Pension funds should shift from deposits

The Jakarta Post, Jakarta

In the chase for higher returns, pension funds have shifted their investments from bank deposits to riskier portfolios, such as bonds and equities, according to the Indonesian Association of Pension Funds (APDI).

An expert advisor to APDI, Satino, said on Tuesday that pension funds, traditionally considered conservative investors with a total portfolio of Rp 47 trillion (US$4.87 billion), had started shifting their investments in 2002.

"Interest rates on bank deposits have become too small and pension funds are therefore forced to switch to other instruments to attain their investment goals," said Satino, who served as the association's chairman until last month.

Data collected by APDI showed that the proportion of funds invested in bank deposits decreased from 56.5 percent in 2003 to 31 percent in 2004 and was projected to decrease even further to 20 percent this year.

Most pension funds have moved their portfolios into corporate- and government-issued bonds, which increased from 26.5 percent of the investments in 2003 to 48 percent in 2004 and is projected to increase further to 59 percent this year.

Equity and mutual fund investments increased by 90 percent from Rp 3.3 trillion in 2003 to Rp 6.3 trillion in 2004, and is expected to reach Rp 8.9 trillion this year.

Satino said ideally pension funds should allocate only 10 percent of their portfolio in bank deposits, 70 percent in corporate and government bonds and the remaining 20 percent in more volatile investment instruments, such as equities, mutual funds and property.

Eko Pratomo, president director of Fortis Investments, which manages Rp 3 trillion in assets, said that pension funds should diversify their portfolios even further, especially into equities.

He said the stock market was now less volatile compared to previous years, making risks more manageable and equity investment safer.

"In 1999, volatility reached 47 percent, now it is down to 23 percent," he said.

Stock volatility is a measure of fluctuations in a share's price within a certain period of time. A more volatile stock has rapid up-and-down movements in its price, while a less volatile equity has more price stability.

"Although the situation has changed, the majority of pension funds are still utilizing short-term instruments such as time deposits as they still considered the stock market has tremendous risks," Eko said.

"The stock market has become liquid and stable enough for pension funds to invest in. It's a way for pension funds to diversify themselves by taking calculated risks," Satino said.

He said that about 75 percent of pension funds managed their own stock portfolios, which were heavily invested in blue-chip shares in the banking, telecommunications and consumer goods sectors, while the remaining 25 percent put their money in mutual funds controlled by outside investment managers. (002)