Page 80 - SUSTAINABILITY ISSUES & COVID-19

2. LITERATURE REVIEW

Previous Studies
Strong governance mechanisms can create strong and deeply rooted trust among all stakeholders. Pension fund
governance involves managerial control and organizational rules based on accountability and management oversight
itself (Chohan, 2017). Therefore, companies must include risk-based measures that capture changes or uncertainties
in the future. This is shown by the more sophisticated the investment strategy of pension funds, the tighter the
management and supervision are. One of the governance mechanisms is through the roles that the Board of Directors
has. In this case, the board of directors is responsible for creating value and protecting shareholder assets. Ambachtsheer
et al. (2006) in (Chohan, 2017) explains that pension fund researches indicate the Board of Directors has a vital role to
ensure the governance and the investment are working properly.

Research on pension funds is assorted but the research on governance and investment asset allocation for pension
funds is inadequate. Previous studies on investment discussed more in terms of optimizing the results of the investment
portfolio. Several studies outside Indonesia that discuss pension fund governance include Kowalewski (2012) which
examines the impact of governance on the performance of defined contribution pension funds. Kowalewski (2012)
divides governance mechanisms into external, internal, and other governance mechanisms. External governance
mechanisms such as changes in the number of pension fund memberships that are not related to past pension fund
performance. Internal governance mechanisms such as the structure and characteristics of the board of directors have
a significant effect on the measure of the profitability of pension funds (measured by Return on Assets and Return on
Equity).
Research on pension fund governance in Indonesia was conducted by Suharno (2015) with the findings that the
management and supervisory board have not fully carried out their functions and responsibilities, especially non-
operational administrators, most of whose time is spent on carrying out their functions and responsibilities at the
employer; pension funds do not have a reward and punishment system to measure performance, the management has
not made a written review of investment placements and disbursements; and pension funds do not have a special unit
that is responsible for internal supervision.

Research on investment asset allocation was carried out by Soelaiman (2015). Her research aims to determine the
suitability of the pension fund investment portfolio allocation with the Liability Driven Investment (LDI) strategy, the
increase in investment returns after the strategy is implemented, and the impact of this strategy on the level of fund
adequacy. Her research shows that the portfolio allocation is following this strategy, an increase in investment returns
using this strategy, and an increase in the funding ratio. The difference between this study and previous studies is that
this study also discusses the application of the code of ethics by AKM Pension Fund in addition to the implementation
of the basic principles of pension fund governance.

Agency Theory
Agency theory is one of the theories applied to corporate governance. The theory developed by Jensen & Meckling
(1976) describes a contract that describes one or more shareholders (principal) involving management (agent) to
perform several services. This agency relationship arises when shareholders hire management to work for them and
agents act in the best interests of shareholders.

Good governance in the regulation of pension funds itself must be established with the assumption that there is a
principal and agent relationship that must be led by a sense of duty and trust (Clark (2004) in (Chohan (2017)). Agency
problems in pension funds can occur if pension fund participants may want to allocate their pension funds to long-
term instruments to obtain higher benefit but fund managers allocate them to short-term instruments for short-term
gains.

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