New pension scheme

Adequacy versus financial sustainability of the new pension scheme: ILO’s perspective

Responding to a request from the Indonesian Ministry of Manpower and BPJS Ketenagakerjaan the ILO has undertaken an actuarial valuation of the new pension scheme.

News | Bogor, West Java, Indonesia | 10 March 2017
Indonesian garment factory workers
On July, 1, 2015, National Social Protection Agency on Employment (BPJS Ketenagakerjaan) fully started its operation as one of the main social security schemes’ implementation institutions in Indonesia. As mandated by the National Social Security laws and subsequent government regulations, a new public pension scheme were launched at the same date, in order to provide old-age, invalidity and survivors’ pensions to workers from private sector companies.

Responding to a request from the Indonesian Ministry of Manpower and BPJS Ketenagakerjaan the ILO has undertaken an actuarial valuation of the new pension scheme.

In order to share the conclusions of the study and discuss ILO’s recommendations to improve the current design of the pension scheme, namely on aspects related to benefits adequacy and financial sustainability a workshop was held in Bogor, on March 6-7, 2017.

Key National stakeholders from government institutions, workers organizations and employers’ associations (APINDO) attended the two-day workshop, which is also a follow up to the High level Tripartite Dialogue on Employment, Industrial Relations and Social Security that was organized in Jakarta, August 2016 between the Ministry of Manpower, the Indonesian Employers Association (Apindo) and trade unions confederations.

The final recommendations from the August 2016 tripartite constituents included a call to review pension policy and regulation, namely to examine quantitative evidence and organize policy dialogue on mid-term and long-term parameters review with a view to guaranteeing adequacy of benefits and the long-term financial sustainability of the system.

Key recommendations from the study include:

  1. Consider the introduction of a universal social pension scheme. Different scenarios simulated shows that the cost of such policy will be moderate (from 0.5-1.8 percent of GDP for the next fifty years).
  2. Grant “free” years of service for the benefits calculation to workers near retirement age so that they can soon start receiving pension. This will contribute building trust in the scheme.
  3. Reinforce the tripartite governance of the new pension scheme, building trust among tripartite partners
  4. Improve the scheme’s adequacy: slightly increasing the annual accrual rate in the benefit formulae (4/3 percent instead of 1 percent) to ensure at least 40% replacement ratio as per ILO minimum standard (C.102); Indexation of the contribution and pensions ceilings with wage growth instead of GDP growth or inflation.
  5. Improve the coordination of the overall system (new pension scheme, provident fund, labour law): more emphasis on periodical benefits than lump, more emphasis on external financing than direct compensations.
  6. Establish a financing and long-term investment policies.
The workshop offered a forum for participants to share and discuss their views on the recommendations. The study report in Bahasa Indonesia is developed to serve as a knowledge tool for an evidence-base social dialogue on the pension scheme reform.