7
CHAPTER 2
THEORETICAL FOUNDATION
2.1. Characteristic and Environment of Pension Fund
To perform a good analysis, the first thing to do is to recognize and understand the
entity. To understand a Pension Fund, first we should learn about the basic concepts,
laws and regulations, and the pension fund financial statement reporting.
2.1.1 Basic concept of pension fund
‘A pension plan is an arrangement whereby an employer provides benefits (payments) to
employees after they retire for services they provided while they were working.’ (Kieso,
Weygandt, and Warfield, 2002, p. 1018). From the statement above, Pension Fund can
be defined as a corporate body, which has the functions of managing and perform
program that promise post retirement benefit.
According to Tunggal (1999, p. 14) Type of a pension fund include:
b. Contributory, if employee and firm jointly give contribution to the pension fund
c. Non Contributory, if only the company that gives contribution for the pension
fund.
d. Funded Pension Plan, pension fund program that performs by deposits the fund
to a particular body which separate from the company
e. Unfunded Pension Plan, if the company itself that performs the pension payment
to the employees.
8
According to the Pension Fund Law No.11 year 1992, there are two types of pension
fund in Indonesia:
1. Dana Pensiun Pemberi Kerja (DPPK)
Pension Fund that created by employer/company for the benefit of the employees.
DPPK has two types of program:
 Program Pensiun Manfaat Pasti (Define Benefit Plan)
Defines the benefit that the employee will receive at the time of retirement
 Program Pensiun Iuran Pasti (Define Contribution Plan)
Employer agrees to contribute to a pension plan a certain sum each period
based on a formula
2. Dana Pensiun Lembaga Keuangan
Pension Fund, which form by a bank or live insurance company that perform
define contribution plan program.
Figure 2.1 Pension Fund Types in Indonesia
Source: Tunggal 1999. p.178
9
Although this thesis will only focus on defined benefit program, it is important to
distinguish the differences between the two pension plan programs. Table 2.1
summarizes the main differences between Defined Benefit Plan and Defined
Contribution Plan to provide a better understanding of Pension Fund.
Define Benefit Plan
Aspect
Define Contribution Plan
Pension benefit is based on the formula
that has been decided on the pension
fund regulation
Pension Benefit
The value of contribution depends on
the fund adequacy to fulfill the pension
benefit liability based on the actuarial
calculation
Contribution
Pension fund benefit depend on the
amount
of
the
accumulated
contribution from the result of
investment until the participant stop
working, then it will be traded with
insurance company annuity
The value of employer contribution
from the participants contribution has
been set in the Pension Fund
regulation
No PSL
PSL is recognized and the funding is
entirely the responsibility of the
employer.
Investment guidelines placed by plan
sponsor
Past Service
Liability
(PSL)
Investment
Placement
Investment guidelines placed by plan
sponsor and the supervisory body
Plan Sponsor held responsible
Investment
Risk
Participants held responsible (deduct
pension benefit that will be received)
Needed since the beginning and
regularly to calculate the contribution
figure and fund adequacy
Actuarial
calculation
Not needed
Perform by the pension fund
Continued
Pension Benefit
Payment
Relationship
between
Employer and
retiree
Perform by live insurance company
No relationship
Table 2.1 Difference between PPMP and PPIP
Source: Tunggal 1999. p.15-16
10
The benefit of creating Pension Fund includes (Tunggal, 1999, p. 2):
1. To provide employees with income after retirement.
2. Provide prosperity for employees in postretirement.
3. To establish sense of security for the employees.
4. To create a conducive environment.
5. Create a harmonious relationship between employees and the company.
6. To provide motivation for employees.
7. To establish loyalty for the company.
8. Increase the productivity of the company.
9. Increase the remunerativeness of the company.
10. To create a positive image of the company in society.
11. To form an accumulated fund that funded from within the nation, this will reduce
the necessity for foreign assistant in funding the national development program.
Plan Sponsor is a person or entity that forms DPPK, or a bank or a life insurance
company that form DPLK. An entity in this extent could be in the form of a corporation,
foundation, firm, cooperative, and other form of legal entities. For an entity that does not
have the resources to create their own pension fund program, they are able to join in
other pension fund program that held by other entity.
The main activity of a pension fund is to receive the contribution from the participants
and the plan sponsor, to invest the fund that collected, pay the operation and investment
11
expenses and to pay the pension benefit for the member who has retired. Figure 2.2
illustrates the activity in a pension fund.
Figure 2.2 Activity of Pension Fund
Source: Sukemi and Muliawan 2005. p.11
In managing the investment, plan administrators are required to invest the wealth of the
pension fund in accordance with the investment regulation that set by the ministry of
finance. Furthermore, the plan administrator is required to follow the investment
guidelines which made by the plan sponsor and the supervisory board. Although it
12
seems that the plan administrator restricted by the regulation and guidelines, they still
have the authority to decide the most profitable and secure investment. The regulation
and guidelines only give a general restriction; therefore, it gives the plan administrator
the freedom to manage their investment.
2.1.2 Laws and regulation for Pension Fund
Pension Fund in Indonesia regulated under the Pension Fund Law No.11 Year 1992.
According to the law, Pension Fund acknowledged as a legal entity that has the purpose
of managing the pension fund program. ‘The entity treated as a separate legal and
accounting entity for which a set of books maintained and financial statements are
prepared' (Kieso, Weygandt, and Warfield, 2004, p1019). The separations between the
pension fund wealth with the wealth of its plan sponsor are important to assure the safety
of the pension benefit.
Financial accounting standard regulates the accounting for pension fund for the plan
sponsor and the pension fund itself. Financial accounting standard that regulates the
pension fund financial report are:
 PSAK no.18, which regulates accounting treatment and reporting for Pension
Fund
 PSAK no. 24, which regulates the pension benefit cost.
13
Regulations and law, which imply with the creation and analysis of pension fund
financial report, summarized in the Table 2.2
UNDANG-UNDANG
1. UU No.11 tahun 1992 tentang Dana Pensiun dan Penjelasan
PERATURAN PEMERINTAH
1. PP No. 76 tahun 1992 tentang DPPK dan Penjelasan
KEPUTUSAN MENTERI KEUANGAN
1. KMK No.343/KMK.017/1998 tentang Iuran dan Manfaat Dana Pensiun
2. KMK No. 509/KMK.06/2002 tentang Laporan Keuangan Dana Pensiun
3. KMK No.510/KMK.06/2002 tentang Pendanaan dan Solvabilitas Dana Pensiun
Pemberi Kerja
4. KMK No. 511/KMK.06/2002 tentang Investasi Dana Pensiun
5. KMK No. KEP-163/KM.10/2006 tentang Pengesahan Atas Peraturan Dana Pensiun
Dari Dana Pensiun PT Asuransi Jasa Indonesia
KEPUTUSAN DIRJEN LEMBAGA KEUANGAN
1. Keputusan Dirjen Lembaga Keuangan No.KEP.2345/LK/2003 tentang Pedoman
Penyusunan Laporan Keuangan Dana Pensiun
Table 2.2 Laws and Regulations of Pension Fund Financial Reporting
Source: Asosisasi Dana Pensiun Indonesia
14
Investment has a significant role in a pension fund, mainly to increase the wealth of the
Pension Fund. Investment for the pension fund should consider several factors (Wahab,
2005, p. 29):
1. Security factor, which means relatively low risk.
2. Objectives of the investment.
3. Diversification of investment by spreading investment risk in accordance with
present regulation.
Investment of pension fund wealth should be in harmony with the characteristic of
pension fund responsibility, which is to pay pension benefit to the participants.
Government regulates types of investment which pension fund can participate and its
restriction through Finance Minister Decree Number 511/KMK.06/2002 that stated:
1. Time deposit, on call deposit, and deposit certificate, with the limitation that
placement in a single bank can not exceed 20 percent
from the total pension
fund investment [Chapter 6 article (1) letter b and c, Chapter 11 article (1)]
2. Shares, bond, and other marketable securities listed in the Jakarta Stock
Exchange. Placement in a single party on those items can not exceed 20 percent
of the total pension fund investment [Chapter 6 article (1) letter d and e, Chapter
11 article (1)]
3. Direct placement on shares or debt security above one year, but not exceeding 10
years which based on Indonesian law with the regulations that placement in a
single party can not exceed 20 percent of the total pension fund investment
[Chapter 6 article (1) letter f and g, Chapter 9 article (1)]
15
4. Land and building located in Indonesia with the regulations that placement in a
single party can not exceed 15 percent of the total pension fund investment
[Chapter 6 article (1) letter h, i and g Chapter 9 article (2)]
5. Shares or unit of mutual fund without any limitation of investment placement
[Chapter 6 article (1) letter k, Chapter 11]
6. Bank of Indonesia Certificate, with the limitation that placement can not exceed
20 percent of the total pension fund investment [Chapter 6 article (1) letter l]
7. Government bond, with regulation that placement can exceed 20% from the total
Pension Fund investment [Chapter 7 article (1) letter m]
2.1.3 Pension Fund Financial Statement
Under the Pension Fund Law No.11 year 1992 plan administrators are required to
submit audited financial report periodically. This regulation is supported with the
regulation about the reporting of financial statement under the Government Regulation
No. 76 year 1992, article 18 which stated that plan administrator required to report to the
minister of finance concerning:
1. Financial report and pension fund investment report which a public accounting
firm has audited.
2. Technical report that prepared by the plan administrator according to the
regulation set by the finance minister.
3. Actuary report minimum every three years and reported at least five months after
the valuation date.
16
The appointment of a public accountant for the Pension Fund is the duty and privileges
of the supervisory board. Other then the duty of supervising the management of the
pension fund, supervisory board also appoints the public accountant that will conduct the
audit of the pension fund financial statement. The supervisory board assumed to have
the ability to entrust both the participants and plan sponsors importance since the board
members formed from both parties in equal numbers.
The pension fund financial statement specifically regulated under Surat Keputusan
Direktur Jenderal Lembaga Keuangan nomor KEP.2345/LK/2003. Pension fund
financial report, that either held defined benefit plan or defined contribution plan should
include:
a. Net Assets Report
Net assets report is a report, which reflects the wealth of a pension fund available
for pension benefit. Net asset report is asset minus short-term liability. Net asset
report will normally provide information about:
 Investment
 Current Assets Beside Investment
 Operational Assets
 Other assets, and
 Short-term Liability
Investment in net assets presented based on fair value as regulated in the Finance
minister decree No. 76/KMK.017/1995 regarding the financial report. On the
other hand, operational assets presented based on book value.
17
b. Changes in Net Asset Report
Changes in net assets report provide information regarding changes in the net
assets in the current year with previous year.
c. Balance Sheet
A Balance Sheet provides the monetary condition of the Pension Fund at a
certain time. Items that presented in the assets section of the Pension Fund
balance sheet should include:
 Investment
 Difference in Investment Valuation
 Current Assets Beside Investment
 Operational Assets
Investment item in the balance sheet presented using historical value. Investment
on land and building should relate to the accumulated depreciation. Operational
assets presented using historical value.
Items that presented in the liabilities section of the Pension Fund balance sheet
should include:
 Actuarial Liabilities
 Short-term Liabilities
 Unearned revenues
Actuarial liability is a long-term liability for Pension Fund with Defined Benefit
Program. Because the problems associated with the pension fund involve
18
complicated actuarial considerations, actuaries are engaged to assure that the
fund is appropriate. Actuaries are individuals who trained through a certification
program to assign probabilities to future events. Actuaries make actuarial
assumptions of mortality rates, employee turnover, interest rates, early retirement
frequency, and any other factors affecting pension fund
d. Income statement
Income statement is a report, which measures the profitability of a Pension Fund
over a period. The Pension Fund income statement separated income with cost
and separate investment activity with non-investment activity.
e. Cash Flow Report
Pension Fund cash flow report provides information regarding the pattern in
which cash move in and out of the Pension Fund. Cash flows repot should
include:
 Cash flows from investment activity
 Cash flows from operating activity
 Cash flows from Financing activity
f. Note of Financial Report
Note of Financial Report Provide useful information for users of the financial
report. Items that presented in the note include:
 General explanation
 Explanation on the Pension program
 Explanation on important accounting treatment
 Explanation on investment selection
19
 Explanation on financing
 Actuarial calculation
 Calculation of tax
2.2 Theory of Financial Statement Analysis
2.2.1 Basic concept of Financial Statement Analysis
John. J. Wild defined financial statement analysis as the application of analytical tools
and techniques to general-purpose financial statements and related data to derive
estimates and inferences useful in business analysis. Furthermore, financial statement
analysis reduces reliance on hunches, guesses, and intuition for business decisions. It
decreases the uncertainty in the business analysis.
One of the most important jobs for management or investor at the end of a financial
period is to analyze the company financial statement. Financial statement analysis
separates the financial statement into pieces of smaller information units and finds the
relationship between them. Any significant relationship or any relationship between the
information will provide new information’s needed in making an important decision
accurately. Information that gathers from those relationships will add another vision
from different perspective and will give more depth rather the conventional financial
report. The purpose of financial statement analysis is to convert raw data originated from
the report and translate to information that is more useful.
20
Financial statement analysis maximizes the information that relatively small into wider
and more accurate information. The result of the financial statement analysis will reduce
the inconsistency of a report. Results of the analysis will make the information far more
reliable, thus will increase the reliability of the information that will make a more
accurate decision.
2.2.2 Users of Pension Fund Financial Statement
There are several parties that affected by the financial condition of the Pension Fund.
Users of Pension Fund financial statement include (Tunggal, 1999, p. 118):
 Plan Sponsor will need the information regarding the financial condition of the
Pension Fund especially about the wealth and liabilities of the Pension Fund.
Plan sponsor of Pension Fund with defined benefit program considers the
position of the wealth and liabilities of the fund to be very important. The reason
is that it is the responsibility of the plan sponsor to covers the liabilities of the
Pension Fund.
 Participants needed information on how the plan administrator manages the
Pension Fund.
This is important to participants since the pension benefit that
will have received is depended on how the wealth managed.
 The Plan administrator needed the financial report to fulfill their responsibility
for the management of the pension fund.
 Government needed the financial report for observation of the management of
the Pension Fund. The government also uses the financial report to calculate tax.
21
2.2.3 Objectives of Pension Fund Financial Statement Analysis
In general financial statement analysis is prepared to help investors and creditors
understand the financial history of a company and use that knowledge to predict the
future cash flows and price appreciation. John J. Wild in his book “Financial Statement
Analysis” Eight Edition stated:
‘The foundation of a reliable analysis is an understanding of its objectives. This
understanding leads to efficiency of effort, effectiveness in application, and
relevance in focus. Most analyses face constrains on availability of information.
Decisions must be made using incomplete or inadequate information. One goal
of financial statement analysis is reducing uncertainty through a rigorous and
sound evaluation.’
The objectives of financial statement analysis according to Bernstein in 1983 (Cited in
Harahap, p.197)
1. Screening:
Analysis perform with the objectives of understand the situation and condition
of a company through the financial statement without directly went to the field.
2. Understanding:
Understand the company, financial condition, and company profits
3. Forecasting:
Analysis use to predict the financial condition in the future
4. Diagnosis:
Analysis intended to see the possibility of problems in the management,
operational, financing or other problems in the company.
22
5. Evaluation
Analysis was intended to evaluate the achievement of management in managing
the company.
Specific analysis objectives will reduce unnecessary analysis.
With the present of
specific and explicit analysis objectives, plan administrator would be able to choose the
right technique that needed to fulfill the objective. Plan administrator could also leave
behind unnecessary analysis method by adjust to the objective stated earlier. A specific
analysis objective will increase the efficiency and affectivity of financial statement
process. Without unnecessary and overloading analysis method, analysis process will
save time, energy, and cost. The result of the analysis will become more focus and make
the process of decision-making become easier.
Pension Fund financial statement cannot be separated from the principles and standard
of financial accounting in general. Financial report that followed the general standard
should be able to analyze with analysis techniques that used in the common financial
statement with several adjustment.
Before deciding the objectives of the analysis, it is important to consider the function
and duty the party who will perform the analysis. As an example, the plan administrator
has the duty of safeguard the liquidity of the pension fund then one of the objectives of
the analysis is to determine the level of liquidity of the pension fund.
23
It is important to consider the main activity of the Pension Fund as explain in Figure 2.2
when set up the objective of financial statement analysis. The three main activities in the
Pension Fund are collecting plan contribution from the plan sponsor and the participants,
invest or redeem investment and to receive the result of the investment, and payment of
pension benefit.
No.
General Objectives
No.
1.
To determine the compliance of
the Pension Fund toward existing
regulation and law in
reporting/presentation the
financial statement and the
management of the Pension Fund
wealth.
To determine the investment
efficiency and financial
management
1.A
2.
1.B
Determine the rate of return from
Pension Fund investment
2.B
Compare the actuarial assumption
with the realization
To determine result generated from
assets
2.D
To determine the financial safety
of Pension Fund
3.A
3.B
3.C
4.
To determine the ability of
Pension Fund in fulfill the
obligation toward the plan
participant
To determine the compliance of
Financial statement presentation
with existing regulation
To determine the compliance of
Pension Fund wealth management
toward existing regulation
2.A
2.C
3
Specific Objectives
4.A
To value cash flows from
investment activity
To determine the fund adequacy
To determine the compliance of
contribution collection
To determine the trend from the
financial activity
To determine the compliance of plan
administrator to fulfill the obligation
of pension benefit payment
Table 2.3 Objectives of pension fund financial statement analysis
Source: Sukemi and Muliawan 2005. p.50-51
24
2.2.4 Limitation of Financial Statement Analysis
The financial statement analysis techniques are useful for providing insights into the
financial position and performance. Nevertheless, there are certain limitations that
should consider. According to Hogget, Edwards, and Medlin (2003, p.1024-1025) those
limitations include:
1. Financial analysis performed on historical data mainly to forecasting future
performance. The historical relationships may not continue because of changes in
the general state of the economy, the business environment in which the entity
must operate, or internal factors such as change in management or changes in the
policies established by management.
2. The measurement base used in calculating the analytical measures is historical
cost. Failure to adjust for inflation or changes in fair values may result in some
ratios providing misleading information on a trend basis and in any comparison
between entities.
3. Year-end data may not be typical of the entity’s position for the year. Knowing
that certain ratios calculated at year-end, management may attempt to improve a
ratio by entering certain types of transactions near the end of the year.
4. Sometimes the information contained in the general-purposed reports may be
subject to modifications, supplementations and qualifications expressed in
accompanying documents such as directors’ reports and auditors’ report. Any
analysis and interpretation should take into consideration such matters.
25
5. Entities may not be comparable because of factors such as the use of different
accounting methods, size, and the diversification of product lines, data may not
provide meaningful comparison.
2.3 Analysis method of Pension Fund Financial Statement
Analyzing a financial statement conducted by understanding the condition of a company
through accounting by the media of financial report. Steps that often perform in the
financial statement analysis are calculating ratios and indexes, comparing recent
financial statement with previous financial statement, and analyzing relationship and
identify problems in financial statement.
In analyzing Pension fund financial statement, tools that will be used includes:
1. Comparative financial statement analysis
2. Common-size financial statement analysis
3. Ratio analysis
4. Cash flow analysis
5. Compliance Analysis.
6. Investment Performance Analysis.
2.3.1 Comparative Financial Statement analysis
According to Wild, Subramanyam, and Halsey (2004, p.24-25) Individuals conduct
comparative financial statement analysis by reviewing consecutive balance sheets,
income statements, or statement of cash flow from period to period. The most important
26
information often revealed from comparative financial statement analysis is trend. A
comparison of statements over several periods can reveal the direction, speed, and extent
of a trend. Comparative financial statement analysis also referred to as horizontal
analysis given the left-right analysis of account balances.
This method used by using the figures in the financial statement and compares it with
other financial statement. The comparison conducted by comparing the financial
statement with (Harahap, 2006, p.217):
1. Comparing between financial years, for example financial statement of 2005
compared with financial statement of 2006.
2. Comparison of one financial year by comparing the elements
of
financial
statement
3. Compare the financial statement with the best company in the industry.
4. Compare the financial statement with the industry standard.
5. Compare the financial statement with the budget of the company.
2.3.2 Common-size Financial Statement analysis
Common-size financial statement analysis or also known as vertical analysis is an
analysis method that presenting financial statement in the form of percentage. Normally
the percentage connected with important figure in the financial statement, for example
total asset figure in the balance sheet.
27
2.3.3 Ratio Analysis
Ratio analysis is among the most popular tools in the financial statement analysis.
Analysis of ratio can reveal important relations between components that make up the
ratio. According to the management of the pension fund ratios analysis that normally
used in analyzing Pension Fund financial statement, include:
1. Return on Investment (ROI) is the ratio of money gained or lost on an investment
relative to the amount of money invested from the pension fund. ROI computed
as
ROI = Total income from investment /Average of Total Investment
Total income from investment figures found in the income statement or from the
changes of net assets report. Average of total investment calculated from the
balance of total investment at the beginning of the year plus the balance of total
investment at the end of the year and divided by two.
2. ROA is the ratio that shows the performance of the pension fund asset in
generating income. ROA computed as:
ROA = Total income from investment / Average of Net asset
Total income from investment came from the income statement or the changes in
net assets report. Average of net assets calculated from the balance of net asset at
28
the beginning of the year plus the balance of net asset at the end of the year and
divided by two.
3. Solvability ratios refer to the ability of a corporation to meet its long-term fixed
expenses and to accomplish long-term expansion and growth. Based on the
finance minister decree no 510/KMK.06/2002 Solvability ratio computed as:
Solvability Ratio = Net Assets / Solvability Liability
Net asset figures retrieved from the net assets report. Solvability liability
calculated by the actuary and reported in the actuary report.
4. Fund Adequacy Ratio shows the ability of a company to fulfill its obligation with
the assumption that the pension fund is going-concern. Based on the finance
minister decree no 510/KMK.06/2002 Fund Adequacy Ratio computed as:
Fund Adequacy Ratio = Net Assets / Actuarial obligation
Net assets figure retrieve from the net assets report or from the changes in net
assets report. Actuarial obligation figure retrieve from the balance sheet or from
the actuarial report.
According to the finance minister decree no 510/KMK.06/2002 there are three quality of
funding
29
 First rank: The wealth of Pension Fund exceeds both actuarial obligation and
solvability obligation.
 Second rank: The wealth of Pension Fund is less then the actuarial obligation and
exceed the solvability obligation
 Third rank: The wealth of pension fund for funding is less than the solvability
obligation.
2.3.4 Cash-Flow Analysis
The statement of cash flows provides information on cash inflows and outflows for a
period. To predict cash flows in the future analyst could use the historical cash flow.
Cash flow reporting distinguishes the sources and uses of cash flows into operating,
investing, and financing activities. Financing activities includes of contribution
collection and pension benefit payment.
In evaluating sources and uses of cash, the analyst should focus on question like (Wild,
Subramanyan, and Halsey, 2004 p.395):
 Are asset replacements financed from internal or external funds?
 What are the financing sources of expansion and business acquisitions?
 Is the company dependent on external financing?
 What are the company’s investing demands and opportunities?
 What are the requirements and types of financing?
 Are managerial policies (such as dividends) highly sensitive to cash
flow?
30
Efficiency can be measure by calculating cash flow return on investment and cash flow
return on investment revenue. The higher that these ratios the higher the efficiency of
cash usage in investment portfolio.
Cash Flow Return on Investment = Cash Flow from Investing Activity
/ Total Investment
Cash Flow Return on Investment Revenue = Cash Flow from Investing Activity
/ Income from Investment
2.3.5 Measuring the Investment Performance of Pension Fund
Aside from the common analysis method, it is very important to analyze the investment
performance of the pension fund. The fiduciary responsibilities of pension plan
sponsors, administrators, managers, trustees, and other mandate that they periodically
evaluate the investment performance of the fund’s asset pool. Investment performance
measurement provides information on managing pension fund (Logue and Rader, 1998,
p.159):
 How well a fund is doing in meeting its investment goals?
 Investment performance measurement helping meet the goals of the pension plan
or whether it hurting.
 Performance measurement offers insights into the general competence of an
investment manager and establishes whether the manager is following the
investment policy and guidelines provided by the sponsor.
31
 Performance measurement offers information as to whether the investment
manager’s behavior is consistent with the investment philosophy that the
manager portrays as guiding decisions: that is, is the manager following the
investment strategy she said she would follow.