SYARIAH PENSION FUNDS IN OUTLINE

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SYARIAH PENSION FUNDS IN OUTLINE

• By Marliana, MSc and Yurike K, MSc

EAAC, 13 September 2005, Nusa Dua, Bali
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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

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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

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BACKGROUND

• Syariah pension funds will be the answer?

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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

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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 members
  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

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AGREEMENT OF PENSION BENEFIT PAYMENT

• Is pension benefit payment able to be implemented
  at syariah pension funds?

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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

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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)

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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 Quran 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.

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AGREEMENT OF PENSION BENEFIT PAYMENT

• Is it possible to add conditions to the reward
  promises as determined in the Pension Law?

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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)

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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

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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

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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

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SETTING UP SYARIAH PENSION FUNDS

• What is a syariah pension fund?
• How can a syariah pension fund be set up?

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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

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SETTING UP SYARIAH PENSION FUNDS

• Islamic law determines that if Quran 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

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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

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SETTING UP SYARIAH PENSION FUNDS

• However one thing that should be remembered,
  related to a promise Quran 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.

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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.

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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

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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,

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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

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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,