Government’s proposals on pension reforms in Indonesia

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We held a technical meeting on August 20 with Indonesian trade unions on pension reforms, and listened and discussed the Indonesian Government’s proposal.

Highlights of the current Government Proposal

1. Contributions to be paid to a defined-contribution individual saving account (JHT) will be saved into two separate accounts to prevent workers from withdrawing the fund before retirement. The distribution will be 65% for a retirement saving account and 35% for a flexible account that allows withdrawal for spending on education, health, housing and layoffs. This seems to be the World Bank’s proposal inspired by the Malaysia’s Employer’s Provident Fund (EPF).

2. Statutory severance pay mandated for employers by the labour law will be abolished in case of retirement (no change in case of layoffs). The Government estimates the value of retirement severance pay is an equivalent to 4.3% of wage on average. The 4.3% will be added to a defined-contribution scheme, JHT (0.3%) and a defined-benefit scheme, JP (4.0%). In this way, the Government explains to employers no additional costs on employers.

3. JHT contributions will be raised from 5.7% to 6% (0.3% increase financed by the integration of statutory retirement severance pay).

4. JP contributions will be raised from 3% to 9%. 4% increase borne by employers, financed by the integration of statutory retirement severance pay, and 2% by participants. The JP contribution increase will be phased in over 9-10 years (an average of 0.5% per year for employers and 0.25% for workers). Except the rapid transition period, it seems that the ILO proposal on strengthening JP was adopted.

5. The JP accrual rate will be raised gradually from 1% per year to 1.5%. That will meet the ILO’s social security minimum standards.

This law/regulation revision does not have a scope to change legal coverage This may be the best the Government can do for now to improve the system.

Next year, Indonesia will then have to continue working on the coverage extension (mandatory for all employees), the establishment of Floor Zero (extension to workers in informal employment and other residents) and the role of JHT (voluntary or mandatory), which requires the amendment of the social security law. We will fully support the overhaul of the Social security Law.