scheme (BPJS Ketenagakerjaan) Bogor, 7 th March 2017 Nuno Cunha - - PowerPoint PPT Presentation

Actuarial Study on the new pension scheme (BPJS Ketenagakerjaan)

Bogor, 7th March 2017 Nuno Cunha – Senior Social Protection Specialist

Scope of the Actuarial Study

– Assess the financial sustainability of the new pension system that has been in place since 1 July 2015 It’s not a magic crystal ball

3

Income security for old age Overview of the current system

Coverage

• Different schemes for civil servants, army and police
• Very limited coverage for informal economy workers
• Cash transfer targeting the “vulnerable” elderly (part of

PKH): very limited coverage

• Majority of the elderly still depends on family and
• ther available support

4

Income security for old age Overview of the current system

Benefits

• Labour Law (Severance and service reward pay): lump sum
• Severance Pay (UP)
• Reward for Working Time (UPMK)
• Compensation Fee (UPH)
• Provident Fund for private-sector workers: lump sum
• Pension for civil servants: periodical payments
• New pension scheme for private sector employees

Labour Law No. 13/2003

UP – 9 months of salary for more than 8 years UPMK – 10 months of salary for more than 24 years of services UPH – 15% of the amount of UP and UPMK

Ex: worker >24 years of service 2XUP +15%X(2XUP+UPMK) (2X9+10)X1.15Xmonthly salary = 32.2 X monthly salary If an employer contributes to a private pension plan total amount is lower (does not includes UP)

Provident Funds

• Contribution rate

– 3.7% employee’s – 2.0% workers – Possible to withdraw 30% of the amount accumulated for housing plus 10% for other purposes after 10 years

• f contribution

On former PT Jamsostek 75% of all the funds were withdraw before reaching retirement age

Pension

• 15 years of contributions
• Retirement Age: 56 until 2019

– Increase to 57 in 2019 and then 1 year increment every 3 years

• Formula – 1% X number of years of service X average career

index salary

• Contribution rate: 3% (2% E / 1% W)
• Insurable earnings:

– Ceiling is 7 million Rp. – Adjustable to annual GDP growth

• Maximum Pension – 3.6 million Rp. (adjusted to inflation)
• Minimum Pension – 300 000 Rp per month (adjusted to

inflation)

8

Income security for old age: Overview of the current system Finance

• Labour law: employers’ direct compensations
• Provident Fund: external, individual accounts
• Pension: external, collective financing (redistribution)

(some) Key assumptions used

Total Fertility Rate

1 2 3 4 5 6

Expected to decrease to 1.9 by 2045 and to be kept constant

Life expectancy at selected ages

Men Women Year At 0 At 20 At 60 At 0 At 20 At 60 2010 66.4 49.6 15.2 70.5 53.3 17.8 2035 70.1 52.1 16.5 74.9 56.4 19.4 2060 73.6 54.8 18.0 78.4 59.1 21.1 2085 77.6 58.2 20.1 81.4 61.7 22.9

Year : 2010

Year : 2060

Year : 2035

Year : 2085

• Average age is 28.8 years old (2010) - will increase to 42.5 years

(2110)

• Total population will increase to 325,952,588 (2073),then will

gradually decrease

Demographic Projections Indonesia

• Dependency Ratio 15-64/65+

– 2015 – 12.8 – 2060 – 4.3 – 2110 – 2.7

50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 350,000,000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110

0-14 15-64 65-

Proportion of formal-sector workers and self-employed persons

2004 2005 2006 2007 2008 2009 2010 2011 2012 Proportion of workers in the formal sector 30.3 30.7 31.1 31.0 30.4 30.7 33.1 37.8 39.9 Proportion of workers that are self-employed (WB) 68.1 66.4 66.1 66.0 67.4 66.6 64.6 60.6 N/A

2013 2063 2113 Population (no. of persons) Total 246,951,012 325,135,290 311,871,998 Population aged 15−69 (no. of persons) Total 169,668,855 229,573,409 206,808,045 Labour force participation rate (%) Males 85 84 83 Females 53 66 65 Total 69 75 74

• Unemp. rate (%)

6.3 5.0 4.9 Formal sector (%) 40.4 58.7 58.0

Labour Market Balance

Inflation, real salary increase and real GDP growth

1 2 3 4 5 6 7 8 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 2068 2071 2074 2077 2080 2083 2086 2089 2092 2095 2098 2101 2104 2107 2110 2113

Inflation Real Salary Real GDP

Schedule of increase in pensionable age

50 52 54 56 58 60 62 64 66 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 2069 2072 2075 2078 2081 2084 2087 2090 2093 2096 2099 2102 2105 2108 2111

Projected PAYG rates (in per cent of insurable earnings)

GAP – 10,2%

5 10 15 20 25 2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055 2059 2063 2067 2071 2075 2079 2083 2087 2091 2095 2099 2103 2107 2111

PAYG – 22.5 (2015)

With a ratio reserve/expendi.

• f 5%

Projected benefits and reserve in relation to GDP

• Until 2043, annual contributions are sufficient to pay for all

annual expenditures

• From 2044 to 2049, annual investment income from the

reserve must be partly used to pay for annual expenditures

0.0 0.5 1.0 1.5 2.0 2.5 3.0 2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055 2059 2063 2067 2071 2075 2079 2083 2087 2091 2095 2099 2103 2107 2111 Benefits to GDP Reserve to GDP

• From 2050, the reserves

will be used to pay for annual expenditures.

• The reserves will be

depleted during the year 2058

MAIN RECOMMENDATIONS

http://theletmebefrankguy.com/life-transformation-411-day-1/

Introduction of Universal Pension

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 Age 60, adjusted to inflation Age 65, adjusted to inflation Age 60, adjusted to salary Age 65, adjusted to salary

Granting past service to initial members near retirement

• Problem identified

– During 15 years nobody will receive a pension – Long time before pensioners will be able to receive 35 per cent of their average insurable earnings

• Risks the relevance with political implications
• Policy Solution - Providing a certain number of

years of service to the initial insured members for calculating benefits

How could it work?

• Those aged:

– 56 in 2015 and over would be awarded with 15 years of service; – 55 would be granted 14.5 years of service, – 54 would be granted 14 years of service, and so

• n.

– Recognition of past service can be conditional to having contributed to the scheme for at least a given number of years.

Granting past service, PAYG, in per cent

5 10 15 20 25 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 2069 2072 2075 2078 2081 2084 2087 2090 2093 2096 2099 2102 2105 2108 2111 2114 Granting past service Base Scenario

Granting past service, Replacement ratios by benefit type

5 10 15 20 25 30 35 40 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 2069 2072 2075 2078 2081 2084 2087 2090 2093 2096 2099 2102 2105 2108 2111 2114

Old age pension - Granting service Invalidity pension - Granting service Survivors pension - Granting service Old age pension - Base Invalidity pension - Base Survivors pension - Base

Better alignment with C102 principles

Adequacy Sustainability Predictability

A Old Age Pension that better fits Convention 102

• Replacement rate for 30 years of contribution

must be at least 40 %

• The current annual accrual rate - 1 %
• The revision of the accrual rate for the first 30

years of contribution may be considered

• Annual accrual rate should be at least 1.33%

for the first 30 years

A survival pension scheme that fits Convention 102

• Replacement rate for 15 years of contribution

must be at least 40 %

• Currently is only 15%

Sensitivity analysis: Minimum ILO standards

Scenarios

GAP (%) PAYG 2115 (%) Year reserve = 0

Base

10.2 22.5 2058

ILO standards

12.6 27.4 2053

Alternative - reallocate money from other social security scheme, including labour protection programmes – ensure periodical payments

Estimated income replacement level for a male, retirement age at 56 with 30 years of services

Labour Law Real return on assets (%) Real salary increase (%) 2 3 4 5 6 2

13 14 16 18 20

3

13 14 16 18 20

4

13 14 16 18 20

5

13 14 16 18 20

6

13 14 16 18 20

Provident Fund Real return on assets (%) Real salary increase (%) 2 3 4 5 6 2

8 11 15 19 25

3

7 10 12 16 21

4

6 8 11 14 18

5

6 7 9 12 16

6

5 6 8 11 14

Pension Benefits Real return on assets (%) Real salary increase (%) 2 3 4 5 6 2

30 30 30 30 30

3

30 30 30 30 30

4

30 30 30 30 30

5

30 30 30 30 30

6

30 30 30 30 30

Total Real return on assets (%) Real salary increase (%) 2 3 4 5 6 2

51 55 61 67 75

3

50 54 59 65 71

4

49 53 57 62 68

5

48 52 56 60 66

6

48 51 55 59 64

Adoption of a scaled premium contribution rate

• PAYG contribution rate (100 years) 22.5%
• GAP – 10.2%
• Increasing the contribution rate by 2 % every 10 years starting in

2025 is shown for considerations

0% 5% 10% 15% 20% 25% 2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055 2059 2063 2067 2071 2075 2079 2083 2087 2091 2095 2099 2103 2107 2111

PAYG Base scenario Scaled premium

Evolution of the reserve ratio

• 60
• 50
• 40
• 30
• 20
• 10

10 20 30 40 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 2105 2110

Scaled premium Base scenario

Indexation of the contribution ceiling and the maximum and minimum pensions

• Average annual wage increases are expected to be

higher than inflation

• The indexation of maximum annual pension in line with

CPI will result in problems in the long run

– Gradual share of the scheme replacement rate will go down – No incentive to declare

• The average insurable earnings required in 30 years

to obtain the maximum will be 75% lower than the maximum insurable earnings in 2115

• Recommendation: Index Max annual Pension with

average wage growth

Replacement rates current law and base scenario

5 10 15 20 25 30 35 40 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 2069 2072 2075 2078 2081 2084 2087 2090 2093 2096 2099 2102 2105 2108 2111 2114

Old age - Law Invalidity pension - Law Survivors pension - Law Old age pension - Base Invalidity pension - Base Survivors pension - Base

Projected PAYG rates, current law and base scenario

5 10 15 20 25 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 2069 2072 2075 2078 2081 2084 2087 2090 2093 2096 2099 2102 2105 2108 2111 2114

Current law Base scenario

Funding Policy In order to:

– Explain the type of funding – formalize the long-term funding objectives of the scheme, for example defining:

• The equilibrium period
• Minimum level of reserves over the long term. This objective

is a major driver of increasing the contribution rate;

– better understand the risks and advantages of financing options – enhance scheme governance by increasing transparency.

Funding Policy Should include:

• Contribution rates
• Risks faced by the scheme and how these risks

can be managed

• Funding objectives (like contribution stability
• r improving the funding ratios)
• Frequency of actuarial valuation, method of

actuarial projection

• Goals related to intergenerational equity

Long Term Investment Policy

• Well-documented investment policy should be

implemented

• Based on risk management principles and international

guidelines

• Proper balance between higher investment returns and

the long-term stability

• The choice of the financing strategy will affect

considerably the level of assets to be held in the fund and the level of assets will affect considerably the future level of contribution rates.

Funding and Investment Policy Important Questions

Have a nice reading Thank you

cunhan@ilo.org