Islamic Pensions to Spur Growth as Indonesia Over-60s to Triple

  • Shariah retirement funds to be allowed for first time
  • Over-60s to be 19% of population by 2050, UN estimates

Indonesia is set to allow Shariah-compliant pension funds, a boost to its waning Islamic finance industry as the nation’s population over 60 is forecast to triple by 2050.

Insurers and asset managers will be permitted to market retirement plans that comply with the Koran’s tenets and will have the option of converting existing funds into Shariah vehicles, according to a proposal released last month by the Financial Services Authority that didn’t given an implementation date. With some of the lowest financial literacy levels among major Asian economies, Indonesia has just $16 billion of private pension fund assets.

QuickTake Islamic Finance

Shariah retirement plans will deepen the Islamic finance market in Indonesia by spurring sukuk sales, according to PricewaterhouseCoopers LLP, which would aid growth in Shariah banking assets that slowed to 4 percent in 2015 from levels just shy of 50 percent at the beginning of the decade. The United Nations predicts the population of Indonesia, which has the most Muslims in the world, will swell to 322 million by 2050 and over 60s will triple to 62 million.

“This represents a great opportunity for Islamic pensions,” said Samina Akram, the managing director of Samak Ethical Finance Ltd. in London. It “could give a real boost to the Indonesian Islamic finance industry,” she said.

Shariah-compliant retirement funds invest in Islamic bonds and shares of companies that avoid activities deemed unethical including gambling and consuming alcohol or pork. Some 87 percent of Indonesia’s 256 million people are Muslim.

Indonesian private pension fund assets rose 11 percent to 211.95 trillion rupiah ($16 billion) in January from a year earlier, according to data from the Financial Services Authority. That compares with the 667.56 billion ringgit ($172 billion) of assets managed by the Employees Provident Fund, the largest retirement plan in Malaysia, whose economy is less than half the size of Indonesia’s.

Strong Demand

There should be strong demand for Islamic pension funds and a proliferation of plans should also drive interest in Shariah banking, said Jusuf Wibisana, a partner at PwC in Jakarta. Growth in banking assets that comply with the religion’s ban on interest has slowed from 48 percent in 2010 and 49 percent in 2011 to 4 percent last year, following a 15 percent contraction in 2014.

Insurers and money managers seeking a slice of the market will have to contend with a general lack of awareness about investing. Indonesia was ranked 3rd to last out of 16 Asia-Pacific countries in Mastercard Inc.’s Financial Literacy Index Report for the first half of 2014.

The plan to allow Shariah pension funds follows other efforts by the government to spur the nation’s Islamic finance industry, which has lagged far behind industry pioneer Malaysia. President Joko Widodo set up a committee in January to grow the market and bring together fragmented regulations currently overseen by several different agencies.

“The establishment of Shariah-compliant pension funds would widen the appeal of the Islamic finance industry in Indonesia,” said Jonathan Lawrence, London-based co-head of Shariah finance at law firm K&L Gates LLP. “It remains to be seen whether the boost will be significant or symbolic.”

Before it's here, it's on the Bloomberg Terminal.