Retirement planning: Do not ignore individual pension plans
Do Indians enjoy financial freedom in their retirement days? If we calculate the size of the funds available with EPFO, NPS and companies in the organised sectors providing superannuation, the total amount will be below 10% of current GDP. Size of pension funds of most developed countries are much more than their GDPs. The Netherlands leads the pack with its pension fund amounting to 160% of GDP.
In India, less than 12% of the population is covered by pension plans even as the birth rate is falling and longevity of the Indians is increasing. Many Indians are going to live for a period almost as long as their working life. But financial future of most Indians is very uncertain. In OECD countries, more than 60% of the citizens are covered by some form of pension.
Funding retirement
So, how are Indians planning to finance their living expenses after retirement? Surveys show 50% Indians believe their children will be financing their old age expenses. The rest however, are not so hopeful. Are Indians serious about building their retirement corpus while in service? Research shows that they start thinking about life beyond retirement only after 40. At that time, they have their families and worry about their future as well. Some of them believe that the pension granted by employers will be adequate to meet the expenses of the remaining part of life. Anything less than 60% of the last drawn salary would possibly be inadequate.
Under Defined Benefit schemes, hardly any employer gives as much pension. Presently, employees are covered by Defined Contributions (DC) schemes. The low-growth/ low-interest economic environment is reducing the long term benefits of compound interest under DC schemes. Those who have access to only EPF will get 30% of the last drawn salary. Only a combination of PF, superannuation schemes and NPS will possibly take a person to 63%. These are back of the envelope calculations made by actuaries.
In fact, NPS covers only 10% of the workforce. Even EPF is not statutory for employees of very small business establishments. Moreover, many employees withdraw a large part of their EPF savings during the period of active service to meet emergency expenses. Thus, most Indians are not properly equipped to lead a financially independent retired life. This also means insurers have a large market to sell customised Individual Pension Plans (IPP).
Individual Pension Plans
Unfortunately, the IPPs are not as popular as endowment, term and unit-linked insurance plans. Even when people buy these products, they come out of it before the end of the policy terms. This defeats the very purpose of buying pension products. In India, people need pension even more as there is hardly any social security schemes (except APY to some extent) that offer decent pensions to the citizens.
Pension products fetched only 10.33% of the total business of life insurers in 2018-19. And this includes pensions provided under group schemes as well.
Promoting pension system
The Melbourne Mercer’s Index that measures the extent of development of a country’s pension system did a survey in 2018-19 on the criteria of adequacy, sustainability and integrity of the pension systems in 37 developed and emerging markets including India. The weightages of these three criteria are 40%, 35% and 25%, respectively. India’s rank is 32. This necessitates promotion of a strong pension system. While India does well on integrity and fairly okay on sustainability, its performance on adequacy has been adjudged as very low.
A retired life with financial freedom must be an important financial goal. Insurers should launch a nationwide campaign to urge each citizen in the 18-45 years group to build a reasonable pension corpus. They have a responsibility to encourage people to secure their financial future by developing a pension corpus that is not too much exposed to market risks and yet capable of providing a decent flow of pension for a very long time.