It has published on Islamic Finance News on 2022, Oct 5th
Having a source of income until retirement age is one of the hopes of people around the world including Indonesians. Since 2017, the public can prepare for their financial needs during their retirement age by participating in the Shariah pension fund which is in accordance with Shariah principles. Considering that there is a clear contract (Aqad) in the implementation of the Shariah pension program, investment instruments are Shariah compliant and a Shariah supervisory board will supervise the Shariah aspects.
However, there are still many who have a limited understanding of the Shariah pension fund. Some thinks that Shariah pension funds are not much different from conventional pension funds and many others think that pension funds can only be owned by government employees or state-owned enterprises (BUMN) employees. Therefore, campaign activities regarding Shariah pension funds need to be carried out continuously.
In principle, all can have a Shariah pension fund. Meanwhile, the mechanisms and procedures for becoming a participant in the Shariah pension fund are quite diverse. Individuals can become participants in the Shariah pension fund by purchasing a Shariah investment package managed by the Financial Institution Pension Fund (DPLK). To register through this channel, participant can visit the DPLK office or the branch office of the bank that established the DPLK as well as register through the DPLK website. As of May 2022, Indonesia has 5 DPLK that have permission to sell Shariah investment packages that manage about IDR8.15 trillion funds.
The advantage of this option is that participants do not need to think hard about managing their investments, because the DPLK management will carry out investment placements, monitor investments, and provide a personal report on the accumulation of Shariah pension funds. Participants only need to pay pension contributions and choose the type of investment package. In return for the management of this Shariah pension program, DPLK will charge a fee to participants with a relatively low percentage.
If during the participating period, participants change their mind and want to change the type of investment package, they can do so free of charge. Participants in the Shariah pension program need to pay attention to the financial statements provided by the DPLK as a basis for evaluating their Shariah investment package.
Meanwhile, for employers, apart from becoming a participant in the Shariah pension fund, they can also include their employees to become participants in the Shariah pension fund.
The employer has 3 (three) options to include their employees as participants in the Shariah pension fund:
1. By establishing a Shariah employer pension fund (DPPK).
2. By becoming a founding partner for Shariah DPPK.
3. By purchasing a Shariah investment package managed by DPLK for their employees.
The first option has the highest level of complexity, considering that to establish a new Islamic pension fund, the employer as the founder of the Shariah pension fund must prepare an adequate organizational structure and human resources. The minimum eligibility criteria to own a Shariah pension fund, one should be a directors, supervisors/commissioners, and the Shariah Supervisory Board (DPS).
Besides that, Islamic pension funds must at least have Pension Fund Regulation, Investment Direction, Pension Fund Governance Guideline, and Risk Management Guideline. Furthermore, in the operational aspect, Shariah pension funds must manage business processes from collecting pension contributions, managing investments, and paying pension benefits. In terms of reporting, Shariah pension funds must prepare and submit periodic reports to the OJK.
Currently in Indonesia, three employers have established their Shariah employer pension funds (DPPK). Two of them are providing a defined benefit program and one Shariah pension fund provides a defined contribution program. The total funds managed by these three employers are about IDR0.73 trillion.
The second option is relatively easier, especially if the founding partners do not ask for an allocation to be part of the management/supervisor of the Shariah pension fund. Founding partners only need to pay their employees’ monthly pension contributions to the pension fund management. If the Shariah pension fund runs a defined contribution program, the founding partners will receive information on the accumulation of the Shariah pension fund for each participant, whereas if the Shariah pension fund organizes the defined benefit program, the founding partner will receive a copy of the actuary report results that can be used to see the quality of funding for each founding partner. If there is a surplus, the founding partners may not have to pay dues. On the other hand, if there is a deficit, the founding partner must pay additional contributions. Currently, there are 41 founding partners of Shariah DPPK.
The third option is almost similar to individual participation. The distinguishing aspect is the part that pays the pension contributions. In the individual participation scheme, full contribution comes from the participants, while in the collective participation scheme, the employer can pay in full or a combination of contributions from the employer and the employees.
Lastly, employers who already have a pension fund are also allowed to organize a Shariah pension program for their employees by opening a Shariah unit. Currently, Indonesia already has one Shariah unit of employer pension funds. Institutionally, pension funds that have a Shariah unit must have a Shariah supervisory board. In addition, the Shariah unit of the pension fund is required to submit a report separately from its parent pension fund.
The mechanism to be a participant in the Shariah pension fund is made easy so that the barriers in the supply-side can be removed in order to access Shariah pension funds.
Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.
Mohammad Amin is the division head of Sharia Insurance and Sharia Pension Fund Supervision of Otoritas Jasa Keuangan. He can be contacted at m.amin@ojk.go.id.