T

he Financial Services Authority (OJK) will exempt two types of business in the pension fund and insurance industries from an upcoming regulation requiring a minimum ownership in government bonds.

OJK deputy commissioner for non-banking supervision Dumoly F. Pardede said the new regulation would not be imposed on the Financial Institution Pension Fund (DPLK) and unit-linked life insurance products.

The DPLK is a pension fund managed by financial institutions while unit-linked insurance offers protection and investment.

'€œFor this year, the DPLK and unit-linked insurance products will be allowed to manage their own portfolios in government bonds independently,'€ Dumoly said in Jakarta recently.

Dumoly said the financial regulator decided to exempt the two types of business as they were flexible with adjustments in accordance with the needs of customers, particularly regarding the percentage of investment.

Despite the exemption, Dumoly said the OJK would keep suggesting that the DPLK and life insurers with unit-linked products prioritized government bonds when offering investment schemes to customers.

'€œWe will evaluate their risk management and ask them to better manage their portfolios if they have an overly high percentage of floating investments in the capital market,'€ he said.

OJK chairman Muliaman D. Hadad said in November that domestic pension funds and insurers would be required to keep a minimum percentage of government bonds in their portfolios to help provide stability for the debt market.

Muliaman said the minimum percentage of ownership would keep the country'€™s bond market from high volatility, while also pushing a stronger domestic investor base.

Domestic pension funds and insurers owned 15.1 percent of government bonds in the secondary market as of Dec. 31 last year, Finance Ministry data showed. Foreign investors held 38.2 percent.

Dumoly said the upcoming regulation, which is currently under review at the Law and Human Rights Ministry, would require life insurers and non-financial institution pension funds to keep a minimum 30 percent of government bonds in their portfolios by the end of 2016.

Meanwhile, general insurers, reinsurers and guarantors would be required to keep 20 percent of government bonds in their portfolios, he said.

Similarly, Dumoly said the Health Care and Social Security Agency (BPJS Kesehatan) would be required to invest a minimum 30 percent of its portfolios in government bonds institutionally.

'€œHowever, the Workers Social Security Agency [BPJS Ketenagakerjaan] should also keep a minimum of 50 percent of its social security funds in government bonds,'€ he said, adding that the OJK would increase the minimum percentages in 2017.

With the gradual increase of the minimum percentage, Dumoly said the OJK predicted that the non-banking industry'€™s investment allocation in government bonds could reach Rp 286.2 trillion by 2020, from Rp 147 trillion currently.

Indonesian Life Insurance Association (AAJI) chairman Hendrisman Rahim said the life insurance industry would welcome the regulation as government bonds had the benefit of lower tax, which could become an incentive for life insurers.

Meanwhile, Indonesian Life Insurance Association (ADPI) chairman Mudjiharno Sudjono told Reuters previously that a minimum government bond requirement could result in lower investment yields for pension funds, but would be positive for risk management.

'€œGovernment bonds are much more stable [than shares], which is good for long-term investors like us,'€ he said. '€œThere are some pension funds that are exposed as high as 40 percent to stocks, which is not good, especially in today'€™s market.'€