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

Author

Listed:
  • Mohammad Alvin Prabowosunu
  • Reza Yamora Siregar
  • Rosi Melati
  • Rizky Rizaldi Ronaldo

    (ndonesia Financial Group (IFG) Progress, Jakarta, Indonesia)

  • Devan Hadrian

    (Universitas Indonesia, Indonesia)

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).

Suggested Citation

  • Mohammad Alvin Prabowosunu & Reza Yamora Siregar & Rosi Melati & Rizky Rizaldi Ronaldo & Devan Hadrian, 2024. "Identifying Risk-Taking Behavior and Prudent Asset Allocation in Pension Funds in Indonesia," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 70, pages 17-33, June.
    • Handle: RePEc:lpe:efijnl:202402
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    More about this item

    Keywords

    pension funds; liability-driven investment; risk-taking behavior; prudent asset allocation; asset return;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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