voluntary pension funds is not required to have any technical knowledge of pensions. Pension funds tend to use a two-tier governance system, with the Management Board made up of directors from either the sponsoring employer or the financial entity managing the fund, and a Supervisory Board made up of commissioners. Management Boards must be comprised of at least two members, of which half need to have knowledge in investment and/or risk management, and one of which needs to be in charge of compliance. In addition, there is a requirement for members to follow ongoing education in the fields of investment, accounting, risk management, and actuarial science. However, the members of the Supervisory Board are only required to have more general knowledge relating to management capabilities, laws and regulations, strategic management and sound business development, and the ability to assess a company’s financial situation. Nevertheless, the Supervisory Board can have advisory committees on audit, risk monitoring, and nomination and remuneration. Such committees are required for pension funds managing more than IDR 100 billion, and members of the risk monitoring committee need to have the relevant experience. There are no committees on investment, however.
1.4.2. The sustainability and solvency of defined benefit pension schemes
There are concerns around the sustainability of both the mandatory BPJS-JP DB scheme and the voluntary DPPK DB schemes.
Sustainability of the BPJS-JP DB scheme
The contributions to the JP scheme total 3%, which earn the participant 1% of their salary paid each year for life in retirement, adjusted for inflation. This level of contribution is far from being sufficient to finance the level of benefit promised. The Ministry of Finance estimates that with this level of contribution, the scheme will have no more invested assets by around 2070 (Kementerian Keuangan Republik Indonesia, 2024[5]). They estimate an actuarially fair contribution rate closer to 5% assuming 30 years of service, but even increasing contributions to this level now will eventually result in deficits as the scheme is already underfunded. By law, the contribution rate to the scheme must be reviewed every three years, but so far there have been no changes since the inception of the scheme.
Sustainability of the DPPK DB schemes
There are insufficient guardrails in place to ensure the sustainability of the occupational DPPK DB pension schemes. While employers are required to finance any funding deficit of their DB schemes, the requirements around how the deficit is measured are very flexible. Funding can be calculated either through a solvency termination measure or an ongoing valuation measure. The assumptions on which funding calculations are based are also not subject to rigorous oversight.
One assumption that may be problematic is the discount rate used to value the defined benefit pension liabilities. The average interest rate used for valuations is 8%, and this ranges between 5% and 10%. Although the simple average of returns of these funds over the last decade has been 8%, as shown in Figure 1.5, around one-third of the funds use an interest rate above 8% (OJK, 2022[11]). In reality, many DB plans therefore have a worse funding position than they actually report.
Source: OJK (2022[11]), Statistik Dana Pensiun 2022, https://ojk.go.id/id/kanal/iknb/data-dan-statistik/dana-pensiun/Documents/Pages/Buku-Statistik-Dana-Pensiun-2022/Buku%20Statistik%20Dana%20Pensiun%202022.pdf.
There are also no formal requirements for the mortality assumptions used to value liabilities. In practice, pension funds usually adjust standard mortality tables to reflect the mortality of the plan members, and assumptions usually account for future mortality improvements.
To add to the potential underfunding of DB plans, many pension funds have contributions that are receivable and have not yet been paid by employers. This means that the funding ratio calculation does not necessarily reflect the actual assets invested, which would also result in overstating the funding position of these plans.
In addition, the high proportion of investments in government bonds presents increased exposure to concentration risk. If there was a default on those obligations, it could trigger a solvency problem for all the DB pension schemes.
1.4.3. The complementarity of the different components of the system
The harmonisation of the pension system is a key priority of the government and an objective of many of the reforms being carried out. There has already been significant progress in streamlining the organisation of the system. Before 2014, the institutional framework for the management of social benefits was fragmented. The reorganisation of the system consolidated the various institutions into two: BPJS Employment (BPJS Ketenagakerjaan) that manages employment-related benefits, and BPJS Kesehatan that manages health-related benefits. BPJS Employment now manages the two mandatory pension schemes for private sector employees, the JP and the JHT. It registers members, collects contributions, administers benefits and manages the investment of assets.
The recent Law 4/2023 included several measures that intend to improve the efficiency and harmonisation of the pension system. A single employer pension fund (DPPK) may now manage both a DB plan and a DC plan, which should allow the funds to better optimise operational costs. The law also now requires DC pension funds to manage the transition from accumulation of retirement savings to the payout of savings in retirement, either by providing a programmed withdrawal or transferring the assets to an insurance company to purchase an annuity, which should facilitate members’ transition to retirement. The law also standardised the allowed retirement ages for occupational pension plans, which previously varied widely across plans. Now, the minimum retirement age in these plans is 55, and early retirement cannot be earlier than 5 years before the normal early retirement age in the system.
Nevertheless, there remain outstanding organisational issues to resolve to ensure that the different schemes providing retirement benefits have clear objectives and complement one another. Three main issues to address involve the severance pay system, the failure of the JHT to finance retirement, and the introduction of a new mandatory pension programme for higher-income workers. Regulations should clearly define the objectives of these three programmes and their design should be conducive to achieving those objectives in a complementary manner.
The severance payment system does not have clearly defined objectives, and most workers are not able to substantially benefit from the programme. Currently, only the employer at the time the benefit is claimed – i.e. at death, disability, or retirement – is liable to pay the severance benefits, and the calculation of benefit entitlements only considers the employment record of the employee with that employer. As such, people who have changed jobs during their working life will benefit less, and there is an incentive for employers not to keep employees until retirement, putting the employment of older workers at risk. In addition, even though severance payments are mandatory, less than 20% of companies actually comply with the requirement. Mostly only large companies comply. So even if a worker stays with the same employer throughout their working life, they are not likely to benefit from a full severance payment. The Law 6/2023 reduced benefits paid under the severance system, which comprised of a formula accounting for severance pay, service pay, and additional compensation amounting to 15% of the other amounts. Previously, benefits were equivalent in the case of death or retirement, and the service allowance for disability was doubled. Now, the compensation pay has been eliminated, the additional service compensation in the case of disability removed, and the severance pay in the case of retirement reduced. The authorities are considering additional reforms that would require employers to pre-finance severance liabilities through the JHT scheme instead of through a DPPK or DPLK for those earning less than IDR 10 million.5 However, the purpose of the severance system in providing benefits for retirement remains unclear, and the incentives to use occupational pension funds to finance the severance liabilities for higher earners remain.
Another challenge relates to the failure of the BPJS-JHT scheme to fulfil any objective relating to financing retirement benefits. The majority of assets are withdrawn when members change or lose their job, and only a small fraction of assets are withdrawn at retirement. The light blue bars in Figure 1.6 shows this. To address this, the authorities are separating savings in the JHT scheme into two accounts: one reserved to finance retirement, and another that can be used as emergency savings in the case of health problems, illness, unemployment, or alternatively for the purchase of a first home.
Source: Kementerian Keuangan Republik Indonesia (2024[5]).
Finally, the Indonesian authorities have also introduced a new requirement for additional mandatory contributions to a DC scheme for employees earning more than IDR 10 million per month.5 Which institution will manage these contributions is not yet clear. Investing the additional contributions in the JHT scheme is one option, however the BPJS only has a legal mandate to manage the basic pension benefits for the population, and not the supplementary benefits, so depending on the interpretation of their mandate, their management of additional contributions could require changes in legislation. The other option would be for the private pension funds to manage the additional contributions.
Regardless of the solution chosen to manage these additional contributions, this new requirement will only impact about 5% of the working population. Therefore, while it will contribute to the goal of increasing replacement rates from the pension system, it will only do so for a small minority of the population who are already better off financially and who already contribute more to the system. Additionally, providers of pension funds are concerned that an increase in mandatory contributions will reduce the appetite for voluntary savings in occupational pension plans and exacerbate the trend to close plans offered by employers.
References
[13] BPS-Statistics Indonesia (2024), Income and Consumption Database, https://www.bps.go.id/en/statistics-table?subject=523.
[2] BPS-Statistics Indonesia (2023), Labour Statistics, https://www.bps.go.id/en/statistics-table?subject=520 (accessed on June 2024).
[6] Holmemo, C. et al. (2020), Investing in People: Social protection for Indonesia’s 2020 vision, The Wold Bank, https://documents1.worldbank.org/curated/en/384621587010378649/pdf/Main-Report.pdf.
[1] ILO (2025), ILO Modelled Estimates and Projections database, http://ilostat.ilo.org/data.
[5] Kementerian Keuangan Republik Indonesia (2024), Harmonization of Pension Programs in Indonesia: Initiative to Improve Old-age Protection and Advanceing Public Welfar - DRAFT.
[8] Ministry of Finance (2024), Discussion with the Head of Insurance & Pension, OECD.
[16] OECD (2024), Pension Markets in Focus 2024, OECD Publishing, Paris, https://doi.org/10.1787/b11473d3-en.
[3] OECD (2023), “Gross replacement rates: Public vs. Private, Mandatory vs. Voluntary schemes”, in Pensions at a Glance 2023: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/6ee56185-en.
[17] OECD (2023), Pension Markets in Focus 2023, OECD Publishing, Paris, https://doi.org/10.1787/28970baf-en.
[4] OECD (2022), Pensions at a Glance Asia/Pacific 2022, OECD Publishing, Paris, https://doi.org/10.1787/2c555ff8-en.
[9] OJK (2024), A Glance of Indonesia Pension Program.
[12] OJK (2024), Roadmap for the development & strengthening of Indonesia pension fund 2024-2028.
[14] OJK (2022), Indonesia’s Social Security Statistics.
[11] OJK (2022), Statistik Dana Pensiun 2022, https://ojk.go.id/id/kanal/iknb/data-dan-statistik/dana-pensiun/Documents/Pages/Buku-Statistik-Dana-Pensiun-2022/Buku%20Statistik%20Dana%20Pensiun%202022.pdf.
[10] Rosedewayani, S. (2017), Fiscal and other incentives for pension and saving schemes in Indonesia, https://www.ojk.go.id/id/kanal/iknb/berita-dan-kegiatan/info-terkini/Documents/Pages/OJK-dan-World-Bank-Gelar-Indonesia-Pension-Conference/Session3_Pension%20Day_Fiscal%20and%20Other%20Incentive_Santhi%20Devi%20WTW_v4.pdf.
[15] The World Bank Group (2024), Indonesia Financial Sector Assessment Program Technical Note: Long term finance and capital market development.
[7] United Nations (2022), World Population Prospects, http://population.un.org/wpp/.
← 1. This is the same definition of informality than in Latin American countries. It means that the self-employed are classified as informal workers. This is not the case in North America, Europe or Japan.
← 2. Life expectancy figures do not account for future expected mortality improvements, so the average amount of time that an individual can expect to be in retirement is actually longer.
← 3. Removing participants in Asabri and Taspen, who have around 4.8 million members.
← 4. Based on employment statistics from 2022. The breakdown of participants in occupational and personal DPLK plans is not available.
← 5. This amount is still under discussion.