Professional Documents
Culture Documents
Abstract
This paper will elaborate the benefit of a mandatory employee social security
system (Jamsostek) as a basic pension system. The potential of Jamsostek to be
the largest invastor is sigruficant with which it has power to raise funds through a
worlang society and administers their database. Jamsostek (formerly known as
Astek) was founded in 1977 as a state entity which develops employment accident,
health care, death and provident fund schemes for employees. Membership of
Jamsostek was previously those w o k q for medium to larger scale company's
employees, however, recently the top priority to be given is directed toward the
extension of coverage across smaller employers. In term of financing the schemes,
eligible employers on behalf of their employees pay the contributim to
Jamsostek. The current investment policy is conservative in shares because of the
investment guidance which has been applied to Jamsostek limits the allocation of
fund to shares or other risky financial asets. As a result, the allocation of funds
(which account fors about 70% of total funds) is deposited into bank time
deposits. Another problem which recently arises in particular for accumulating a
long term fund is early withdrawal of provident fund account by the members. It
can be met by the members so far as their membership has been at least 5 years
and 6 months. The last is that they are undergoing a layoff from the employer.
1. Background on Jamsostek
Over the past twenty years, the employee social security system (Jamsostek) has
been remarkably succesfull. Jamsostek had been carefully phased and gradually
implemented before 1992. Conceptionally, it is a protection system for employees against
occupational, sickness, death and old age risks and is a compulsory social security scheme
for all the categories of paid workers. In other words, social security benefits are basically
designed to provide a lumpsum income support for those having an accident at work, died
before age 55 and achieving an retirement age. The amount of benefits provided for
employees is much lower than those provided by commercial insurance. The size of the
benefits is subject to the contribution rates, gross pay of employees as reported by
employers to Jamsostek and promised rate of interests on provident fund. To finance the
schemes, both employers and employees make contributions proportionately to the
schemes while employers are required to pay the contribution higher than employees.
Top priority for developing social security in Indonesia over that period was given
to protect employed people in particular those working for the economic formal sectors
but this does not mean to ignore the protection of those working for the informal sector.
Employed people must be protected first by Jamsostek because protection of employees
closely relates to the promotion of human resources development. Under this concept,
employers shall provide their employees with necessary vocational training and basic social
security.
Additionally protection of people working in the formal sector is more significant
than those working casually in the sense that they are dependent on employment system
Although social security schemes for those working in the informal sectors were
undeveloped, people in Indonesia can survive without the financial assistance from the
government. A tax-finance social security scheme will not be developed in the near future,
however, in place of that, the underground economic sector is still needed to provide more
casual jobs. Nevertheless, social security plans as a whole embrace development of a
private pension plan.
The legal provision of Jamsostek is Law No. 3 Year 19922. Under the Law,
hrthermore not only provides work accident, death and provident fund but also provides a
health care scheme. A health care program is very typical for any entities organizing social
security schemes which include unemployment benefits and family allowance assistance
and the provision of a health care scheme is directed to improve the health of employees.
Additionally, employees who work for smaller employers feels more secure to join
Jamsostek because of a health care scheme. The eligible employers under the Law include
those smaller employers having at least 10 persons or a monthly payroll of Rp. 1 Million
(about US$425). The aim of which is to extend the coverage of membership across many
more small employers including family employers. However, extension of coverage across
smaller employers is still a major problem in Indonesia because of the employer's financial
shortage which relates to provide a payroll on an minimum basis.
Before 1992, the coverage of membership was limited to the schemes covering
only occupational, death and old age risks. Additionally, coverage of employees was
limited to those working for medium to large scale companies. In other words, only
employers having industrial relations and those having at least 100 employees as well as a
monthly payroll of Rp. 5 million could be covered. And this had brought about inequality
in the provision of a basic protection for employees working in the smaller employers as
recently there are about 16 million employees more who recently work under the smaller
employers have not been protected under Jamsostek. For that reason, Law No. 311992
was enacted in order to embrace a broader scope of protection.
Another legal provision of Jamsostek was also Law No. 1411969 that it was
regarding the manpower protection. Under the old law, all employers were obligated to
provide a health care for employees and their families but in practice the operation of a
health care was not in operation because it was not compulsory. In many cases, there is a
great concern for Government ie. the Ministry of Manpower in order for Jamsostek to
manage this basic health care scheme. Jamsostek is the only state entity licenced to
manage only a floor protection scheme including a primary health care scheme. To operate
the scheme, Jamsostek will charter numbers of both public and private hospitals to be
operated as Hospital Maintenance Operations (HMOs).
The philosophy of developing a health care scheme under Jamsostek is that of two
considerations. The first is that development of a health care is very costly for employers
while the participation in private sickness insurance is also very expensive. The second is
due to the aim of national development, viz. to focus on the development of a national
healthc system. Jarnsostek's primary health care scheme is established on referring to the
aim of national development.
Health care scheme under Jamsostek is mandatory3 although in practice the
coverage of this scheme is subject to optional. In this case, smaller employers have the
only option to join a health care scheme because it is relatively cheaper than building a
clinic. A mandatory health care scheme is a managed scheme in which Jamsostek
administers the membership database and collects contributions from the employers. Part
of the contributions will be paid out to the appointed hospital on a capitation system. A
referral system is also applied for those require an advanced medical treatment and
specialists.
So far as a primary health care scheme is considered significant for improving
health of employees and their families because of a cheaper scheme. The government will
support the scheme although it is compulsory. The implementation of employment
accident has also been important for employees, employers and the government.
Employment accident is as a means of creating the demand for employees protection
against occupational and death risks. The impact of this is the increases in the productivity
gain of the employees.
Unlike a provident hnd, employment accident and a health care as elaborated
above are sensitive to a contingencies risk so part of their contributions is reserved.
Provident fund is a basic pension component. The government in this case the Ministry of
Finance acknowledges Jamsostek's provident fund as a defined contribution plan (DCP) so
the investment earnings of that h n d is not taxed. Investment sources of Jamsostek are
mostly derived from a provident fund and its accumulated interests which account for
more than three quarters of the total funds.
The organization of the paper is as follows. The first chapter is to present
background on Jamsostek and its potential for the establishment of institutional investor.
The second chapter is to highlight progress achieved in term of developing programs and
of covering more employees after 1993. The third illustrates the investment pattern of
Jamsostek directed to conservative policies and the fourth chapter is the development of
future prospects of Indonesian hnds and their potential to be larger institutional investors
in Indonesia. The fifth chapter is the presentation of Indonesian pension programs which
focuses on the coverage of private pension plans and the investment barrier of the plan. A
concluding part of the paper is finally presented.
TABLE 1
LABOR-FORCE, EMPLOYMENT OPPORTUNITIES AND EMPLOYEE
MEMBERSHIP IN JAMSOSTEK
respectively between 24.5 million and 27.1 million that those recently being covered under
Jamsostek is about half of the number in particular 1997. Number of paid workers recently
uncovered by Jamsostek is the potential of Jamsostek that the number has been decreasing
from 18.2 million in 1993 to approximately 12.1 million workers in 1997. The potential
number of 12.1 million workers which happen in 1997 is expected to decrease sharply by
respectively 8.1 million in 1998, 5.3 milllion in 1999 and 1.7 million in 2000. So in the
21 st century all paid workers are expected to be protected under Jamsostek.
The impact of increased coverage on the accumulated hnds is significant. In
developing countries like Indonesia, rapid growth of investment assets is merely due to the
increases in new coverage and not to be generated by investment earnings, because capital
market is not well developed. The investment earnings of the funds is the only return that
can bear the promised rate of interests and the operation costs of funds. Capital gain
generated by the hnds can add directly to the growth of assets because of the international
diversification. Recent investment policies direct to make one single asset investment
which means that almost 80% of the funds are allocated into bank time deposits although
the funds invested are long term in nature. As a result, the fund failed to generate a long
term rate of return.
Performance of Jamsostek is seen from its capacity to generate a future income
and collect more incoming funds, pay out the benefits quickly for the members and issue a
statement of accounts. Highlights of incoming funds and outgoing funds as reflected by
the contributions received and the payment of benefits of employment, health, death and
provident fund as well as to bear the operation costs of Jamsostek are presented in Table 2
below.
TABLE 2. INCOMING AND OUTGOING FUNDS OF JAMSOSTEK
(Billion of Rupiah)
DESCRIPTION
1993
1994
1995
1996
1997*
1 Contributions received
504.2
724.8
883.2
1,110.3
1,429.6
2 Benefits paid
92.6
123.3
210.4
270.9
351.9
3 Operational costs
78.7
89.4
133.7
137.9
165.9
4 Gross surplus
38.5
99.8
81.9
115.4
137.6
c.
Equity issued by a firm is defined as total assets - borrowing from banks, government
and abroad. Thus, any direct borrowing by firms from households is regarded as an
equity holdings of the company and is calculated as a residual in the financial markets.
allocation process. In practice, the investment pattern remains conservative because of the
conservative investment guidance recently applied to the plan limits the investment in
shares.
Many more local pension funds were in cooperation with fund managers to invest in
shares. For example, Jamsostek has also set up the investment portfolio in shares, however,
the first priority in alloting the funds would be to invest in blue-chip shares such as telecom,
bank and electricity shares. In Indonesia, investment diversification still means to distribute
assets into a variety of financial products including time deposits and certificate bank of
Indonesia.
Under the new regulation, there is a small allotment of funds to be held in nonfinancial assets eg. property. Although, there is freedom to hold any assets both financial
and real assets. For individual investors, it is free to hold any assets as Indonesia applies to
free capital account. Nevertheless, asset holding of Jamsostek refers to Government
Regulation No. 28 Year 1996 which limits the allocation of funds to property.
Conservative investment guidance for Jamsostek means to secure its funds in
particular provident fund although it is not a real pension plan. Another consideration to
secure the fund is that almost 90% of Jamsostek's funds are in the form of accumulated
provident funds plus accumulated interests accrued at total investable funds and the rest
were contingencies fund. As a result, almost 80% of the investment funds were directed
towards cash deposits and bonds. The aim of this allotment is just to generate a normal
rate of return as far as interest rates on time deposits remain high so the market value of
assets also increases between 1993 and 1996.
Under article 3, paragraph 1 of the Government Regulation No. 2811996, the
definition of assets of Jamsostek includes (a) investment funds, (b) cash on hands and cash
in bank and, (c) contributions receivable. There is another form of investments called land
& buildings and corporate shares. Total assets of Jamsostek are also investment funds
(whch mostly derived from accumulated provident funds) as the funds have accounted for
about 95% averagely between 1993 and 1996 (see Table 3).
TABLE 3.
BRIEF FINANCIAL DATA OF JAMSOSTEK (BILLION OF RP)
Maximum allotment of Jamsostek funds to bank time deposits, CBI and Corporate Bonds
is respectively 70% of the investment funds and the rest may be tolerated to a maximum of
10% of the investment funds eg. the placement of funds to corporate shares.
Below are the investment restrictions for Jamsostek. The restrictions are provided
under article 6 of the Government Regulation No. 28 Year 1996 which elucidates that the
investment of Jamsostek funds must be directed towards the investment in secured financial
assets.
1 . derivatives instrument
2. foreign exchange and future trading
3. foreign investments
4. direct participation in the insurance companies
5. any entities owned directly by Board of Directors, Board of Commissioners
1994
GDP Growth
7.3%
9.24%
Inflation Rate
Foreign Reserves ($ Billion) 11.35
14.27%
Prevailing Interest Rates
1995
7.5%
8.64%
13.25
15.73%
1996
7.8%
7.0%
14.50
15.0%
increases in investment funds, assets of Jamsostek also increased from Rp. 3,436.9 billion
to Rp. 4,430.3 billion in 1996. Liabilities side of Jamsostek which include provident funds
and technical reserve also increased respectively from Rp. 3,127.6 billion to Rp. 4,014.4
billion in 1996.
Although there was a significant increase in the value of investments in 1996, the
investment portfolio of Jamsostek funds over the period 1978-1996 remains unchanged.
They have mostly been concentrated on one single financial asset eg. time deposit. This is
because there is limitation to invest in overseas countries and or in overseas investment
instruments. Empirically, the allotment of Jamsostek funds between 1994 and 1996 was as
follows.
1.
2.
3.
4.
5.
5.
6.
T w e of Investments
Time Deposits including on call
Certificate of Bank Indonesia
Bonds
Shares
Equity
Notes & Commercial Paper
Property
capital gains. If surplus increases sharply then the funding ratio tends to rise as the
increase of the value of assets is quicker than that of liabilities. It is defined as assets to
liabilities ratio. Liabilities here mean to include the summation of contingencies fund to
accumulated provident funds.
For illustration, the funding ratio of Jamsostek as provided in Table 3 illustrates
financial data of 1993-1997 and the ratio achieved in 1996 was still less than 1.10.
However, as seen from Chart 1 that the funding ratio as illustrated by financial data of
1991-1995 was also less than 1.10. This means that surplus has not increased quicker,
because no capital gain was generated by Jamsostek both over the period of 1991-1995
and that of 1993-1996. Although no rule of thumb is applied to measure what is the
minimum funding ratio, however, the funding ratio of US pension funds in 1990 was about
1.75. The assets of US pension plans have been almost doubled the market value of the
liabilities. Nevertheless, it can be concluded that the growth of investment funds in
Indonesia is still impacted by the growth of (new) coverage of employees.
m
m
7
m
m
m
m
m
m
7
m
m
Funding ratio of Jamsostek over the period 1991-1995 was relatively low at less
than 1 . 1 except the ratio of 1994. To achieve a target of funding ratio at between 1.3 and
1.5, modem portfolio theory need to be applied for future development of the investment
pattern and strategy. The development of dynamic investment pattern should do the
following action (see Cummins, 1977:105-1 12):
1 . The investment managers of funds should be able to evaluate the investment in shares
35 per cent
30 per cent
20 per cent*
10 per cent
05 per cent
Rupiah time deposits would be the first option, however, a proportion of funds
allocated to corporate bonds is proposed to increase by 30% of the investment value.
Superscript * is a proportion of 20% of Jamsostek funds which are tolerable to be invested
in blue-chip shares such as telecom and Bank BNI. The proposal to fix at 20% investment
in blue chip share refers to the Government Regulation No. 2811996 and the Minister of
Finance's Decree No. 78/KMK/1995.
: 0.88%
: 1.55%
: 3.1 1%
: 8.64%
: 9.05%
: 10.28%
: 12.92%
1.
2.
3.
: 50.2%
: 41.2%
: 8.6%
TABLE
Reserves
Jamsostek
3,370.8
3,199.0
Taspen
414.4
Askes
778.7
823.8
Jiwasraya
230.9
J. Raharja
118.1
379.6
Jasindo
84.0
Indore
193.7
91.1
318.8
52.9
13.0
418.4
Asabri
AEI
212.0
48.3
3 17.0
AKI
Total
Source : IP l sat Data Bisnis Indonesia (PDB , Centre for Indonesii
?!WE!
BILLIOb
Investments
Returns
3,264.8
2,894.7
362.6
726.1
168.5
172.3
106.6
394.0
297.7
506.1
8,893.4
385.0
355.2
42.5
75.6
16.5
19.2
9.5
44.8
37.8
59.3
979.5
s gross premium.
reserves
3 Capital
4 Surplus
5 Gross premiums
6 Net premium
7 Claims mid
7 Investments
1 4,996.9 1 6,270.3
1994. There will be a tendency that life expectation will rise very quickly up to 29% in 15
years to come. It is recently identified as aging population problems which will impact on
the development of a defined benefit plan. The negative impact of their respective changes
on this plan is that the growing number of old people will be inappropriate with the
number of young people as (prospective) pension contributors, so that results a difficulty
in financing the future plan. As a result of this difficulty, defined benefit plan remains
inappropriate for Indonesia as the ability of the (respective) plans to pay their promise for
their members is determined by the sufficiency of its past service liabilities to support its
solvency in the long run.
Under Jamsostek's provident fund, although we recognised that its benefit does not
seem appropriate to be consumed by the retired employees in the long run because of a
basic lumpsum benefit. For that reason, the Government imposed the Law No. 11 Year
1992 on the establishment of private pension plans. The Law has tolerated to any
employers having sufficient financial capability in order to develop the plan for their own
employees. Under the Law, they may develop either defined contribution or defined
benefit plans. There is no law enforcement on whether employers establish the plan or not.
Under the Law No. 11 Year 1992, there are two forms of private pension plans.
The first is the funds administered by employers called employers sponsored pension funds
(ESPFs). The second is the kinds administered by the insurance and banking companies
called financial institution pension funds (FIPFs).
In 1996 there are a plenty of employers who ignore to develop pension plans for
their own employees. For illustration, there were about 60,000 employers in 1995 which
have joined Astek's basic provident fund and only about 2,000 employers now sponsoring
the plan for their own employees. Another problem which was related to the reluctance of
employers to establish the plan was financial problem. Indonesia has recently intensified a
campaign on encouraging employers to provide minimum wages for employees. Those
must be in effective since 1995 in certain provinces while removing different wage levels
between male and female agricultural workers.
Empirically, a defined contribution plan is the only choice to be taken by employers
although they can develop defined benefit plan. In addition, private sector employees
prefer to have a lumpsum benefit than annuity benefits.
The obligation of ESPFs to the members is to hlfil the payment of pension benefits
when they are due. Sponsoring the hnds relateds to the investment management of funds.
To manage funds optimally, Minister of Finance's Decree No. : 78KMK.01711995 on the
investment management of the hnds states that the allotment of pension funds must be
directed towards:
1. Bank time deposits and certificate of time deposits
2. Corporate shares and bonds as listed in Jakarta Stock Exchange
3 . Promissory notes
4. Corporate equity
5. Land & buildings.
Maximum allotment of pension funds to shares, bonds is limited to 20% of the investment
funds and the rest may be tolerated to a maximum allotment of 10% of the investment
funds eg. the placement of funds to corporate equity.
long term rate of returns as the recent growth of the assets was merely due to the quick
increases in the new coverage.
Jamsostek is one of find industries in Indonesia that Jamsotek has performed
better over the last 10 years compared to the rest of othe h n d industries. Fund industries
have repidly developed in the 1980s in particular when the legal entities of social insurance
instutions, commercial (life) insurance firms and the employee social security (Jamsostek)
have been changed to a more commercial basis. Recently there are about more or less 25
million people as members of 171 schemes and the importance of this membership is that
they will be protected against their death, accident, sickeness and old age risks. In the
hture the h n d industries are expected to be the largest institutional investors in order to
contribute to the development of Indonesian capital markets.
References
Government Regulation No. 28 Year 1996 on Investment Management of
Employees Social Security Programs.
Kompas Daily News on Performance and Insurance Industries, 18 June 1996,
p.23.
Law No. 3 Year 1992 on Jamsostek, Jakarta
Bailey, Jeffery V, Richards & Tiemey, Inc., (1991), 'Investment Policy and Missing Link',
Probus Publishing Coy, Chicago, Illinois.
Curnmins, J. David, (1977), 'Investment Activities of Life Insurance Companies', Wharton
School and University of Pennsylvania.
Purwoko, Bambang, (1995), 'A Social Security Highlight in Indonesia: an Economic
Perspective', PT ASTEK (Persero), Jakarta.
Purwoko, Bambang, (1996), 'Indonesian Social Security in Transition: an Empirical
Analysis', International Social Security Review 1/96, Geneva.
Radelet, Steven, (1995), 'Indonesian Foreign Debt: Headed for a Crisis or Financing
Sustainable Growth', BIES, Vol. 31, No. 3 December 1995.
Thorbecke, Erik, (1992), 'Development Centre Studies Adjustment and Equity in
Developing Countries: Adjustment and Equity in Indonesia.
The first establishment as a mandatory system was in 1977 when the Government promulgated
Government Regularion No. 33 Year 1977 on Astek' s schemes which are similar to Employee. Social
Insurance System.
M n i t i o n of Jamsostek's schemes according to the Law No. 3 Year 1992 is as follows:
a. Employment accident scheme provides the employers with the reimbursement of medical costs and
transportation expenses from the place of accident to the hospital. Eligibility to accident benefits
is
disability and death allowance for any employees sdering from a work related accident or disease and or
dead because of accident.
Temporary disability benefits which are eligible for employees include 100% of earnings for the first 4
months and 50% of earnings thereafter.
b. Provident fund is a compulsory saving scheme payable for employees having reached age 55 or due to
total permanent disability. The benefit and can be withdrawn by the members when they are unemployed
after having membership of about 5 years and 6 months. Promised rate of accrued interest is fixed at 10%.
c. Death benefit is contributed by employers at 0.3% of wages and provides a cash payment to the heirs of
an employee who died before age 55. Death allowance and funeral fee: Rp. 1.2 million.
d. Health care scheme provides the covered employees with medical services and treatment for outpatient, in-patient, maternity, drugs, delivery and other medical servicesto the members
and
their
families who fall sick.
Rates of Contributions
Group of employment
accident contributions
Breakdown of
contributions
a. Work accident
b. Provident fund
c. Death
d. Health care 3-6%
(Single employee 3%
Emplover
0.24-1.74%
3.7%
0.3%
Em~lovees
2%
Prior to 1992, a health care scheme was implemented gradually as a pilot project and the operation of
this scheme was voluntary between 1986 and 1991.
The formula of Irving Fist: Real return = (l+Rn)(Po/Pn)-1, where Rn = nominal interest, PoIPn
purchasing power when inflation rate is fixed at n.