By: Marliana, MSc and Yurike K, MSc

EAAC, 13 September 2005, Nusa Dua, Bali

TOPICS TO BE PRESENTEDBackgroundAgreement of Pension Benefit PaymentSetting up Syariah Pension FundsAdministrators and Supervisory Board of

Syariah Pension FundsFunding and InvestmentsRoles of ActuariesConclusions

BACKGROUNDMuslims are majorityBanks experience in 1997Investment cases in pension funds within the last

3 yearsNumber of pension funds diminished

Financial problems of the employer as effect from crisis in 1997

Pension regulations not synergizedNumber of individual members increased very

slowly Less promotion Less attractive

BACKGROUND

Syariah pension funds will be the answer?

AGREEMENT OF PENSION BENEFIT PAYMENTHistorically, 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

AGREEMENT OF PENSION BENEFIT PAYMENTPension 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

AGREEMENT OF PENSION BENEFIT PAYMENT

Is pension benefit payment able to be implemented at

syariah pension funds?

AGREEMENT OF PENSION BENEFIT PAYMENTThe 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 muamallahMuamallah is defined as the way of life for

Muslims to interact amongst people

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)

AGREEMENT OF PENSION BENEFIT PAYMENT

Why must not be haram?The pension benefit is an income which will be

utilized for livingAccording to Islamic law, incomes of muslims

must be received through righteous waysAllah 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.”

AGREEMENT OF PENSION BENEFIT PAYMENT

Is it possible to add conditions to the reward

promises as determined in the Pension Law?

AGREEMENT OF PENSION BENEFIT PAYMENTA 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)

AGREEMENT OF PENSION BENEFIT PAYMENTConclusions:

─ 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

SETTING UP SYARIAH PENSION FUNDSBased on the Pension Law, a pension fund is a

legal entity operating a pension programA 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 fundsthe 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

SETTING UP SYARIAH PENSION FUNDSSince a pension fund is a legal entity, the assets

must be separated by founder assetsDocuments 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 regulationsFormal letter stated appointment of administrators and

supervisory board of pension funds by the founderFinancial report and actuarial reportStatement of co founders mentioned that they agreed

with the

SETTING UP SYARIAH PENSION FUNDS

What is a syariah pension fund?

How can a syariah pension fund be set up?

SETTING UP SYARIAH PENSION FUNDSA syariah pension fund is a pension fund

operating on syariah principles basisIn 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

SETTING UP SYARIAH PENSION FUNDSIslamic 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

SETTING UP SYARIAH PENSION FUNDSConclusions:

− 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

SETTING UP SYARIAH PENSION FUNDSHowever 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.

SETTING UP SYARIAH PENSION FUNDSAnd 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.”

ADMINISTRATORS AND SUPERVISORY BOARD OF SYARIAH PENSION FUNDSAccording 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

FUNDING AND INVESTMENTS OF SYARIAH PENSION FUNDSHow 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,

ROLES OF ACTUARIESAccording to the Pension Law, the role of

actuaries is significant at the DB programActuaries will be need for a syariah

pension fund implementing DB modelBased on experience, none actuaries does

become an administrator of pension fundsSince in Indonesia, requirements of

administrators is general, means anybody who meet the criterion may be appointed as an administrator

CONCLUSIONSHow 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,