A Study of Target Date Fund as An Investment Instrument for Voluntary Pension Fund in Indonesia Ardhivipala Gunawijaya
Fakultas Ekonomi dan Bisnis Universitas Indonesia *ardhivipala.gunawijaya[at]ui.ac.id
The mandatory social security program in Indonesia, known as Sistem Jaminan Sosial Nasional (SJSN) for the retirement age: Old Age Security, known as Jaminan Hari Tua (JHT) and Pension Plan, known as Jaminan Pensiun (JP), gives around 35% to 40% income replacement ratio (IRR) based on recent published news. Meanwhile, the 2013 HSBC Global Report says that the desired household income level that people need to feel comfortable in retirement is 78%. Therefore, in Indonesia, the employee is expected to fill in the big gap of IRR to the desired level by participating in the voluntary pension program. The law (Undang-Undang) no. 11/92 regulates the voluntary pension program managed by Financial Institution Pension Fund, known as Dana Pensiun Lembaga Keuangan (DPLK). Data from OJK reports between 2015 to 2017 shows that participants of the voluntary program (DPLK) are risk-averse by putting their pension fund allocation into fixed income such as time deposit or government bonds. The return from those instruments based on the reports is around 5.8% to 6.3% per annum. This figure may seem unsatisfactory as an investment alternative to filling the gap of IRR. However, alternatives instrument for the voluntary pension fund in Indonesia are not so many as well as research that focuses on it. In the countries where their pension industry is more advanced like in the U.S., Canada, and the U.K, there is a favorite instrument for the pension funds, that is Target Date Fund (TDF). TDF means the pension fund provider (DPLK) professionally manages the pension fund by following an investment allocation path to meet the needs of pension fund participant planning to retire. The objectives of this study are to see whether TDF gives a better investment return to the voluntary pension fund participant in the case of Indonesian capital market historical situation, how is its agility in term of capital market volatility, and whether TDF is efficient. In order to answer those questions, this study used multiple hypothetical scenarios covering the accumulation period and the decumulation period; increment and fixed contribution; and hypothetical glide path of the TDF. The underlying instruments for the simulation consist of 2 investment allocation: 24-month time deposit and stock. Bank Indonesia and Jakarta Stock Exchange Index are the source of the historical data. The study uses four glide paths: the maximum stock path, the minimum stock path, the fixed allocation, and the inverse of the minimum stock path. The first two are taken from the U.S. glide paths universe. This study also used scenarios where simple volatility management and cost of funds are applied. With the result of this study, there is an expectation that the voluntary pension fund provider (DPLK) to start exploring the product development of TDF and feel confident to launch it in the Indonesian pension market.