74608 Policy Note on SJSN PROGRAM AND POLICY IMPLICATIONS Issue 5, December 2012 Asset-Liability Management of SJSN Social Security Funds Background BPJS Assets PT Jamsostek will be transformed into BPJS Ketenagakerjaan Under the BPJS Law, the assets of the Social Security Funds are on January 1, 2014 and will begin its operations administering legally separated from the BPJS assets. The BPJS administers the SJSN work accident, old age, pension and death the Social Security Funds, but the assets of each program are programs no later than July 1, 2015. Participants in programs held in a separate fund at the state owned enterprise custodian sponsored by PT TASPEN and PT ASABRI must join the SJSN bank. BPJS assets come from several sources: employment programs by January 1, 2029. • Initial capital from the Government, which cannot exceed two trillion rupiah In order to transform PT Jamsostek into BPJS Ketenagakerjaan, PT Jamsostek will be declared dissolved without liquidation • The assets transferred from the state-owned enterprises and all assets and liabilities will be split between those that are that currently administer the social security programs the property of the government and those that are the property • The investment yield of BPJS assets of participants. The assets belonging to participants will likely be transferred to the appropriate social security fund. • Operational fees collected from the Social Security Funds • Other sources in accordance with statutory laws/regulations. A detailed plan for separating these assets and satisfying the liabilities of PT Jamsostek to its program participants is needed. The BPJS Law requires the appointment of a public accounting firm to audit the closing statement of financial position of PT Investment Jamsostek and the opening statement of financial position of Yield BPJS Employment. As stated in the BPJS Law, BPJS will manage its own assets and the assets of its Social Security Funds. This is a very Transferred Operational different governance structure from PT Jamsostek, which Asset BPJS Funds does not separate its corporate assets and liabilities from the assets and liabilities of its program participants. Assets BPJS Assets Initial Other Capital Sources BPJS manages Social Security Fund Assets BPJS assets can be used for: • Operational costs of administering the Social Security It is a big challenge to change the governance structure of PT programs Jamsostek to the governance structure required by the BPJS law. Under the SJSN and BPJS laws, the BPJS are required to • Cost of procurement of goods and services to support invest the Social Security Funds and BPJS assets in the best Social Security program operations interests of the participants. BPJS are also required to provide • Costs to increase service capacity participants with far more information about the performance, financial condition, assets and investment results of the social • Investments in accordance with the statutory laws/ security funds. regulations. BAPPENAS Each Participant Operational Investment Yield Assets Transferred from the State Owned Cost Enterprises Social Security Fund Utilization Assets Procurement Investment of BPJS Goods and Assets Services Other Legitimate Contributions Sources Increase Service As previously stated, Social Security Fund assets can only Capacity be used to pay benefits and the expenses of BPJS program administration. The determination of operational cost must be a percentage of contributions received and/or from a percentage of investment yield. The fees charged should be Social Security Fund Assets sufficient to cover BPJS operational costs only, as the BPJS is a not-for-profit organization. Social Security Fund is a trust fund belonging to all participants consisting of contributions and their investment income. These assets are managed by the BPJS and can only be used for the Bene�t payment of benefits to the participants and for the operational Payment costs of administering the Social Security programs. Assets of one program cannot be used to subsidize the assets of another program. Each program should have a contribution rate that is sufficient to finance the benefits and expenses Utilization of of that program. Consequently, BPJS Ketenagakerjaan will Social Security manage four separate social security funds, one for each of Fund Assets the four employment programs, which are work accident, old age savings, pension, and death benefit. Operational Investment Cost Social Security Funds of BPJS Ketenagakerjaan BPJS Expenditures and Liabilities BPJS expenditures consist of personnel costs, goods and materials and capital costs. The majority of expenditures is for Work Old-Age Death Accident Savings Pension Bene�t personnel and consists of salaries and benefits for the Board Fund of Commissioners, the Board of Directors, and employees. Fund Fund Fund In addition, the BPJS must pay for routine operating costs such as utilities, telephones, rent or mortgage payments on The sources of the Social Security Fund Assets are: buildings, supplies, etc. Capital expenditures are needed for such items as IT equipment, furniture and office machines. • Contributions from employers, workers and the government • The investment yield of the Social Security Funds BPJS liabilities are similar to those for any other corporation and consist of such standard items as accounts payable • Each participant’s assets transferred from PT Jamsostek and the outstanding balance on loans. Benefit payments to • Other sources in accordance with the statutory laws/ program participants are not liabilities of the BPJS. They are regulations. the liabilities of the individual social insurance funds. 2 The World Bank PT. Jamsostek has experience in managing health care, work • Incurred but not reported claims (IBNR). These are accident, old age savings and death benefit programs, but has reserves for claims that have been incurred but have no experience in managing a defined benefit pension program. not yet been reported to the BPJS. Since the type and PT Jamsostek is also responsible for managing programs amount of these claims cannot be known until they are covering about 9 million formal sector workers, but BPJS actually submitted, this reserve must be estimated based Ketenagakerjaan will eventually need to manage programs on past experience. covering 110 million workers in the formal and informal sectors. Consequently, significant changes in the organizational Unearned premium reserves are reserves for contributions structure and business processes will be required to effectively paid for coverage that has not yet been provided. For example, and efficiently manage the SJSN employment programs. assume that a participant pays contributions for one year at a time at the beginning of each year. At the moment the Social Security Fund Expenditures and contributions are paid, the social security fund has received Liabilities an entire year of contributions, but it has not yet provided the coverage for any portion of the year. Consequently, the entire The main expenses of the social security funds is paying amount of the contribution must be set up as an unearned benefits under the four programs (work accident, old-age premium reserves and should not be considered as fund savings, pension and death benefit) to all participants and surplus. After two months have gone by, the social security paying fees to BPJS Ketenagakerjaan for managing the funds. fund has provided two months of coverage and still “owes� ten months of coverage. Consequently, an unearned premium The liabilities of the social security funds at any point in time reserves must be held for the other ten months of coverage consist of the reserves necessary to assure program solvency that has not yet been provided. and payment of claims when due. The size and characteristics of these liabilities differ significantly by fund. The primary types Mathematical reserves arise whenever a social security of reserves are: program is fully or partially funded. This most commonly arises for defined benefit pension programs (where it is often referred • Claim reserves to as a demographic reserve) and with whole life insurance. • Unearned premium reserves This type of reserve arises whenever an increasing pattern of required contributions is replaced by a level equivalent pattern • Mathematical reserves of contributions. When this occurs, the contributions in the early years are higher than what is needed to pay expected claims and the contributions in the later years are insufficient to pay expected claims. The excess contributions in the early years must be saved and invested to cover the shortfalls in the later years. Claim reserves will be required for all SJSN employment programs. These will be the primary reserves for the work Mathematical Unearned Premium accident and death benefit programs and will be relatively Claim Reserves Reserves Reserves small. Since claims are paid quite quickly after claims are incurred, these reserves tend to be small and of short duration. Type of Reserves Claim reserves for the old age savings program will be for payouts that have been approved but not yet paid. Since the lump sum payments under the old age savings program Claim reserves are liabilities for claims that have already been can be quite large, the reserve can also be significant. Claim incurred but have not yet been paid. The claims process reserves will usually be largest for the pension program consists of three distinct steps. The claims must be reported because once a claim is approved, the reserve must cover all to BPJS, the claims must then be approved or denied, and expected future monthly payments to the pensioner. then the claim must be paid. There are three common types of claim reserves corresponding to each of these three steps: Mathematical reserves are the primary reserve for the pension and old age savings programs and can be very significant. The • Open claim reserves. Reserves for claims that have already mathematical reserves for the old age savings program are been received and approved but for which payment has not equal to the total account balances of all active participants. yet been made. For the pension program, the reserves represent the prefunding • Claims in course of settlement (ICOS). These are reserves of future benefit payments. For new pension programs and for claims that have been submitted to the BPJS but have pension programs for rapidly aging populations, these reserves not yet been reviewed. are often quite high. Policy Note on SJSN | Issue 5 | December 2012 3 Asset-Liability Management for BPJS over a long duration. Consequently, the regulations should require that assets be invested only in short-term, highly liquid From the explanation of the assets and liabilities of the BPJS, and highly safe securities. it seems the general regulations applicable to business capital are sufficient. The BPJS is not an insurance company and For the old age savings fund (and for the SJSN pension fund does not incur any insurance or investment risk at all. It merely if it will be partially funded), a very different investment policy administers the program for a fee. The BPJS doesn’t even would be appropriate since most of the funds will not need face the direct risk of loss of customers, as it is a monopoly to be paid out until many years in the future. Here the goal and contributions are mandatory. Consequently, the general should be to maximize the rate of return within the risk levels business rules applicable to the manner in which capital can appropriate for pension assets. Equities, longer-term bonds, be invested should be applicable and sufficient. securities backed by real assets and other assets with higher risk and rates of return might be appropriate. Asset-Liability Management for Social Security Funds While the actual technique for asset-liability management and the development of an appropriate investment policy The social insurance funds definitely need regulations on statement and strategic asset allocation is beyond the scope asset-liability management and investments. The regulations of this policy note, it should be clear from this discussion that should state general principles and should also require that professional assistance from experts will be needed to develop the assets be invested in accordance with fund liabilities and appropriate regulations and investment policies. best international practice in asset-liability management. The regulations must allow the flexibility to appropriately adopt very different investment strategies for funds with different liability This Policy Note was produced as part of the World characteristics. Bank inputs to the Government of Indonesia on the implementation of SJSN (Sistem Jaminan Sosial The type of assets held by a social security fund and the Nasional, National Social Security System). This note investment policy for those funds must be directly related to was prepared by the Poverty–Social Protection unit of the nature of the fund’s liabilities. The assets should produce the World Bank Office Jakarta and written by Mitchell sufficient cash flow to finance expected benefit payments Wiener (Senior Social Protection Specialist, EASHS), when due without creating a significant risk of having to sell Iene Muliati (Social Protection Specialist, EASHS), and plan assets at a loss in order to pay benefits. Indra Budi Sumantoro (Consultant, Social Security Analyst, EASHS). Funding for this note was made For example, it would be inappropriate to buy 30-year bonds available by the Australian Agency for International to back liabilities for health claims that will be paid in three Development (AusAID). months. If interest rates were to increase in the interim, the long bond would decline in value and would have to be sold at Significant input for this note was provided by partners a significant loss in order to pay claims when due. Instead, a from the Government of Indonesia, particularly Rahma government bond maturing in three months would make more Iryanti (Director for Manpower and Employment sense. Similarly, it would make sense to be longer-term bonds Opportunities Development) from Badan Perencanaan for an old age savings plan where benefits may not be paid out dan Pembangunan Nasional (Bappenas), the National until twenty years in the future and where the opportunity to Development Planning Agency. earn higher rates of return exists. The findings, interpretations, and conclusions Sophisticated techniques such as cash flow and duration expressed herein do not necessarily reflect the views of matching and immunization exist to assure that benefits the Board of Executive Directors of the World Bank or can be paid without incurring a high risk of asset losses and the Governments they represent. maximizing rates of return. These techniques should be taken into account when developing the investment policy guidelines For any questions regarding this note, please contact for each of the social security funds. Mitchell Wiener (mwiener@worldbank.org) or Iene Muliati (imuliati@worldbank.org). The work accident program should be treated similarly to the health program, since normally about two-thirds of all claim payments are for health. Health claim reserves should be quite THE WORLD BANK OFFICE JAKARTA low and of short duration, so the investment policy and asset- Indonesia Stock Exchange Building Tower II/12th Floor liability management for the health fund is relatively simple. Jl. Jend. Sudirman Kav. 52-53 Reserves must be held for unpaid claims, claims in course of Jakarta 12190, Indonesia settlement (ICOS), incurred but not reported claims (IBNR) and Tel: (6221) 5299-3000 unearned premium reserves. Assuming each health payment Fax: (6221) 5299-3111 is treated as a separate claim, which is the practice in most countries, there should not be any claims that will be paid out 4 The World Bank