2020-12-30 | 28/SEOJK.05/2020Added · Updated
Financial Services Authority Circular No. 28/SEOJK.05/2020 mandates pension funds to implement effective risk management aligned with their business objectives, size, and complexity. The regulation requires pension funds to establish written strategies, policies, and procedures covering eight specific risk types, maintain a supporting organizational structure, and conduct risk profile assessments. It also sets specific requirements for managing risks associated with business development or expansion and repeals the previous circular No. 10/SEOJK.05/2016 for pension funds, with the rules taking effect on the date of issuance.
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To:
Board of Directors and Acting Board of Directors of Pension Funds
COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA NUMBER 28 /SEOJK.05/2020
CONCERNING
IMPLEMENTATION OF RISK MANAGEMENT FOR PENSION FUNDS
In relation to the mandate of Article 25 of Financial Services Authority Regulation Number 44/POJK.05/2020 concerning the Implementation of Risk Management for Non-Bank Financial Service Institutions (State Gazette of the Republic of Indonesia Year 2020 Number 200, Supplement to the State Gazette of the Republic of Indonesia Number 6552), it is necessary to further regulate the implementation of risk management, the organizational structure of the Risk Management Committee, the organizational structure of the Risk Management function, the relationship between business and operational functions with the Risk Management function, and the management of risks arising from the development or expansion of business activities for pension funds in this Financial Services Authority Circular Letter as follows:
I. GENERAL PROVISIONS
In this Financial Services Authority Circular Letter, the following terms are defined:
Pension Fund is a legal entity that manages and runs a program promising pension benefits, including Pension Funds that carry out all or part of their business using Sharia principles.
Employer Pension Fund, hereinafter abbreviated as DPPK, is a Pension Fund formed by a person or entity that employs employees, as the founder, to carry out a defined benefit pension program or a defined contribution pension program, for the benefit of some or all of its employees as participants, and which creates obligations for the employer.
Financial Institution Pension Fund, hereinafter abbreviated as DPLK, is a Pension Fund formed by a bank or life insurance company to carry out a defined contribution pension program for individuals, both employees and self-employed workers, separate from the DPPK for employees of the respective bank or life insurance company.
Risk is the potential for losses that cannot be controlled and/or can be controlled due to the occurrence of a specific event.
Risk Management is a series of procedures and methodologies used to identify, measure, control, and monitor Risks arising from all business activities of the Pension Fund.
Strategic Risk is Risk due to inaccuracies in making and/or implementing strategic decisions and failures in anticipating changes in the business environment.
Operational Risk is Risk due to insufficient and/or non-functioning internal processes, human error, system failures, and/or external events affecting the operations of the Pension Fund.
Credit Risk is Risk due to the failure of other parties to fulfill obligations to the Pension Fund.
Market Risk is Risk on asset and liability positions due to overall changes in market conditions.
Liquidity Risk is Risk due to the Pension Fund's inability to meet maturing liabilities from cash flow funding sources and/or from liquid assets that can be easily converted into cash, without disrupting the Pension Fund's activities and financial condition.
Legal Risk is Risk arising from legal claims and/or weaknesses in legal aspects.
Compliance Risk is Risk due to the Pension Fund not complying with and/or not implementing applicable laws and regulations and provisions for Pension Funds.
Reputational Risk is Risk due to a decrease in the level of trust of stakeholders stemming from negative perceptions of the Pension Fund.
Founder is:
a. a person or entity that forms a DPPK; or b. a bank or life insurance company that forms a DPLK.
Co-Founder is an employer that participates in a Founder's DPPK, for the benefit of some or all of its employees.
Participant is every person who meets the regulatory requirements of the Pension Fund.
Board of Directors is the Board of Directors of the Pension Fund.
Acting Board of Directors is an official from the DPLK Founder who is tasked with carrying out the operational activities of the DPLK.
Board of Supervisors is the Board of Supervisors of the Pension Fund.
Sharia Supervisory Board is a board responsible for providing advice and suggestions and supervising the fulfillment of Sharia principles in the implementation of pension programs based on Sharia principles.
II. STANDARDS AND GUIDELINES FOR THE IMPLEMENTATION OF RISK MANAGEMENT
The implementation of Risk Management must be adjusted to the objectives, business policies, size, and complexity of the Pension Fund's business, considering the development of conditions and potential problems faced.
In the implementation of Risk Management as referred to in item 1, the Pension Fund must have and apply written Risk Management strategies, policies, and procedures.
The implementation of Risk Management as referred to in items 1 and 2 refers to the standards and guidelines for the implementation of Risk Management as contained in Appendix I, which is an integral part of this Financial Services Authority Circular Letter.
The written Risk Management strategies, policies, and procedures as referred to in item 2 can be formulated in the form of an internal Pension Fund Risk Management guideline.
The standards and guidelines for the implementation of Risk Management as referred to in item 3 are the minimum reference for Pension Funds in implementing Risk Management, to ensure that all Risks faced by the Pension Fund are identified, measured, controlled, and monitored accurately.
The Risk Management strategies, policies, and procedures as referred to in item 4 must at least cover:
a. the implementation of Risk Management, which must at least cover:
1) active supervision by the Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board;
2) adequacy of Risk Management policies and procedures and the establishment of Risk limits;
3) adequacy of the Risk identification, measurement, control, and monitoring processes, as well as the Risk Management information system; and
4) a comprehensive internal control system;
b. the implementation of Risk Management for each type of Risk, which covers the implementation of Risk Management for 8 (eight) types of Risk, namely Strategic Risk, Operational Risk, Credit Risk, Market Risk, Liquidity Risk, Legal Risk, Compliance Risk, and Reputational Risk; and
c. risk profile assessment, which covers the assessment of inherent risk and the assessment of the quality of Risk Management implementation reflecting the Risk control system for the Pension Fund. This assessment is conducted against the 8 (eight) types of Risk as referred to in letter b. The Pension Fund's risk profile assessment is conducted by referring to Financial Services Authority Regulations regarding the assessment of the health level of non-bank financial service institutions.
Pension Funds must have an organizational structure that supports the effective implementation of Risk Management, including the organizational structure of the Risk Management Committee and the organizational structure of the Risk Management function, which are an integral part of the Pension Fund's Risk Management organizational structure.
The Pension Fund's Risk Management organizational structure as referred to in item 7 must explain the relationship between business and operational functions with the Risk Management function.
The Risk Management organizational structure as referred to in items 7 and 8 refers to Appendix II, which is an integral part of this Financial Services Authority Circular Letter.
In the context of Risk measurement, Pension Funds may use various Risk measurement approaches, including using models for internal purposes (internal model). Measurement using internal models is intended to anticipate the increasingly complex business activities of Pension Funds as well as future Pension Fund policies. The application of internal models requires various minimum quantitative and qualitative requirements so that risk assessment results can better reflect the actual condition of the Pension Fund.
In the context of implementing effective Risk Management, Pension Funds take preparatory, developmental, and/or improvement steps, including:
a. conducting an analysis of the organization, Risk Management strategies, policies, and procedures, or internal Risk Management guidelines; b. formulating a plan to improve the Pension Fund's Risk Management in accordance with the reference in the standard guidelines for the implementation of Risk Management for Pension Funds, in the event of inconsistencies between the Pension Fund's Risk Management strategies, policies, and procedures, or internal Risk Management guidelines, and the standard guidelines for the implementation of Risk Management for Pension Funds as per the standard guidelines in this Financial Services Authority Circular Letter;
c. socializing the Risk Management strategies, policies, and procedures, or internal Risk Management guidelines to employees so that they understand Risk Management practices, and developing a risk culture among all employees at every level of the Pension Fund's organizational structure; and
d. ensuring that the internal audit function participates in monitoring the formulation and improvement of internal Risk Management guidelines and the implementation of Risk Management, as well as the risk profile assessment as regulated in Financial Services Authority Regulations regarding the assessment of the health level of non-bank financial service institutions.
The implementation of Risk Management in Pension Funds also includes the implementation of anti-money laundering and counter-terrorism financing programs as regulated in Financial Services Authority Regulations regarding the implementation of anti-money laundering and counter-terrorism financing programs in the financial services sector.
III. MANAGEMENT OF RISKS ARISING FROM THE DEVELOPMENT OR EXPANSION OF PENSION FUND BUSINESS ACTIVITIES
Pension Funds must have written policies and procedures to manage the inherent risks associated with the development or expansion of business activities.
The Risk Management policies and procedures for the development or expansion of business activities must be in line with the Pension Fund's business plan.
Pension Fund business activities categorized as a form of development or expansion of business activities are business activities that:
a. have never been previously conducted by the Pension Fund, such as the implementation of other benefit programs by a Pension Fund that has not yet implemented other benefit programs or the periodic payment of pension benefits by a Pension Fund implementing a defined contribution pension program; or b. have been previously implemented by the Pension Fund, but involve development that changes or increases certain Risk exposures for the Pension Fund, such as the addition of Co-Founders for DPPK or changes in investment package offerings for DPLK.
The Pension Fund's Risk Management strategies, policies, and procedures, or internal Risk Management guidelines regarding the aspects referred to in Section II item 6 letters a and b must be adjusted in the event that the development or expansion of the Pension Fund's business activities has a significant impact on the Pension Fund's overall business activities.
IV. OTHER PROVISIONS
Pension Funds that already have Risk Management strategies, policies, and procedures, or internal Risk Management guidelines, but which are not yet in accordance with the standards and guidelines for the implementation of Risk Management as referred to in the appendix of this Financial Services Authority Circular Letter, must adjust and improve their Risk Management strategies, policies, and procedures, or internal Risk Management guidelines by referring to this Financial Services Authority Circular Letter.
Pension Funds may broaden and deepen the standards and guidelines for the implementation of Risk Management as referred to in the appendix of this Financial Services Authority Circular Letter according to the needs of the Pension Fund.
The implementation of Risk Management for DPLK may be combined with the implementation of Risk Management by the DPLK Founder if the DPLK can ensure that the implementation of Risk Management by the DPLK Founder has met all aspects of Risk Management implementation as referred to in this Financial Services Authority Circular Letter.
V. CLOSING
This copy is in accordance with the original
Director of Law 1
Legal Department signed
Mufli Asmawidjaja
Determined in Jakarta on December 30, 2020
EXECUTIVE HEAD OF SUPERVISOR
FOR INSURANCE, PENSION FUNDS,
LENDING INSTITUTIONS, AND
OTHER FINANCIAL SERVICE INSTITUTIONS
FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA, signed
RISWINANDI
APPENDIX I
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA NUMBER 28 /SEOJK.05/2021 CONCERNING IMPLEMENTATION OF RISK MANAGEMENT FOR PENSION FUNDS
TABLE OF CONTENTS
I. IMPLEMENTATION OF RISK MANAGEMENT ................................................... 2
A. Active Supervision by Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board .................................. 2
a. Authority and Responsibilities of Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board ............................................................................. 3
b. Human Resources (HR) ............................................ 8
c. Risk Management Organization ............................................ 10
B. Adequacy of Risk Management Policies and Procedures and Establishment of Risk Limits ............................................................ 11
a. Risk Management Strategy ................................................ 12
b. Risk Appetite and Risk Tolerance ........................................ 13
c. Policies and Procedures ..................................................... 14
d. Establishment of Risk Limits ...................................................... 18
C. Adequacy of Risk Identification, Measurement, Control, and Monitoring Processes, as well as Risk Management Information System .. 19
a. Risk Identification .............................................................. 20
b. Risk Measurement ............................................................ 20
c. Risk Control .......................................................... 24
d. Risk Monitoring ........................................................... 25
e. Risk Management Information System ................................... 26
D. Comprehensive Internal Control System ....................... 29
II. IMPLEMENTATION OF RISK MANAGEMENT FOR EACH RISK TYPE 31
A. Strategic Risk ........................................................................ 31
B. Operational Risk ................................................................... 41
C. Credit Risk ............................................................................ 53
D. Market Risk ............................................................................. 62
E. Liquidity Risk ...................................................................... 68
F. Legal Risk .......................................................................... 77
G. Compliance Risk ..................................................................... 82
H. Reputational Risk ........................................................................ 87
III. RISK PROFILE ASSESSMENT .............................................................. 91
STANDARDS AND GUIDELINES FOR THE IMPLEMENTATION OF RISK MANAGEMENT FOR PENSION FUNDS
I. IMPLEMENTATION OF RISK MANAGEMENT
As regulated in Financial Services Authority Regulation Number 44/POJK.05/2020 concerning the Implementation of Risk Management for Non-Bank Financial Service Institutions, Pension Funds are required to implement Risk Management effectively, which generally covers at least 4 (four) pillars, namely:
The Risk Management principles of each of these pillars are described as follows:
A. Active Supervision by Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board
The Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board are responsible for the effectiveness of Risk Management implementation in the Pension Fund. Therefore, the Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board must at least:
a. have a good understanding of the types and levels of inherent risk in the Pension Fund's business activities; b. provide clear direction in the implementation of Risk Management;
c. conduct active supervision and mitigation of Risk;
d. ensure an adequate organizational structure to support the effective implementation of Risk Management; e. establish clear duties and responsibilities in the implementation of Risk Management for each function; and f. ensure the adequacy of the quantity and quality of human resources to support the effective implementation of Risk Management.
Matters to be considered in the implementation of active supervision by the Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board include the following:
a. Authority and Responsibilities of Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board
1) The Board of Directors/Acting Board of Directors, Board of Supervisors, and Sharia Supervisory Board, according to the scope of their respective authorities, are responsible for ensuring that the implementation of Risk Management has been effective in accordance with the characteristics, complexity, and risk profile of the Pension Fund;
2) The Board of Directors/Acting Board of Directors and Board of Supervisors must ensure that each function in the Pension Fund implements Risk Management;
3) The authority and responsibilities of the Board of Directors/Acting Board of Directors must at least include:
a) formulating written and comprehensive Risk Management policies and strategies, including among others:
(1) formulating and updating procedures and tools to identify, measure, control, and monitor Risk; (2) determining overall Risk limits and per Risk type, considering the risk appetite and risk tolerance in accordance with the Pension Fund's conditions, and specifically for DPPK implementing defined benefit pension programs, also considering the impact of Risk on funding adequacy; (3) ensuring that all policies, provisions, systems, and procedures, as well as business activities conducted by the Pension Fund comply with applicable laws and regulations; (4) after obtaining approval from the Board of Supervisors for the Risk Management policy, the Board of Directors/Acting Board of Directors establishes the Risk Management strategies, policies, and procedures, or internal Risk Management guidelines; and (5) evaluating and updating the Risk Management strategies, policies, and procedures, or internal Risk Management guidelines at least once (1) in one (1) year or at a more frequent frequency in the event of changes in factors affecting the Pension Fund's business activities, Risk exposure, or risk profile significantly; b) being responsible for the implementation of Risk Management policies and the Risk exposure taken by the Pension Fund as a whole, including among others:
(1) evaluating and providing direction based on reports submitted by the Risk Management function, including reports regarding the risk profile; (2) taking necessary actions in accordance with the Pension Fund's risk profile, including by providing recommendations or proposals regarding the implementation of Risk Management to each function in the Pension Fund; (3) ensuring that all material Risks and the impacts caused by such Risks have been followed up and submitting accountability reports on such follow-up to the Board of Supervisors periodically. Such reports include among others reports on the development and problems related to material Risks accompanied by improvement steps that have been, are being, and will be taken. If necessary, such reports can also be submitted to the Founder; (4) ensuring the implementation of improvement steps for problems or deviations in the Pension Fund's business activities found by the internal audit function; and (5) submitting accountability reports on the implementation of Risk Management policies and the Risk exposure taken by the Pension Fund to the Board of Supervisors and Sharia Supervisory Board at least once (1) in six (6) months; c) evaluating and deciding on transactions and Risk limits that require the approval of the Board of Directors/Acting Board of Directors, including formulating and establishing transaction approval mechanisms, including those exceeding limits and authority for each job level in the Pension Fund; d) developing a Risk Management culture at all levels of the organization, including developing Risk awareness at all levels of the organization, including among others adequate communication to all levels of the organization about the importance of effective internal control; e) ensuring the improvement of competence of human resources related to Risk Management so that the Pension Fund has adequate human resource support to manage and control Risk, including among others through continuous education and training programs related to the implementation of Risk Management; f) ensuring that the Risk Management function has operated independently, reflected among others by:
(1) the separation of functions between the Risk Management function that performs Risk identification, measurement, monitoring, and control and the internal control function; and (2) the implementation of Risk Management being free from conflicts of interest between functions; g) conducting periodic reviews to ensure:
(1) the accuracy of Risk assessment methodologies; (2) the adequacy of the implementation of the Risk Management information system; and (3) the appropriateness of Risk Management policies and procedures and the establishment of Risk limits, such reviews are conducted to anticipate if there are changes in external and internal factors;
4) The authority and responsibilities of the Board of Supervisors must at least include:
a) approving the Risk Management policies formulated by the Board of Directors/Acting Board of Directors and evaluating such policies,
including the Risk Management strategy prepared by the Board of Directors/Acting Board of Directors, at least 1 (one) time in 1 (one) year or at a more frequent frequency in the event of changes in factors that significantly affect the business activities of the Pension Fund; b) evaluate the accountability of the Board of Directors/ Acting Board of Directors at least 1 (one) time in 6 (six) months and provide guidance for improvement regarding the implementation of Risk Management policies on a regular basis. The evaluation is conducted to ensure that the Board of Directors/Acting Board of Directors manages Pension Fund activities and Risks effectively and ensures that Risk Management policies and implementation are carried out effectively and integrated into the overall business process. In conducting the evaluation, the Board of Supervisors may form a risk monitoring committee tasked with assisting the Board of Supervisors in monitoring the implementation of Risk Management prepared by the Board of Directors/Acting Board of Directors; c) evaluate and decide on requests from the Board of Directors/Acting Board of Directors regarding transactions and Risk limits that require the approval of the Board of Supervisors. Such transactions and Risk limits are business or operational activities that have exceeded the authority of the Board of Directors/Acting Board of Directors to do so, according to the internal policies and procedures of the Pension Fund;
Authority and responsibility of the Sharia Supervisory Board,
at least including:
a) evaluating policies, including the
Risk Management strategy prepared by the
Board of Directors/Acting Board of Directors that relates to the fulfillment of Sharia principles at least 1 (one) time in 1 (one) year or at a more frequent frequency in the event of changes in factors that affect the business activities of the Pension Fund significantly and providing guidance regarding policies for Risk Management established in the context of fulfilling Sharia principles; and b) evaluating the accountability of the Board of Directors/Acting Board of Directors regarding the implementation of Risk Management policies related to the fulfillment of Sharia principles at least 1 (one) time in 6 (six) months. The evaluation is conducted to ensure that Risk Management policies and processes are implemented in accordance with Sharia principles. b. Human Resources (HR) In carrying out the responsibility for implementing Risk Management related to HR, the Board of Directors/Acting Board of Directors must:
establish clear HR qualifications for each
job level related to the implementation of
Risk Management;
ensure the sufficiency of the quantity and quality of existing HR
in the Pension Fund and ensure that the aforementioned HR understands their duties and responsibilities, both for business and operational functions (risk taking function), Risk Management function, internal audit function, as well as supporting functions that are responsible for the implementation of Risk Management;
develop employee recruitment, development,
and training systems, including managerial succession plans and adequate remuneration to ensure the availability of competent employees in the field of Risk Management;
ensure the improvement of competence and integrity
of leaders and employees in the business and operational functions (risk taking function), Risk Management function, and internal audit function, by considering factors such as knowledge, experience or track record and adequate ability in the field of Risk Management through continuous education and training programs, to guarantee the effectiveness of the Risk Management process;
place competent employees in each
function according to the nature, number, and complexity of the Pension Fund's business activities;
ensure that employees placed in each
of these functions have:
a) an understanding of the Risks inherent
(inherent risk) in each business activity of the Pension Fund; b) an understanding of relevant Risk factors and external factor conditions that affect the business activities of the Pension Fund, as well as the ability to estimate the impact of changes in these factors on the sustainability of the Pension Fund's business; and c) the ability to communicate the implications of the Pension Fund's Risk exposure to the Board of Directors/Acting Board of Directors and the Risk Management committee in a timely manner.
ensure that all HR understands the strategy, the level of Risk to be taken (risk appetite) and
Risk tolerance (risk tolerance), and policies
Risk Management that have been established by the Board of Directors/Acting Board of Directors and approved or known by the Board of Supervisors and implement them consistently in all business activities of the Pension Fund.
c. Risk Management Organization
In order to implement effective Risk Management, the Board of Directors/Acting Board of Directors establishes the Risk Management organizational structure by considering at least the following matters:
The organizational structure prepared must be accompanied
by clarity of duties and responsibilities generally as well as regarding the implementation of Risk Management in all functions adjusted to the objectives and business policies, size and complexity of the Pension Fund's business activities;
The Pension Fund has a Risk Management committee and
an independent Risk Management function;
The organizational structure must be designed to
ensure that the internal audit function and the Risk Management function are independent of the business and operational functions (risk taking function) of the Pension Fund;
The organizational structure is designed so that the Risk Management
function has direct access and reporting to the Board of Directors/Acting Board of Directors, the Board of Supervisors, and the Sharia Supervisory Board for matters such as:
a) assessment of Risks and Risk exposure positions as well as steps to be taken to manage such Risks; b) assessment of changes in the Pension Fund's Risk profile; c) assessment of established Risk limits; d) Risk Management related to strategy, for example, the Pension Fund's investment strategy; and e) assessment of Risks that have occurred and
identification of appropriate corrective actions for such Risks;
5) The person in charge of the Risk Management function has
the authority and obligation to inform the Board of Supervisors of any event that may have a material impact on the Pension Fund's Risk Management system;
6) Sufficiency of the framework for delegation of authority
is adjusted to the characteristics and complexity of the business line, the level of Risk to be taken (risk appetite) of the Pension Fund, as well as the experience and expertise of the respective personnel. The delegated authority is evaluated regularly to ensure that the authority is appropriate with current conditions and the performance level of the relevant employees. B. Sufficiency of Risk Management Policies and Procedures and Establishment of Risk Limits
The implementation of effective Risk Management must be supported
by a Risk Management framework, or internal Risk Management guidelines that include Risk Management strategy, policies, and procedures as well as established Risk limits clearly aligned with the vision, mission, and strategy of the Pension Fund.
The formulation of Risk Management strategy, policies, and procedures, or internal Risk Management guidelines is done
by considering among other things the type, complexity of business activities, Risk profile, and level of Risk to be taken (risk appetite) as well as applicable legislation and healthy Pension Fund practices.
The implementation of Risk Management policies and procedures owned by the Pension Fund must be supported by sufficient
funding support, quality HR, and adequate infrastructure.
The policies and procedures owned by the Pension Fund must be
based on the Risk Management strategy and supplemented with Risk tolerance (risk tolerance) and Risk limits.
The Pension Fund's Risk Management policy must explain
how the relationship between Risk Management and the objectives, strategy, and current condition of the Pension Fund.
Matters to be considered in the establishment of strategy,
policies, procedures, and limits include the following:
a. Risk Management Strategy
c) the Pension Fund's organization including the sufficiency of HR and supporting infrastructure; d) the Pension Fund's financial condition including the ability to manage investments, and e) the Pension Fund's ability to manage Risks that arise as a result of changes in external factors and internal factors.
5) The Board of Directors/Acting Board of Directors must
describe the Risk Management strategy into
Risk Management policies and procedures.
6) The Board of Directors/Acting Board of Directors must
communicate the Risk Management strategy effectively to all relevant employees so that it is clearly understood.
7) The Board of Directors/Acting Board of Directors must
evaluate the Risk Management strategy regularly, including its impact on the financial performance of the Pension Fund, to determine whether changes to the Pension Fund's Risk Management strategy are necessary. b. Level of Risk to be Taken (Risk Appetite) and Risk Tolerance (Risk Tolerance)
business objectives of the Pension Fund which are formulated in the Pension Fund's business plan and established in the form of establishing the level of Risk to be taken (risk appetite statement).
3) The level of Risk to be taken (risk appetite) can
be in the form of the amount of Risk and/or characteristics of Risk that are acceptable to the Pension Fund.
4) Risk tolerance (risk tolerance) is the maximum
limit of the level of Risk and amount of Risk established by the Pension Fund. Risk tolerance (risk tolerance) is an elaboration of the level of Risk to be taken (risk appetite).
5) Risk tolerance (risk tolerance) can be in the form of
quantitative and/or qualitative limits. An example of a quantitative limit is the limit on the range of technical interest rates that can be used by the Pension Fund. An example of a qualitative limit is a management decision stating that there is no tolerance (zero tolerance) for fraud (fraud) or money laundering practices. If there are conditions that deviate from the quantitative and/or qualitative limits, the Pension Fund must immediately take action.
6) The establishment of Risk tolerance (risk tolerance) is done
by considering the level of Risk to be taken (risk appetite), the objectives and strategy of the Pension Fund as a whole, as well as the ability of the Pension Fund to accept Risk (risk bearing capacity).
c. Policies and Procedures
monitoring and control of Risks in each business activity of the Pension Fund; c) the establishment of the level of Risk to be taken (risk appetite), Risk tolerance (risk tolerance), and Risk limits; d) the establishment of data that must be reported, format of reports, and types of information that must be included in reports related to the implementation of Risk Management so that they reflect the Risk exposure that is considered in the context of decision making while still considering the principle of prudence; e) the establishment of authority and magnitude of limits in a hierarchical manner including transaction limits that require approval from the Board of Directors/Acting Board of Directors; f) the establishment of Risk profile rankings as a basis for the Pension Fund to determine steps for improvement of business activities of the Pension Fund and specific activity areas of the Pension Fund and evaluate the results of implementation of Risk Management policies and strategies; g) an organizational structure that clearly formulates the roles and responsibilities of the Board of Directors/Acting Board of Directors, Board of Supervisors, Sharia Supervisory Board, committees, Risk Management function, business and operational functions (risk taking function), internal audit function, and other supporting functions; h) business continuity plan policies (business continuity plan or business continuity management) for possible worst-case external and internal conditions, so that the continuity of the Pension Fund's business activities can be maintained, including the disaster recovery plan (disaster recovery plan) and
contingency plan (contingency plan).
The formulation of business continuity plan policies meets among other things the following:
(1) involves various related functions;
(2) is flexible to be able to respond to various unexpected and specific disruption scenarios, i.e., description of certain conditions and actions that are needed immediately; (3) periodic testing and evaluation of the business continuity plan; and (4) the Board of Directors/Acting Board of Directors must update the business continuity plan regularly to ensure the effectiveness of the business continuity plan that has been prepared; i) the establishment of an internal control system in the implementation of Risk Management to ensure compliance with applicable external and internal regulations, effectiveness and efficiency of the Pension Fund's operational activities, effectiveness of Risk culture (risk culture) at each level of the Pension Fund's organization, as well as the availability of accurate, complete, useful, and timely management and financial information; and j) the development of pension benefits as well as asset and liability management which clearly elaborates on the determination of the nature of assets and liabilities, the role of asset and liability management activities, and the relationship between the development of business activities, valuation, and investment management.
7) Risk Management procedures must at least include:
a) clear process stages;
b) clear accountability and levels of delegation of authority c) periodic review of procedures at least 1 (one) time in 1 (one) year or more frequent frequency, depending on the type of Risk, needs, and development of the Pension Fund; and d) adequate documentation of procedures to facilitate review implementation and audit trail. d. Establishment of Risk Limits
The Pension Fund must have Risk limits that are appropriate
with the level of Risk to be taken (risk appetite), Risk tolerance (risk tolerance), and strategy of the Pension Fund as a whole by considering the Pension Fund's funding ability to absorb Risk exposure or losses that arise, past loss experience, HR ability, and compliance with applicable external regulations.
The establishment of Risk limits must at least include:
a) clear accountability and levels of delegation of authority b) periodic review of the establishment of Risk limits at least 1 (one) time in 1 (one) year or more frequent frequency, depending on the type of Risk, needs and development of the Pension Fund; and c) adequate documentation of the establishment of Risk limits to facilitate review implementation and audit trail.
The establishment of Risk limits is done comprehensively
over all aspects related to Risk, which includes overall Risk limits, limits per Risk, and limits per Pension Fund activity that has Risk exposure.
Risk limits must be understood by all relevant parties and communicated well, including
in the event of changes.
In the context of Risk control, Risk limits
are used as a threshold to determine the level of intensity of Risk mitigation to be implemented by management.
The Pension Fund must have an approval mechanism
in the event of exceeding Risk limits.
The magnitude of Risk limits is proposed by the business and
operational functions (risk taking function) concerned, which are then recommended by the Risk Management function to obtain approval from the Board of Directors/Acting Board of Directors or the Board of Supervisors through the Risk Management committee, or the Board of Directors/Acting Board of Directors according to their respective authorities as regulated in the internal policies of the Pension Fund.
C. Sufficiency of Risk Identification, Measurement, Control, and
Monitoring Processes, and Risk Management Information System
Identification, measurement, control, and monitoring
of Risk are the main part of the Risk Management implementation process. Risk identification is proactive, covering all Pension Fund activities and is conducted to analyze the sources and possible occurrence of Risks and their impact. Risk measurement is done according to the characteristics and complexity of business activities of the Pension Fund. The effectiveness of Risk Management implementation also needs to be supported by Risk control by considering the results of Risk measurement, including establishing Risk mitigation strategies. Subsequently, monitoring is conducted on the results of Risk measurement and control.
The Pension Fund establishes a function that is independent from the party
conducting transactions to monitor the level and trends and analyze the direction of Risk Management implementation.
In order to support the process of identification, measurement,
control, and monitoring of Risk, the Pension Fund also needs to develop a Risk Management information system that is adjusted to the characteristics and complexity of business activities of the Pension Fund.
Matters to be considered in the implementation of the process
of identification, measurement, control, and monitoring of Risk as well as the Risk Management information system include the following:
a. Risk Identification
(2) availability of an information management system that enables the system to obtain appropriate and accurate data and information at the right time; (3) availability of documentation from the data sources used for the risk measurement process; and (4) the database and data storage process must be part of the system design to prevent the interruption of a series of statistical data; b) In the event that the Pension Fund conducts back testing against models for internal purposes (internal model) such as Credit Scoring Tools, Value at Risk (VaR), and stress testing for exposures containing certain Risks, the Pension Fund must use historical data or a series of parameters and assumptions compiled by the Pension Fund itself or assumptions requested by the regulator; c) In order to overcome weaknesses that may arise from the use of certain risk measurement models, the Pension Fund must validate those models which is carried out by an independent internal party relative to the function that applies the model; d) If necessary, validation is carried out or supplemented with the results of a review conducted by an external party who has competence and technical expertise in the development of risk measurement models. Model validation is a process:
(1) evaluation of the internal logic of a particular model by verifying mathematical accuracy; (2) comparing model predictions with
events after a certain date position (subsequent events); and (3) comparing one model with other existing models, both internal and external, if available; e) Validation must also be performed on new models, whether developed internally by the Pension Fund or provided by external parties. Models used by the Pension Fund must be evaluated periodically and ad hoc, especially in the event of significant changes in market conditions; and f) Risk measurement methods must be clearly understood by employees involved in risk control, among others the Risk Management Committee, the Risk Management function, and the Board/Acting Board members who oversee the Risk Management function.
6) The risk measurement system must be evaluated and improved periodically at least once every 6 (six) months or ad hoc when necessary to ensure the appropriateness of assumptions, accuracy, reasonableness and integrity of data, as well as the procedures used to measure Risk.
7) The risk measurement process must clearly contain the validation process, validation frequency, data and information documentation requirements, and evaluation requirements for the assumptions used, before a model is applied by the Pension Fund.
8) Stress testing is conducted to complement the risk measurement system by estimating potential losses of the Pension Fund under abnormal market conditions using specific scenarios to view the sensitivity of the Pension Fund's performance to changes in Risk factors and to identify impacts that significantly affect the
Pension Fund portfolio.
9) The Pension Fund needs to conduct periodic stress testing and evaluate the results of such stress testing and take appropriate steps if the estimated conditions to occur exceed the acceptable tolerance level. The results are used as input during the establishment or change of policies and limits.
10) The Pension Fund measures Risk based on its ability to assess its own Risks.
c. Risk Control
Example: Risks categorized as "low" and "relatively low" are decided to be accepted, or Risks categorized as "medium" and "relatively high" are decided to be accepted by taking other preventive steps, for example asking the Founder to bear additional funding. b) Control, the Pension Fund decides to reduce the impact or likelihood of occurrence of Risk. Example: formulating asset allocation strategy policies adjusted to liability maturity and formulating early warning indicators to monitor Risks with potentially significant impact. c) Avoid, the Pension Fund decides not to carry out an activity or choose alternative activities that produce the same output to avoid the occurrence of Risk. Example: investment placement policy on liquid asset investments. d) Transfer, the Pension Fund decides to transfer all or part of the responsibility for carrying out a process to a third party. Example: insuring buildings owned by the Pension Fund.
4) The Pension Fund must have a responsive framework to changes occurring due to the types of Risks present in the Pension Fund.
d. Risk Monitoring
a) determination of all activities in the Pension Fund containing Risk that have been carried out in the Risk identification process; b) ranking of likelihood of occurrence and impact (inherent risk assessment) obtained from the results of Risk measurement; c) steps for handling potential risks (potential risk treatment), for example Accept, Control, Avoid, or Transfer (ACAT) used in the Risk control process; and d) ranking of likelihood of occurrence and impact after the Risk mitigation process.
2) The Pension Fund must have a monitoring system and procedure that among others covers monitoring of the magnitude of Risk exposure, Risk tolerance (risk tolerance), internal limit compliance, and the results of stress testing as well as consistency of implementation with established policies and procedures.
3) Monitoring is carried out by both business and operational functions (risk taking function) and the Risk Management function.
4) The results of monitoring are presented in periodic reports submitted to the Board/Acting Board members in the context of Risk mitigation and necessary actions.
e. Risk Management Information System
ensure:
a) the availability of accurate, complete, informative, timely, and reliable information so that it can be used by the Board/Acting Board members, Supervisory Board, Sharia Supervisory Board, and related functions in implementing Risk Management to assess, mitigate, and monitor the Risks faced by the Pension Fund, both overall Risk or per type of Risk or in the context of decision-making by the Board/Acting Board members; b) the effectiveness of Risk Management implementation covering policies, procedures, and the establishment of Risk limits; and c) the availability of information about the results or realization of Risk Management implementation compared to targets set by the Pension Fund in accordance with the policies and strategies for implementing Risk Management.
4) The Risk Management information system and the information generated must be adjusted to the characteristics and complexity of the Pension Fund and adaptive to changes.
5) The adequacy of the scope of information generated from the Risk Management information system must be reviewed periodically to ensure that the scope is adequate according to the development of the level of complexity of the Pension Fund's business activities.
6) As part of the Risk Management information system, the Risk profile report is prepared periodically by the independent Risk Management function relative to the business and operational functions (risk taking function) and internal control functions. The frequency of submission of reports to the Board/Acting
Board members concerned must be increased according to needs, especially when market conditions change rapidly.
7) The Risk Management information system must support the implementation of reporting to the Financial Services Authority.
8) In developing new information system technology and software, the Pension Fund must ensure that the implementation of new information systems and technologies will not disrupt the continuity of the Pension Fund's information system.
9) If the Pension Fund decides to assign outsourced workforce in the development of software and system improvement, the Pension Fund must ensure that the decision to appoint the third party is done objectively and independently. In outsourcing agreements or contracts, clauses regarding maintenance and updating as well as anticipatory steps to prevent disturbances that may occur in its operation must be included.
10) Before implementing a new management information system, the Pension Fund must conduct testing to ensure that the processes and outputs generated have gone through effective development, testing, and re-evaluation processes, and the Pension Fund must ensure that historical accounting and management data can be accessed by the new system or software properly.
11) The Pension Fund must account for and update system documentation, which contains hardware, software, databases, parameters, process stages, assumptions used, data sources, and outputs generated so as to facilitate embedded control and audit trail implementation.
12) The Pension Fund must prepare a backup system and effective procedures to prevent disturbances in the Risk monitoring process and conduct checks and re-evaluations periodically on the backup system.
D. Comprehensive Internal Control System
conformity between the internal control system and the type and level of inherent Risk in the Pension Fund's business activities;
determination of authority and responsibility for monitoring compliance with Risk Management policies and procedures as well as the establishment of Risk limits;
determination of reporting lines and clear separation of duties from the business and operational functions (risk taking function) to the internal audit function;
organizational structure that clearly describes the tasks and responsibilities of each function and individual;
accurate and timely financial and operational activity reporting;
adequacy of procedures to ensure the Pension Fund's compliance with internal regulations and legislation;
effective, independent, and objective review of the Pension Fund's policies, frameworks, and operational procedures;
adequate testing and evaluation of the management information system;
complete and adequate documentation of the scope, operational procedures, audit findings, and responses from the Board/Acting Board members, Supervisory Board, and Sharia Supervisory Board based on audit results; and
verification and periodic and continuous review of the handling of material weaknesses of the Pension Fund and actions by the Board/Acting Board members to correct deviations that occur.
c. Implementation of review on the implementation of Risk Management at minimum as follows:
periodic review and evaluation at least once every 1 (one) year by the Risk Management function and internal audit function;
Frequency and intensity of review and evaluation can be increased based on the development of the Pension Fund's Risk exposure, changes in market conditions, measurement methods, and Risk management; and
Review by the internal audit function among others covers:
a) reliability of the Risk Management framework, which includes policies, organizational structure, resource allocation, design of Risk Management processes, information systems, and Risk reporting of the Pension Fund; and b) implementation of Risk Management by business and operational functions (risk taking function) or supporting functions, including review of the implementation of monitoring by the Risk Management function.
The results of the review assessment by the Risk Management function are submitted to the Supervisory Board, internal audit function, audit committee (if any), and relevant Board/Acting Board members as input in the context of improving the Risk Management framework and process.
Monitoring by the internal audit function regarding improvements over the results of internal and external audit findings. Audit findings that have not been followed up must be informed by the internal audit function to the Board/Acting Board members to take necessary steps.
The responsiveness level of the Pension Fund to weaknesses and deviations that occur regarding applicable internal and external regulations.
II. IMPLEMENTATION OF RISK MANAGEMENT FOR EACH TYPE OF RISK
A. Strategic Risk
a) The Board/Acting Board members, Supervisory Board, and Sharia Supervisory Board must ensure that the implementation of Risk Management for Strategic Risk is carried out integrated with the implementation of Risk Management for other Risks that can impact the overall Risk profile of the Pension Fund. b) The Board/Acting Board members, Supervisory Board, and Sharia Supervisory Board must formulate and approve strategic plans and business plans in accordance with their respective duties and responsibilities, which cover matters as regulated in the provisions and communicate them to every level of organization within the Pension Fund. c) The Board/Acting Board members are responsible for the implementation of Risk Management for Strategic Risk which covers:
(1) ensuring that strategic objectives set are aligned with the vision and mission, culture, investment direction, and Risk tolerance (risk tolerance) of the Pension Fund; (2) providing clear guidance regarding the level of Risk to be taken (risk appetite) and Risk tolerance (risk tolerance) that can be accepted by the Pension Fund; (3) ensuring that the structure, culture, infrastructure, financial conditions, manpower and managerial competence including executive officials, as well as existing systems and controls in the Pension Fund are adequate to support the implementation of the established strategy; and (4) ensuring that every strategic problem that arises can be resolved effectively by the relevant work unit and monitoring of corrective actions by the strategic policy work unit. d) The Board/Acting Board members must monitor internal conditions (weaknesses and strengths of the Pension Fund) and developments of external factors/conditions that directly or indirectly affect the business activities of the Pension Fund. e) The Board/Acting Board members are responsible for ensuring that Risk Management for Strategic Risk has been implemented effectively and consistently across all related levels of organization. In the event that the Board/Acting Board members delegate some of their responsibilities to executive officials and management below them, such delegation does not eliminate the obligation of the Board/Acting Board members as the primary party responsible.
2) Human Resources (HR)
The Pension Fund ensures the adequacy of HR for Strategic Risk by referring to the provisions as referred to in item I.A.2.b.
3) Organizational Risk Management for Strategic Risk
a) All business and operational functions (risk taking function) and supporting functions in the Pension Fund are responsible for assisting the Board/Acting Board members in formulating strategic planning, and implementing strategies effectively. b) Business and operational functions (risk taking function) and other supporting functions are responsible for ensuring at minimum:
(1) Risk Management practices for Strategic Risk and controls in business and operational functions (risk taking function) are consistent with the overall Risk Management framework for Strategic Risk; and (2) business and operational functions (risk taking function) and other supporting functions have policies, procedures, and resources to support the effectiveness of the Risk Management framework for Strategic Risk. c) The Board/Acting Board members who oversee the Risk Management function lead the change programs necessary in the context of implementing the established strategy. d) The Risk Management function in the Risk Management process for Strategic Risk at minimum:
(1) coordinates with business and operational functions (risk taking function) in the process of formulating strategic plans; (2) monitors the development of strategic plan implementation, and provides input regarding opportunities and options available for the continuous development and improvement of strategy; and (3) ensures that all strategic issues and their impact on the achievement of strategic objectives are followed up promptly. b. Adequacy of Risk Management Policies and Procedures as well as Establishment of Risk Limits In ensuring the adequacy of Risk Management policies and procedures as well as the establishment of Risk limits for Strategic Risk, in addition to ensuring the adequacy of Risk Management policies and procedures as well as the establishment of Risk limits as referred to in item I.B., in each aspect thereof, the Pension Fund needs to add the application of:
the scope of analysis must align with the scale and complexity of the Pension Fund's business activities. b) Pension Funds must establish written strategic plans and business plans and implement them. c) Strategic plans and business plans must be evaluated and adjusted in the event of deviations from targets due to significant external and internal changes. d) In the event that a Pension Fund plans to implement long-term and sustainable strategies, the Pension Fund must have sufficient managerial succession plans to support the effective implementation of strategies sustainably. e) Pension Funds have sufficient funding support to implement strategic plans.
2) Risk Appetite and Risk Tolerance
The determination of Risk Appetite and Risk Tolerance for Strategic Risk refers to the provisions as referred to in item I.B.6.b.
3) Policies and Procedures
a) Pension Funds must have and implement policies and procedures to formulate and approve strategic plans. b) Pension Funds must have sufficient procedures to identify and respond to changes in the business environment. c) Pension Funds must have procedures to measure progress achieved from the realization of business plans and performance according to the established schedule.
4) Determination of Risk Limits
Strategic Risk limits generally relate to limitations on deviations from established strategic plans, such as budget deviation limits and target completion time deviation limits.
c. Adequacy of Risk Identification, Measurement, Control, and Monitoring Processes, as well as Risk Management Information Systems for Strategic Risk
In ensuring the adequacy of risk identification, measurement, control, and monitoring processes, as well as risk management information systems for Strategic Risk, in addition to meeting the provisions as referred to in item I.C., in each of these processes, Pension Funds must additionally apply:
legislation in the field of Pension Funds;
(6) fraud incident reports, for example in the form of a whistleblowing system; and (7) recommendations from the Risk Management function regarding reviews conducted on the assessment of Operational Risk of Pension Funds. d. Comprehensive Internal Control System In implementing an internal control system for Operational Risk, in addition to applying internal controls as referred to in item I.D., Pension Funds must have a routine rotation system to avoid potential self-dealing, collusion, or concealment of documentation or transactions that are not normal.
C. Credit Risk
potential losses in the future for each of those instruments. c) The Risk Management Information System for Market Risk must be able to facilitate stress testing, especially to identify Risks quickly, so that corrective actions can be taken immediately, including as a response to changes in market factors that may have a negative impact on the health level of the Pension Fund. d. Comprehensive Internal Control System In implementing an internal control system for Market Risk, in addition to applying internal controls as referred to in item I.D., the Pension Fund must also apply:
E. Liquidity Risk
b. Liquidity Risk can be caused by the Pension Fund's inability to liquidate assets without incurring a material discount due to the absence of an active market or severe market disruption, which is called market liquidity risk.
c. Liquidity Risk in DPPKs that administer defined benefit pension programs also includes Risks arising from the DPPK's inability to provide assets to fund liabilities due to insufficient contribution setting.
2. Objective
The main objective of Risk Management for Liquidity Risk is to minimize the possibility of the Pension Fund's inability to meet its obligations to Participants, retirees, and entitled parties.
3. Implementation of Risk Management
The implementation of Risk Management for Liquidity Risk is adjusted to the size and complexity of the Pension Fund's business activities. The implementation of Risk Management for Liquidity Risk must at least cover:
a. Active Supervision by the Board of Directors/Acting Board of Directors, Supervisory Board, and Sharia Supervisory Board In carrying out active supervision by the Board of Directors/Acting Board of Directors, Supervisory Board, and Sharia Supervisory Board for Liquidity Risk, in addition to carrying out active supervision as referred to in item I.A., in each aspect of active supervision, the Pension Fund must add the application of:
Authority and Responsibility of the Board of Directors/Acting Board of Directors, Supervisory Board, and Sharia Supervisory Board
a) The Board of Directors/Acting Board of Directors, Supervisory Board, and Sharia Supervisory Board must ensure that the implementation of Risk Management for Liquidity Risk is carried out in an integrated manner with the implementation of Risk Management for other Risks that can impact the Pension Fund's overall Risk profile. b) In DPPKs, the Board of Directors and Supervisory Board must ensure that contributions submitted by the Founder are deposited on time and in the correct amount. c) The Board of Directors/Acting Board of Directors must periodically monitor the position and Liquidity Risk in both normal situations and unfavorable market situations. d) The Board of Directors/Acting Board of Directors must ensure that the Pension Fund does not experience difficulties in meeting its obligations to Participants, retirees, and entitled parties. e) The Board of Directors/Acting Board of Directors must adjust the policies and strategies for Risk Management for Liquidity Risk based on the results of evaluations of the position and Liquidity Risk. f) The Board of Directors/Acting Board of Directors must submit reports to the Supervisory Board and the Founder (in DPPKs) regarding the position and Liquidity Risk profile, as well as the implementation of policies and procedures for Risk Management for Liquidity Risk.
Human Resources (HR)
The Board of Directors/Acting Board of Directors must ensure that every function responsible for Risk management has HR with adequate competence.
Risk Management Organization for Liquidity Risk
The Pension Fund ensures the adequacy of the Risk Management organization for Liquidity Risk with reference to the provisions as referred to in item I.A.2.c. b. Adequacy of Risk Management Policies and Procedures and Risk Limit Setting In ensuring the adequacy of Risk Management policies and procedures and risk limit setting for Liquidity Risk, in addition to ensuring the adequacy of Risk Management policies and procedures and risk limit setting as referred to in item I.B., in each of those aspects, the Pension Fund needs to add the application of:
Risk Management Strategy
The Pension Fund must have a Risk Management Strategy for Liquidity Risk that implements Assets and Liabilities Management (ALMA).
Risk Appetite and Risk Tolerance
a) The Risk Appetite is reflected in the asset composition or wealth for funding and the Pension Fund's obligations, as well as the gapping strategy carried out by the Pension Fund. b) Risk Tolerance for Liquidity Risk must consider every factor that affects Liquidity Risk exposure, such as the composition of liquid assets and funding conducted by the Founder.
Policies and Procedures
a) Liquidity management policies and procedures must at least include:
(1) asset and liability composition;
(2) the level of liquid assets that the Pension Fund must maintain;
(3) the determination of the type and allocation of assets classified as high-quality liquid assets; (4) stability of funding sources; (5) liquidity management on various funding sources, including the Founder and counterparties; (6) the application of life cycle funds for Pension Funds that administer defined contribution pension programs; and (7) Liquidity Risk limits. b) The Pension Fund must establish indicators that serve as early warning indicators for Liquidity Risk as a tool for identifying problems and determining Liquidity Risk mitigation. c) Early warning indicators include internal and external indicators. Internal indicators include, among others, deteriorating asset quality, increased concentration in certain assets, increased overall costs, and/or worsening cash flow positions as a result of large maturity mismatches, especially in the short-term time scale. External indicators include, among others, negative information from Participants, retirees, and entitled parties regarding the Pension Fund. d) The Pension Fund must conduct stress testing for Liquidity Risk, adjusted to the fund management or investment strategy, so that it can accurately describe the Pension Fund's Liquidity Risk profile. e) DPPKs that administer defined benefit pension programs must be able to explain to the Founder in the event of a funding shortage that results in the Founder's obligation to deposit additional contributions to the Pension Fund to maintain the Pension Fund's funding condition.
4) Risk Limit Setting
a) Liquidity Risk limits must be consistent and relevant to the Pension Fund's business activities. In addition, Liquidity Risk limits must also be adjusted to the Pension Fund's condition, including the number of Participants who will retire, solvency liability positions, and/or actuarial present value. b) Liquidity Risk limits may include, among others, cash flow mismatch limits in both the short and long term, including concentration limits on assets and liabilities, and other liquidity ratios.
c. Adequacy of Risk Identification, Measurement, Control, and Monitoring Processes, and Risk Management Information Systems for Liquidity Risk
In ensuring the adequacy of risk identification, measurement, control, and monitoring processes, as well as risk management information systems for Liquidity Risk, in addition to meeting the provisions as referred to in item I.C., in each of those processes, the Pension Fund must add the application of:
Liquidity Risk Identification
a) In order to identify Liquidity Risk, the Pension Fund must conduct an analysis of all sources of Liquidity Risk, such as all Pension Fund activities that affect asset and liability positions. b) The Pension Fund must consider the possibility of increased Liquidity Risk due to increased other Risks, such as Credit Risk, Market Risk, and Operational Risk.
Liquidity Risk Measurement
a) In measuring Liquidity Risk, among others, indicators/parameters can be used in the form of:
(1) current asset and current liability profiles; (2) cash flow profiles; (3) long-term asset profiles; (4) long-term liability profiles; (5) comparison between long-term assets and long-term liabilities; and (6) the difference between expected investment performance and achieved investment performance. b) The Pension Fund must have a measurement tool that can measure Liquidity Risk quantitatively, accurately, and comprehensively. This measurement tool must also be able to measure Liquidity Risk arising from assets and liabilities. c) The measurement tool must at least include:
(1) current asset or liability profiles, which must at least include minimum liquidity ratios, current asset ratios, and current liability ratios; and (2) cash flow profiles, namely cash inflows from investment, operational, and funding activities compared with cash outflows from investment, operational, and funding activities. d) The approach taken in Liquidity Risk measurement can be simulation-based and more dynamic, supported by various relevant assumptions. e) The Pension Fund must conduct stress testing on Liquidity Risk, namely testing the Pension Fund's ability to meet liquidity needs under specific stress conditions for the Pension Fund or stress conditions in the market.
Liquidity Risk Control
a) Liquidity Risk control is carried out through funding strategies, periodic control of liquidity positions and Liquidity Risk, management of high-quality liquid assets, and funding plans through additional contributions for DPPKs that administer defined benefit pension programs. b) Active management of liquidity positions and periodic Liquidity Risk aims to meet the Pension Fund's obligations on time, for example, when Participants retire, the Pension Fund is able to meet its obligations, both in normal conditions and crisis conditions, by prioritizing its solvency liabilities. c) The Pension Fund must analyze changes in liquidity positions resulting from pension benefit payments to retirees and entitled parties. This analysis is conducted, among others, based on cash flow projections prepared periodically. d) The Pension Fund must have high-quality liquid assets in sufficient quantities and compositions adjusted to the Liquidity Risk profile in order to meet liquidity needs in both the short and long term. e) In the event that Liquidity Risk exposure for DPPKs that administer defined benefit pension programs causes funding quality to decline, the Pension Fund must coordinate with the Founder for a funding fulfillment plan through additional contributions.
Liquidity Risk Monitoring
a) Liquidity Risk monitoring conducted must consider early warning indicators to know the potential increase in the Pension Fund's Liquidity Risk. b) Monitoring of Liquidity Risk is carried out periodically by considering the application of ALMA. c) The Pension Fund must always maintain its liquidity level in order to meet the obligation to pay pension benefits and other benefits to Participants, retirees, and entitled parties.
Risk Management Information System for Liquidity Risk
a) The Pension Fund must have an adequate and reliable Risk Management information system to support the implementation of identification, measurement, control, and monitoring processes, as well as reporting of Liquidity Risk exposure in normal and crisis conditions, completely, accurately, currently, wholly, and continuously. b) The Risk Management information system must be able to provide information related to Liquidity Risk, including:
(1) cash flows and maturity profiles of assets and liabilities; (2) compliance with limits and ratios used to measure Liquidity Risk; (3) liquidity trends; and (4) other related information, such as positions and valuations of high-quality liquid asset portfolios, concentration of investment placements, or solvency liability positions and actuarial present value for DPPKs that administer defined benefit pension programs. d. Comprehensive Internal Control System In implementing an internal control system for Liquidity Risk, in addition to applying internal controls as referred to in item I.D., the Pension Fund must also apply:
The Pension Fund must apply adequate internal controls and independent reviews on the implementation of Risk Management for Liquidity Risk carried out by internal audit together with the Risk Management function.
Weaknesses identified in internal controls and independent reviews must be reported to relevant parties for follow-up.
F. Legal Risk
c. Adequacy of Risk Identification, Measurement, Control, and Monitoring Processes, and Risk Management Information Systems for Legal Risk
In ensuring the adequacy of risk identification, measurement, control, and monitoring processes, as well as risk management information systems for Legal Risk, in addition to meeting the provisions as referred to in item I.C., in each of those processes, the Pension Fund must add the application of:
Legal Risk Identification
The implementation of identification for Legal Risk refers to the provisions as referred to in item I.C.4.a.
Legal Risk Measurement
a) The Pension Fund must have adequate and integrated Risk measurement methods for Legal Risk with the Pension Fund's Risk Management framework, using both quantitative and qualitative approaches. b) In measuring Legal Risk, among others, indicators/parameters can be used in the form of:
(1) absence or changes in legislation;
(2) weaknesses in legal aspects (legal issues); and (3) litigation or dispute resolution.
Legal Risk Control
The function overseeing the legal field must periodically review contracts and agreements between the Pension Fund and other parties, among others by re-evaluating the effectiveness of the enforceability process to check the validity of rights in the contracts and agreements.
Legal Risk Monitoring
The implementation of monitoring for Legal Risk refers to the provisions as referred to in item I.C.4.d.
Risk Management Information System for Legal Risk
The Pension Fund must document and administer every incident, including litigation processes related to Legal Risk, along with the amount of potential losses caused by such incidents, in a data administration system. d. Comprehensive Internal Control System The implementation of an internal control system for Legal Risk refers to the provisions as referred to in item I.D.
G. Compliance Risk
Objective
The main objective of Risk Management for Compliance Risk is to ensure that the Risk Management process can minimize the possibility of negative impacts from the Pension Fund's behavior that deviates from or violates generally applicable standards, provisions, or legislation.
Implementation of Risk Management
The implementation of Risk Management for Compliance Risk is adjusted to the size and complexity of the Pension Fund's business activities. The implementation of Risk Management for Compliance Risk must at least cover:
a. Active Supervision by the Board of Directors/Acting Board of Directors, Supervisory Board, and Sharia Supervisory Board In carrying out active supervision by the Board of Directors/Acting Board of Directors, Supervisory Board, and Sharia Supervisory Board for Compliance Risk, in addition to carrying out active supervision as referred to in item I.A., in each aspect of active supervision, the Pension Fund must add the application of:
Pension funds must comply with applicable legislation.
Human Resources (HR)
Employees assigned to the compliance function must not be placed in positions vulnerable to conflicts of interest in carrying out compliance function responsibilities.
Risk Management Organization for Compliance Risk
Pension Funds must have a compliance function as regulated in the Financial Services Authority Regulation regarding Pension Fund Governance. This function must support the implementation of Risk Management for Compliance Risk.
b. Adequacy of Risk Management Policies and Procedures and Risk Limit Setting In ensuring the adequacy of Risk Management policies and procedures and the setting of Risk limits for Compliance Risk, in addition to ensuring the adequacy of Risk Management policies and procedures and the setting of Risk limits as referred to in item I.B., in each aspect, Pension Funds must add the implementation of:
Risk Management Strategy
The formulation of strategies for Compliance Risk refers to the provisions as referred to in item I.B.6.a.
Risk Appetite and Risk Tolerance
On principle, Pension Funds must meet the applicable laws and regulations. This causes Pension Funds to have zero tolerance for Compliance Risk and to take quick and precise steps in handling Risks.
Policies and Procedures
a) Pension Funds must have an adequate compliance work plan. b) Pension Funds must ensure the effectiveness of the implementation of Risk Management for Compliance Risk, particularly the formulation of policies and procedures to be in accordance with generally accepted standards, regulations, and legislation.
Risk Limit Setting
The setting of limits for Compliance Risk refers to the provisions as referred to in item I.B.6.d.
c. Adequacy of Risk Identification, Measurement, Control, and Monitoring Processes, and Risk Management Information Systems for Compliance Risk
In ensuring the adequacy of risk identification, measurement, control, and monitoring processes, and risk management information systems for Compliance Risk, in addition to meeting the provisions as referred to in item I.C., in each process, Pension Funds must add the implementation of:
Compliance Risk Identification
Pension Funds must conduct identification and analysis of factors that can increase Compliance Risk exposure, including:
a) the type and complexity of the Pension Fund's business activities, including the development or expansion of business activities; and b) the number and materiality of the Pension Fund's non-compliance with internal policies and procedures, regulations or legislation, and healthy business ethics practices and standards.
Compliance Risk Measurement
In measuring Compliance Risk, indicators/parameters such as the following can be used:
a) the type and significance of violations committed; b) the frequency of violations committed and the Pension Fund's non-compliance track record; c) the behavior underlying the violations; and d) follow-up on violations.
Compliance Risk Control
The implementation of controls for Compliance Risk refers to the provisions as referred to in item I.C.4.c.
Compliance Risk Monitoring
The Risk Management function or compliance function must monitor and report Compliance Risks that occur to the Board of Trustees/Acting Board of Trustees both ad hoc at the time of the Compliance Risk occurrence and periodically.
Risk Management Information System for Compliance Risk
The implementation of the management information system for Compliance Risk refers to the provisions as referred to in item I.C.4.e.
d. Comprehensive Internal Control System
In the implementation of internal controls for Compliance Risk, in addition to implementing internal controls as referred to in item I.D., Pension Funds must have an internal control system for Compliance Risk, including to ensure the Pension Fund's responsiveness level to deviations from generally accepted standards, regulations, or legislation.
H. Reputational Risk
Definition
a. Reputational Risk is the Risk resulting from a decrease in the level of trust of stakeholders stemming from negative perceptions of the Pension Fund. b. Reputational Risk can stem from, among others, negative media coverage and/or rumors regarding the Pension Fund, as well as the Pension Fund's ineffective communication strategy.
Objective
The main objective of Risk Management for Reputational Risk is to anticipate and minimize the impact of losses due to the Pension Fund's Reputational Risk.
Implementation of Risk Management
The implementation of Risk Management for Reputational Risk is adjusted to the size and complexity of the Pension Fund's business activities. The implementation of Risk Management for Reputational Risk must at least cover:
a. Active Supervision by the Board of Trustees/Acting Board of Trustees, Board of Supervisors, and Sharia Supervisory Board In the implementation of active supervision by the Board of Trustees/Acting Board of Trustees, Board of Supervisors, and Sharia Supervisory Board for Reputational Risk, in addition to carrying out active supervision as referred to in item I.A., in each aspect of active supervision, the Pension Fund must add the implementation of:
Authority and Responsibility
Board of Trustees/Acting Board of Trustees, Board of Supervisors, and Sharia Supervisory Board a) The Board of Trustees/Acting Board of Trustees, Board of Supervisors, and Sharia Supervisory Board must ensure that the implementation of Risk Management for Reputational Risk is carried out in an integrated manner with the implementation of Risk Management for other Risks that can impact the Pension Fund's overall Risk profile. b) The Board of Trustees/Acting Board of Trustees, Board of Supervisors, and Sharia Supervisory Board must pay attention to the implementation of Risk Management for Reputational Risk by relevant functions in the Pension Fund, particularly functions related to interaction with external parties. c) The Board of Trustees/Acting Board of Trustees, Board of Supervisors, and Sharia Supervisory Board must behave professionally and maintain business ethics so as to serve as an example for all elements of the Pension Fund organization in efforts to build and maintain reputation. d) Pension Funds must establish information flow channels to Participants, retirees, entitled parties, and other external parties regarding the Pension Fund's business activities to control Reputational Risk.
Human Resources (HR)
Pension Funds need to provide centralized services to handle questions, suggestions, or complaints from Participants, retirees, and entitled parties, for example, in the form of a call center service.
Risk Management Organization for Reputational Risk
All employees, including business and operational management (risk-taking function) and supporting functions of the Pension Fund, must be part of the implementation structure of Risk Management for Reputational Risk.
b. Adequacy of Risk Management Policies and Procedures and Risk Limit Setting In ensuring the adequacy of Risk Management policies and procedures and the setting of Risk limits for Reputational Risk, in addition to ensuring the adequacy of Risk Management policies and procedures and the setting of Risk limits as referred to in item I.B., in each aspect, the Pension Fund must add the implementation of:
Risk Management Strategy
The Risk Management Strategy for Reputational Risk is an inseparable part of the Pension Fund's Risk Management Strategy as referred to in item I.B.6.a.
Risk Appetite and Risk Tolerance
The setting of Risk Appetite and Risk Tolerance for Reputational Risk refers to the provisions as referred to in item I.B.6.b.
Policies and Procedures
a) Pension Funds must have written policies and procedures that meet the principle of transparency in the implementation of good governance. These policies must also align with regulations or legislation governing consumer protection. b) Pension Funds must have and implement appropriate communication policies to face negative news or publications or prevent information that tends to be counterproductive, including by applying effective media usage strategies to face negative news.
Risk Limit Setting
Reputational Risk limits are generally not limits that can be quantified financially. Examples of Reputational Risk limits include the time limit for following up on complaints from Participants, retirees, and entitled parties.
c. Adequacy of Risk Identification, Measurement, Control, and Monitoring Processes, and Risk Management Information Systems for Reputational Risk
In ensuring the adequacy of risk identification, measurement, control, and monitoring processes, and risk management information systems for Reputational Risk, in addition to meeting the provisions as referred to in item I.C., in each process, the Pension Fund must add the implementation of:
Reputational Risk Identification
Pension Funds can use several information sources to identify Reputational Risk, including mass media coverage, social network analysis results, Participant complaints through call center services, or Participant satisfaction questionnaires.
Reputational Risk Measurement
In measuring Reputational Risk, indicators/parameters such as the following can be used:
a) the reputational influence of the Founder and/or related companies; b) business ethics violations; c) product complexity (for DPLK); and d) the frequency and materiality of complaints or reports from Participants, including legal issues.
Reputational Risk Control
a) Pension Funds must immediately follow up on and address complaints from Participants, retirees, and entitled parties, including if there are legal lawsuits that can increase Reputational Risk exposure. b) Pension Funds must develop reliable mechanisms to carry out effective Reputational Risk control actions, such as providing information whenever there are changes in Pension Fund regulations to Participants, retirees, and entitled parties. c) Reputational Risk control actions are also followed by improvements to control weaknesses and procedures that trigger Reputational Risk.
Reputational Risk Monitoring
The implementation of monitoring for Reputational Risk refers to the provisions as referred to in item I.C.4.d.
Risk Management Information System for Reputational Risk
Pension Funds must have an early warning system mechanism to provide signals to the Board of Trustees/Acting Board of Trustees, so that follow-up and mitigation can be carried out as needed.
d. Comprehensive Internal Control System
The implementation of the internal control system for Reputational Risk refers to the provisions as referred to in item I.D.
III. RISK PROFILE ASSESSMENT
The Risk Profile is one of the results of the Risk Management information system. Pension Funds conduct Risk assessments on all Pension Fund business activities, both main business activities and other activities, covering 8 (eight) Risks, namely Strategic Risk, Operational Risk, Credit Risk, Market Risk,
This copy is in accordance with the original
Legal Director 1
Legal Department signed
Mufli Asmawidjaja
Liquidity Risk, Legal Risk, Compliance Risk, and Reputational Risk.
Risk assessments are conducted by Pension Funds based on a comprehensive and structured analysis of:
Determined in Jakarta on December 30, 2020
EXECUTIVE HEAD OF INSURANCE, PENSION FUND,
FINANCING INSTITUTION, AND
OTHER FINANCIAL SERVICE INSTITUTION SUPERVISOR FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA, signed RISWINANDI
APPENDIX II
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA NUMBER 28 /SEOJK.05/2020 REGARDING IMPLEMENTATION OF RISK MANAGEMENT FOR PENSION FUNDS
PENSION FUND RISK MANAGEMENT ORGANIZATIONAL STRUCTURE
I. General Guidelines
A. The Risk Management organizational structure is adjusted to the size and complexity of the Pension Fund's business.
B. The Risk Management organizational structure also considers relevant and inherent Risks in each Pension Fund business activity.
C. The Risk Management organizational structure must still follow good Pension Fund governance practices as regulated in the Financial Services Authority Regulation regarding Pension Fund Governance.
II. Risk Management Committee Organizational Structure
A. Risk Management Committee Membership
B. Authority and Responsibility of the Risk Management Committee The authority and responsibility of the Risk Management Committee is to provide recommendations to the Chairman of the Board of Trustees/Acting Board of Trustees regarding Risk Management, which must at least include:
III. Risk Management Function Organizational Structure
A. Organizational Structure
B. Independence of the Risk Management Function
The Risk Management function must be independent from business and operational functions and from internal control functions to create 3 (three) lines of defense in the Pension Fund for Risk management (3 lines of defense).
The implementation of Risk Management with the principle of 3 (three) lines of defense in the Pension Fund for Risk management (3 lines of defense), namely:
a. First Line of Defense (1st lines of defense), namely business and operational functions (risk-taking function); b. Second Line of Defense (2nd lines of defense), namely Risk Management function (risk management function); and
c. Third Line of Defense (3rd lines of defense), namely internal control functions implemented by the internal audit function (internal audit function).
The authority and responsibility of each function as referred to in number 2 are described as follows:
a. Business and Operational Function (Risk-Taking Function) The business and operational function (risk-taking function) is the frontline of the Pension Fund in Risk Management implementation, having authority and responsibility including:
b. Risk Management Function
The Risk Management function (risk management function) has the following authority and responsibility:
c. Internal Audit Function
The internal audit function in Risk Management implementation has authority and responsibility including:
IV. Relationship between Business and Operational Functions and Risk Management Functions
A. Information Submission
B. Examples of Inter-Function Relationships in the Risk Management Organizational Structure
Format 1
The Risk Management function at the Pension Fund Administration Unit (DPPK) is in another work unit, but the Risk Management function reports directly to the Chairman of the Board. The focus of Risk Management implementation in the current year is related to funding, so the members of the Risk Management Committee are the Chairman of the Board, the head of the work unit overseeing the Risk Management function, the head of the internal audit work unit, and the head of the work unit overseeing the funding function.
Format 2
The Risk Management function at the DPPK is in a separate work unit and reports directly to the Board member overseeing the compliance or Risk Management function. The focus of Risk Management implementation in the current year is related to membership and investment, so the members of the Risk Management Committee are the Chairman of the Board, the Board member overseeing the Risk Management function, the head of the Risk Management work unit, the head of the internal audit work unit, the head of the work unit overseeing
membership functions, and the head of the unit managing investment functions.
Format 3
The Risk Management function in Sharia Pension Funds (DPPK) resides in another separate unit, but the Risk Management function reports directly to the Board Chairman. The focus of Risk Management implementation in the current year relates to membership, so the members of its Risk Management Committee are the Board Chairman, the head of the unit managing the Risk Management function, the head of the unit managing the membership function, and the head of the internal audit unit.
Format 4
The Risk Management function in Pension Fund Managers (DPLK) is combined with the Risk Management unit existing within the Founder. The Founder must ensure that the implementation of Risk Management in the combined DPLK complies with regulations regarding the implementation of Risk Management for Pension Funds. The focus of Risk Management implementation in the current year relates to membership, so the members of its Risk Management Committee are the Acting Board Chairman, the head of the unit managing the membership function, the head of the unit or representative from the Risk Management unit within the Founder, and the head of the internal audit unit.
Other Formats
Pension Funds may develop organizational structures according to the size and complexity of the Pension Fund's operations. The more complex and/or the larger the size of a Pension Fund, the more complete the organizational structure, particularly in the Risk Management organizational structure, such as the formation of special units handling the Risk Management function.
This copy matches the original
Legal Director 1
Legal Department signed
Mufli Asmawidjaja
Established in Jakarta on December 30, 2020
EXECUTIVE HEAD OF THE SUPERVISOR OF
INSURANCE, PENSION FUNDS,
FINANCING INSTITUTIONS, AND
OTHER FINANCIAL SERVICE INSTITUTIONS
FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA, signed
RISWINANDI
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Source: Otoritas Jasa Keuangan (Financial Services Authority) — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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