Identifying Risk-Taking Behavior and Prudent Asset Allocation in Pension Funds in Indonesia

Mohammad Alvin Prabowosunu, Reza Siregar, Rosi Melati, Rizky Rizaldi Ronaldo and Devan Hadrian
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Rizky Rizaldi Ronaldo: ndonesia Financial Group (IFG) Progress, Jakarta, Indonesia
Devan Hadrian: Universitas Indonesia, Indonesia

Economics and Finance in Indonesia, 2024, vol. 70, 17-33

Abstract: This research aims to investigate asset allocation strategies in the pension fund industry in Indonesia in relation to liability profiles and risk-taking behavior. Utilizing data on market returns for each asset class and several financial indicators of pension funds, we applied the risk-taking behavior model proposed by Andonov & Rauh (2022) and a modified model to observe the Liability-Driven Investment (LDI) strategies of pension funds in Indonesia. We discovered that private defined contribution pension fund schemes (PPIP) tend to exhibit higher risk-taking behavior, primarily through investment allocation in equities. On the other hand, private defined benefit pension funds (PPMP) demonstrate a less aggressive risk-taking approach, allocating investments in bonds and cap/blue-chip stocks. PPMP also indicates relatively better implementation of the LDI strategies by considering the sensitivity of long-term bonds concerning return on investment (ROI).

Keywords: pension funds; liability-driven investment; risk-taking behavior; prudent asset allocation; asset return (search for similar items in EconPapers)
JEL-codes: G11 G23 J3 (search for similar items in EconPapers)
Date: 2024
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