1. By: Marliana, MSc and Yurike K, MSc EAAC, 13 September 2005, Nusa Dua, Bali

2. TOPICS TO BE PRESENTED Background Agreement of Pension Benefit Payment Setting up Syariah Pension Funds Administrators and Supervisory Board of Syariah Pension Funds Funding and Investments Roles of Actuaries Conclusions

3. BACKGROUND Muslims are majority Banks experience in 1997 Investment cases in pension funds within the last 3 years Number of pension funds diminished  Financial problems of the employer as effect from crisis in 1997  Pension regulations not synergized Number of individual members increased very slowly  Less promotion  Less attractive

4. BACKGROUND Syariah pension funds will be the answer?

5. AGREEMENT OF PENSION BENEFIT PAYMENT Historically, a pension benefit is likely a reward promised from employer to employees on their services to the company For DB, the formula of pension benefit very depends on the generosity of the employer The Law of Pension Funds enacted in 1992 has objective to protect members’ rights in relation to the benefits

6. AGREEMENT OF PENSION BENEFIT PAYMENT Pension benefit payment regulations in brief:  The payment starts at the normal pension age (55 – 60 years)  Allows for early retirement benefit at age at least 10 years before NPA  For DB, the maximum factor is 2,5% (monthly formula) or 2.5 (lump sum formula)  The maximum benefit is 80% of pensionable salary  The minimum benefit for spouse is 60% of member’s right  The rules on portable and vested are applied  Vested rule is 3 years  Discount factor may not be affected for early retirement pension  Lump sum is allowed up to 20% of present value of pension benefits

7. AGREEMENT OF PENSION BENEFIT PAYMENT Is pension benefit payment able to be implemented at syariah pension funds?

8. AGREEMENT OF PENSION BENEFIT PAYMENT The syariah pension concept (option): The pension benefit is similar to a reward promised Providing a reward to other people, e.g. between employer and employees, is allowed to do in Islamic law This is called muamallah Muamallah is defined as the way of life for Muslims to interact amongst people

9. AGREEMENT OF PENSION BENEFIT PAYMENT Muamallah is allowed to do until forbidden rules are determined There are at least two requirements to provide a reward:  Sources which are used to pay the pension benefit must not be haram (things that Allah not allows) e.g.: alcoholic trading, prostitution, gamble businesses, businesses working out with riba (unsury), corruption and burglar  The reward itself must not contain haram things (alcohol, pork and blood)

10. AGREEMENT OF PENSION BENEFIT PAYMENT Why must not be haram? The pension benefit is an income which will be utilized for living According to Islamic law, incomes of muslims must be received through righteous ways Allah says on Qur’an surah Ali Imran verse 168 meaning, “ O mankind ! Eat of that which is lawful and good on the earth, and follow not the footsteps of Satan. Verily, he is to you an open enemy.” As Hadits from Thabrani, meaning, “Seek for halal materials is a must after other obligations.”

11. AGREEMENT OF PENSION BENEFIT PAYMENT Is it possible to add conditions to the reward promises as determined in the Pension Law?

12. AGREEMENT OF PENSION BENEFIT PAYMENT A pension benefit is a reward promised, if the employer wants requirements in giving a present By Islamic law, no rules to ban him or her to do, as long as the requirements set do not make the employer avoids his promise (pension benefits)

13. AGREEMENT OF PENSION BENEFIT PAYMENT Conclusions: ─ By Islamic law, the agreement of pension benefit payment from an employer to its employees is not forbidden ─ The payment is able to be carried out

14. SETTING UP SYARIAH PENSION FUNDS Based on the Pension Law, a pension fund is a legal entity operating a pension program A pension fund is able to be operated if pension scheme regulations have got approval from the Ministry of Finance There are two types of pension funds the employer of pension funds (EPFs) the financial institution pension funds (FIPFs) EPFs may run DB or DC whilst FIPFs may only run DC FIPFs can only be established by banks or life insurance companies

15. SETTING UP SYARIAH PENSION FUNDS Since a pension fund is a legal entity, the assets must be separated by founder assets Documents required in order to get approval according to the Pension Law, are as follow: Statement by the founder mentioned that he/she agreed to set up a pension fund and to implement the pension scheme regulations (for EPFs) and to exactly Pension scheme regulations Formal letter stated appointment of administrators and supervisory board of pension funds by the founder Financial report and actuarial report Statement of co founders mentioned that they agreed with the

16. SETTING UP SYARIAH PENSION FUNDS What is a syariah pension fund? How can a syariah pension fund be set up?

17. SETTING UP SYARIAH PENSION FUNDS A syariah pension fund is a pension fund operating on syariah principles basis In Indonesia, the law for syariah pension funds has not been enacted yet (even a concept) Is it possible that a syariah pension funds been set up without a particular rules? The existence of pension funds is protected by the Pension Law produced by the Government

18. SETTING UP SYARIAH PENSION FUNDS Islamic law determines that if Qur’an and Hadits do not govern the government system then the Government can set up systems which must be complied Syariah pension funds (if exist) are part of syariah financial institutions According to the Law regarding Wakaf (released by the Ministry of Religion), the syariah financial institutions can be set up based upon the related law

19. SETTING UP SYARIAH PENSION FUNDS Conclusions: − Syariah pension funds are able to set up under the existing Pension Law but subject to inclusive rules of syariah principles ─ When the employer intends to set up a syariah pension fund, he or she write it down the promise to pay the pension benefit and signs with the two or three witnesses (as the ayah statutes) ─ The program model runs by a syariah pension fund may be DC or DB

20. SETTING UP SYARIAH PENSION FUNDS However one thing that should be remembered, related to a promise Qur’an mentioned in Surah Al Baqarah ayah 282, which means, “O you believe! When you contract a debt for a fixed period, write it down. Let a scribe write it down in justice between you.Let not the scribe refuse to write as Allah has raught him, so let him write. Let him (the debtor) who incursth eliability dictate, and he must fear Allah, his Lord and diminish not anything of what he owes.But if the debtor is of poor understanding, or weak, or is unable himself to dictate, then let his guardian dictate in justice. And get two witnesses out of your own men. And if there are not two men (available), then a man and two women, such as you agree for witnesses, so that if one of them (two women) errs, the other can remind her.

21. SETTING UP SYARIAH PENSION FUNDS And the witnesses should not refuse when they are called on (for evidence). You should not become weary to write it (your contract), whether it be small or big, for its fixed term, that is more just in the Sight of Allah; more solid as evidence, and more convenient to prevent doubts among yourselves, save when it is a present trade which you carry out on the spot among yourselves, then there is no sin on you if you do not write it down. But take witnesses whenever you make a commercial contract. Let neither scribe not witness suffer any harm, but if you do (such harm), it would be wickedness in you. So be afraid of Allah; and Allah teaches you. And Allah is the All Knower of each and everything.”

22. ADMINISTRATORS AND SUPERVISORY BOARD OF SYARIAH PENSION FUNDS According to the Pension Law, the following is rules for administrators and supervisory board of pension funds: Administrators:  Definition: a person or a body meeting criterion can be appointed as an administrator or supervisory board

23. FUNDING AND INVESTMENTS OF SYARIAH PENSION FUNDS How a syariah pension fund can be set up? The establishment of a pension fund might be carried out with the requirements as the Pension Law governed. The establishment of pension funds However,

24. ROLES OF ACTUARIES According to the Pension Law, the role of actuaries is significant at the DB program Actuaries will be need for a syariah pension fund implementing DB model Based on experience, none actuaries does become an administrator of pension funds Since in Indonesia, requirements of administrators is general, means anybody who meet the criterion may be appointed as an administrator

25. CONCLUSIONS How a syariah pension fund can be set up? The establishment of a pension fund might be carried out with the requirements as the Pension Law governed. The establishment of pension funds However,