The Efficiency of Indonesian Pension Funds: A Two-Stage Additive Network DEA Approach

Abstract

Employer pension funds (EPFs) manage funds contributed by their members and sponsors with the ultimate goal of providing adequate pension benefits for beneficiaries upon retirement. The critical issue for EPFs is, therefore, their efficiency. This study aims to investigate Indonesian EPFs’ technical efficiency and its determinants using data from 38 EPFs actively operating in 2011–2017. By conceptualizing EPFs’ management processes as a network, this study employs the two-stage additive network data envelopment analysis (DEA) to measure the performance of EPFs based on their overall efficiency, operational efficiency, and investment efficiency. A regression analysis is then performed to examine the determinants of EPFs’ efficiency. The results reveal that investment efficiency is the main source of EPFs’ overall inefficiency, implying that more attention should be directed towards investment management when the EPFs seek to improve their overall performance. The regression analysis shows that size and ownership are the most significant factors that determine EPFs’ efficiency. Ownership positively correlates with both overall efficiency and investment efficiency, while size negatively affects investment efficiency. This study concludes that in order to improve their overall performance, EPFs need to make more efforts in investment management, while accounting for size and ownership as important determinants. This study provides a projection analysis model as a practical guidline for EPFs to improve their performance.