Public sector retirement plans for state and local government employees date back over a century to the late 1800s. These plans were developed by government employers to provide retirement benefits for employees who were in public service National Conference on Public Employee Retirement Systems [1]. The Indonesian civil servant (PNS) pension policy implements a pension scheme known as Pay As You Go. In this scheme, retired civil servants/pensioners will receive certain amount of money every month after their working period ends and will be paid by the government until the civil servant dies. The pension fund also can be passed on to families such as wives, husbands or children. Therefore, this Pay As You Go pension scheme can be a burden to the government and will have an impact on the health of the state budget. According to the Central Government Financial Report (LKPP) 2021, the long-term liabilities of the government's pension program reach Rp 2.929 trillion. It consists of obligations for central civil servants of Rp 935 trillion and regional civil servants of Rp 1.994 trillion.

Improvements to the civil servant pension system that will be implemented immediately are replacing the Pay As You Go system by implementing Fully Funded system [2]. Although it has not been determined yet when it will be implemented, Indonesian government has initiated a discourse on changing pension payments scheme to become fully funded. Which means when the civil servant reaches retirement age, pension payments are given in a full amount. If this happen, pensioners won’t need a product like pension loan anymore. This makes Bank Suguru will potentially loses its revenue stream from pension lending. It will cause a big impact on overall financial performance since the pension lending is the second largest Bank Suguru’s loan portfolio. At the same time, Bank Suguru also facing a downward trend in the number of pension customers. In the last five years, the bank has lost about 82,000 customers or 20% of its customer base. This reduces the bank's market share by 6%, down from 18% in 2019 to 12% in 2023. Meanwhile, the other three market leaders, which are state-owned institutions, experienced an increase in the number of customers or at least did not experience a significant decline. This worsening condition must be immediately addressed by banks to mitigate the potential impact, especially from changes in pension payment scheme regulations. 

Pay As You Go Pension Scheme

A system in which state retirement benefits are financed by contributions levied from current workers, as opposed to a funded system in which contributions are invested to pay for future benefits Law and Smullen. Indonesian government implemented Pay As You Go pension scheme which is directly funded by the government taken from the state budget and paid it in monthly basis when the civil servants retired. The advantages of this method related to controlling payments, especially determining the amount of pension salaries handled by the government. The government budgeting for the pension program will be calculated based on forecasts of real conditions (cash basis). The disadvantages of this method include the increase in pensions from year to year, due to the addition of pension receipts, even though there is no increase in salary. An increase in payments will also occur because the life span of pension recipients is getting longer, in line with improvements in public health, especially if the retirement age does not change. The length of time for payment will be longer due to pension payments for the insured (wife/husband and children/or children).

Fully Funded Pension Scheme

In a fully-funded scheme, pensions are paid out of a fund built over a period of years from its members’ contributions [3]. Fully Funded is a pension scheme where the fund is sourced from premiums payment taken jointly from civil servants as employees and the government as employers and the collected funds will be used as the pension budget. The advantage of Fully Funded scheme is that payment expenses and payment management are allocated separately from the burden on the government budget. The government's burden for premium payments can be estimated together with the payment of civil servant income. Another advantages is when the number of civil servants does not increase, the government contribution will likely remain the same. The only increase might due to the influence of adjustments to inflation or the standard of living.

Literature Review

Scenario Planning

The result of in-depth interview from each respondent and will be summarized and together with both external dan internal factors analysis will be utilized as the baseline analysis for scenario planning. The scenario planning development will follow Garvin and Lavesque scenario planning frameworks [4].

Porter’s Five Forces

Michael Porter developed the highly influential five forces model to help managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage [5]. Porter's Five Forces analysis is used to identify an industry's structure to determine corporate strategy. The model can be applied to any segment of the economy to understand the level of competition within the industry. It helps to identify the competitive environment and profitability of an industry, as well as the attractiveness of the industry for potential new entrants. Bank Suguru must prepared accordingly with the high-level competition among competitors in which considerably will be focusing on direct competition for products and services.

PESTEL

This research also used PESTEL Framework for external environment analysis that helps to find out market trends and challenges. It identifies six groups of issues such as political, economic, socio-cultural, technological, environmental and legal aspect. PESTEL analysis provides a comprehensive and holistic view of the industry and its opportunities and threats. It helps leaders identify the key drivers of change, potential risks and challenges and areas where they can gain a competitive advantage, allowing them to develop strategies to adapt and thrive in the face of these challenges.

VRIO

For internal factors the research will use VRIO framework to explore Bank Suguru internal resources and capabilities and further look up to Bank Suguru’s competitive advantages. VRIO framework is implied in the resource-based model, identifying specific types of resources as key to superior firm performance. For a resource to be the basis of competitive advantage, it must be valuable, rare, costly to imitate and must be organized to capture the value of the resource [5]. This framework is implied in the resource-based model, identifying certain resources as key to superior firm performance. VRIO analysis stands for four questions that ask if a resource is valuable, rare, costly to imitate and is a firm organized to capture the value of the resources. A resource or capability that meets all four requirements can bring sustainable competitive advantage for the company.

This research aims to analyze Bank Suguru in which its pension business highly affected by the changes of pension payment scheme. Because of the future of pension business in the next five years will be uncertain yet can give major consequences for Bank Suguru’s pension business, scenario planning approach will be applied in the research due to the high level of uncertainty and possibilities of effects for the bank. The objective of this research is to identify key driving forces and critical uncertainties for Bank Suguru’s pension business in the next five years. After that, this research will analyze and develop most coherent scenarios in the next five years. Finally, this research will propose strategies that appropriate with each possible scenarios.

The methodology used in this study used qualitative research methodology and the conceptual framework consist of two phases. In the first phase, defining research objective will be the basis and starting point for the framework of this study. Then, the data needed for analysis will be collected both from interview and review from research publications, reports and news article. After that, the data collected will be analyzed using PESTEL framework. Resulted in the list of root cause regarding to the topic.

Figure 1: Conceptual Framework

In the second phase, output of the list of root cause from phase one will be used as a basis for defining key focal issue to start developing scenario planning. This study will explore about the driving forces related to the key focal issue, scoring it based on the level of uncertainties and importance, sorted by the two highest scores. The two highest scoring driving forces will be used as an axes of 2x2 matrix in the scenario creation, resulted in the four possible scenarios. Each scenarios will be elaborated its implications, options and early warning signals narratively as an output of scenario planning framework (Figure 1).

Based on the analysis to company’s internal and external conditions, as well as interviews from decision making level management and operational expert in Bank Suguru, the key focal issue for pension business is: “How changes of pension payment scheme from Pay As You Go to Fully Funded will affect Bank Suguru in the next five years?”.

Then, several driving forces are going to be examined to identify the driving forces that affect the key focal issues. Driving forces can have different level of influence in terms of the key focal issue. Therefore, after the driving forces are done identified, the next step is to determine the critical uncertainties. Critical uncertainties are defined by mapping the level of importance and level of uncertainty of each identified driving forces based on the analysis and information gathered from the interviewed experts. Based on the result of the mapping process, the two critical uncertainties are government regulation towards pension system and Indonesia’s economic growth (Figure 2).

The two critical uncertainties that already defined will be used as an axes in the 2×2 matrix of scenario creation stage. The 2×2 matrix will form four quadrants that will represent a different situations or scenarios. The nation theme has been chosen to represent each scenario created based on the Mercer CFA Institute Global Pension Index 2023 which divides countries with supportive and restrictive pension regulatory conditions. High-rank countries with high GPI scores will represent a scenario with a supportive government axis. Likewise, low-rank countries with low GPI scores will represent a scenario with a restrictive government axis. Another axis that divides countries according to economic conditions, whether rising or falling, is based on annual GDP growth data from the World Bank for the period 2021 and 2022. Countries whose growth in 2022 is greater than in 2021 will represent a scenario with the economic upturn axis. Then for countries whose growth in 2022 is smaller than in 2021 will represent a scenario with an economic downturn axis (Figure 3).

Figure 2: Uncertainty and Importance Mapping Matrix

Figure 3: Scenario Matrix

Table 1: Early Warning Signals

The first quadrant is “Singapore Scenario” which has good and supportive government regulation and ranked 7th from 47 countries in Global Pension Index 2023. On the other hand, the country’s GDP facing downward trend from 2021 to 2022. The second quadrant is “Iceland Scenario” which has first-class supportive government regulation and ranked 2nd from 47 countries in Global Pension Index 2023. At the same time, the country’s GDP facing upward trend from 2021 to 2022. The third quadrant is “Philippines Scenario” which is considered to have weaknesses in their government regulation and ranked 46th from 47 countries in Global Pension Index 2023. On the other hand, the country’s GDP facing upward trend from 2021 to 2022. The fourth quadrant is “Argentina Scenario” which is considered to have weaknesses in their government regulation and ranked last from 47 countries in Global Pension Index 2023. At the same time, the country’s GDP facing downward trend from 2021 to 2022.

Each scenario has different implications. Implications for the Singapore Scenario are increasing competition within pension business, lower demand for lending, higher default rates and increasing risk for banks. Implications for the Iceland Scenario are increasing competition within pension business, increased demand for lending, increase in assets under management, higher inflation and interest rates and increased regulatory audit. Implications for the Philippines Scenario are limitation of growth opportunities for private banks, increased demand for lending and increase in compliance costs. Implications for the Argentina Scenario are limitation of growth opportunities for private banks, lower demand for lending, higher default rates and increasing risk for banks.

Based on the implications in each scenario, then the action options are developed. Options for the Singapore Scenario are offer value-added services such as financial planning and   retirement advice, partnering with other financial institutions to offer a wider range of pension products and services, adjust lending policies and interest rates to attract borrowers, increase loan loss provisions to manage increasing credit risk and monitors regulatory changes and updates the bank's risk management policies and procedures accordingly. Options for the Iceland Scenario are differentiate by offering better services and lower fees to attract customers, use both digital and traditional marketing strategies to reach customers and build relationships with them, get involved in the pension community by sponsoring events to help customers remember the bank's name and the values it stands for, increase interest rates on loans to take advantage of the increased demand and maintain their profit margins and invest in new technology to improve their operational efficiency. Options for the Philippines Scenario are invest in other markets to reduce their dependence on the civil pension market, use local search engine optimization strategies to make it more likely for potential customers to find them through Google searches, partnering with hospitals or healthcare businesses to create products and services that cater the needs of pensioners and collaborate with state-owned banks to offer joint pension products and services. Options for the Argentina Scenario are reduce their dependence on the civil pension market, adjust lending policies, monitors regulatory changes and updates the bank's risk management policies accordingly and provide financial planning resources to pensioners to help them prepare for retirement.

After implications and options from each scenario were developed, then early warning signals are defined. Early warning signals are small signs of significant change and related to the critical uncertainties that used to build scenarios. Identifying early warning signals is crucial to avoid being caught off guard by unexpected threats and help the company prepared to when the expected opportunities occurs. The early warning signals that have been identified for each scenario are shown in the following Table 1.

Based on the four plausible scenarios including its implications and options, Bank Suguru need to establish the strategic imperatives in order to respond to the challenges might occur. There are three proposed general strategies that Bank Suguru can implement, the first is Strategic Diversification. By diversifying revenue streams strategically, company can reduce dependency and spread the risk, which is crucial in the face of unexpected events that can impact primary customer bases. The second is Strategic Collaborations. Collaborations with related parties such as government, pension fund institutions and even competitors are essential to address the evolving needs of the pension system, ensuring it is profitable and sustainable. However, it is important to note that banks should ensure that any collaborations are in compliance with regulatory requirements and do not violate antitrust laws. The third is Building a Positive Brand Image. Building a positive brand image is essential as it directly impacts customer satisfaction, loyalty and repurchasing intention. Investing in corporate social responsibility programs and pension community development projects can aligns with the government's emphasis on inclusive growth and shows goodwill among the pensioners.

The key focal issue for Bank Suguru’s pension business is “How changes of pension payment scheme from Pay As You Go to Fully Funded will affect Bank Suguru in the next five years.” The answer of the key focal issue will determine the business strategy that need to be made to anticipate the challenges that will occur.

There are 21 driving forces identified ranging from political, economical, socio-cultural, technological, environmental, to legal aspect that navigate the change in industry related to the key focal issue. The critical uncertainties that defined from the driving forces with the highest level of uncertainty and importance are government regulation towards pension system and Indonesia's economic growth. 

Based on the two critical uncertainties mentioned above, there are four plausible scenarios that can occur. The first scenario is Singapore Scenario that represent supportive government combined with downturn economic condition. The second scenario is Iceland Scenario that represent supportive government combined with upturn economic condition. The third scenario is Philippines Scenario that represent restrictive government combined with upturn economic condition. The fourth scenario is Argentina Scenario that represent restrictive government combined with downturn economic condition.

There are three general strategy to respond to the implications mentioned in every scenarios. The first strategy is strategic diversification. By diversifying, company can reduce dependency in one market segment and can support continual growth of the company. The second strategy is strategic collaborations with government, pension fund institutions and competitors to address the evolving needs of the pension system. The third strategy is building a positive brand image to maintain or increase customer satisfaction, loyalty and repurchasing intention.

1. National Conference on Public Employee Retirement Systems. The Evolution of Public Pension Plans: Past, Present and Future. 2008. Retrieved from https://www.ncpers.org/files/ncpers-research-the-evolution-of-public-sector-pension-plans.pdf

2. Rakhmawanto, A. "Civil Servants Pension Programs: Perspective Analysis of Civil Servants Pension Programs Improvement from Pay As You Go to Fully Funded." ASN Journal, 2014. Retrieved from https://jurnal.bkn.go.id/index.php/asn/article/view/59/118

3. Barr, N. and Diamond, P. "The Economics of Pensions." Oxford Review of Economic Policy, 2006.

4. Garvin, D. and Levesque, L. A Note on Scenario Planning. Harvard Business School, 2006.

5. Rothaermel, F. Strategic Management. 3rd ed., New York: McGraw-Hill, 2017.