JAKARTA, FEB 13, Reuter - Indonesia's stock market may be too volatile to absorb billions of dollars sloshing around in the country's fast-expanding pension fund industry, economists and fund managers said.

By using tax breaks the government has made it more attractive for firms to direct money into pension funds. But these funds are not jumping into stocks as the government hoped.

"It's chicken and egg. Which comes first, pension funds investing in a stable stock market or a stock market stabilising because of pension fund investment?" one economist questioned.

"We're certainly not keen on the stock market. It's still far too risky to put even 25 per cent of our funds into," said Ed Lamb, finance manager of Hudbay Oil, one of the few foreign- based oil firms to have set up an approved pension plan here.

Many firms now pay benefits out of retained earnings when a worker retires rather than tie up money in pension funds.

But more are being tempted to create government-approved pension plans because employer and staff contributions and most of the funds' investment income are fully tax-deductible. Indonesia's usual company tax rate is 35 pct. The tax concessions have been introduced gradually since 1983.

Currently there are fewer than 150 approved funds, covering about one million of the country's 76 million strong workforce.

Including the civil servants' fund Taspen they control more than six trillion rupiah (3.3 billion dollars), according to Indra Hattari, director of the private Indonesian Association of Pension Funds.

He expects that to swell to more than 20 trillion rupiah by 1994, five times the current capitalisation of the stock market.

The money should be used to add ballast to the market as it grows, Hattari said.

"Indonesia is trying to use the stock market to get around the problem of high-cost money. The only parties that can really handle that are the pension funds, who will let money sit for five or 10 years and not demand a high rate of return," Hattari said.

Finance Minister Johannes Sumarlin has often stressed the importance of pension funds to the tiny stock market.

But some fund managers warned that the funds may smother rather than boost the bourse with pension managers sucking available scrip into their portfolios and sitting on it without trading.

"Indonesia needs to get its secondary market going. (Pension) managers here are used to time deposits, to holding things to maturity. That doesn't help (liquidity) at all," said Michael Huddart of actuaries PT Purbajaga.

The alternatives to stocks are time deposits in banks, where around 60 pct of pension fund money now sits clocking up 17 pct annual interest, and real estate and direct investment. The government is moving to tighten regulations on pension funds with a new law expected this year, actuaries say. This may prevent the money from being directed abroad or from being ploughed back into the contributing company.

A mishmash of laws, dating from the 1920s during the Dutch colonial period, is supposed to prevent too much pension money from being ploughed back into the contributing company.

"But really, the rules are very vague," Huddart said. "It's perfectly legal, for instance, to invest all your pension money in your own bank as time deposits. That's very dangerous."

State bank Bank Nasional Indonesia 1946 was able to pay for its towering new headquarters in central Jakarta out of its pension fund money, while a state plantation workers' fund has started up its own bank aimed at boosting agricultural credit.

"Some of the state (company) funds invest far too much in their own activities, or buy into their associates' low-yielding companies. We're not supposed to be in the risk capital business," one industry source said.

With the prospect of more money, the pension fund industry is crying out for more ways to invest.

"The government has to decide that it will embark on an unbalanced budget and issue bonds," Hattari said. "We would happily buy bonds at, say, 12 pct."

The government, committed by law to a balanced budget, makes up its deficit through concessional loans from abroad often at well below a 12 pct interest rate. Top economic minister Radius Prawiro said last week the government did not intend to issue deficit bonds.

Expertise, too, is at a premium. Purbajaga's Huddart suggests pooling the country's stock investment skills and allowing pension managers to buy into professionally managed unit trusts. However, unit trusts currently do not have tax advantages.