Despite several new products, retirement planning is not as popular as it should be. Will the NPS change things? Are people ignorant or just disinterested in retirement-oriented investment?
The third MONEY TODAY round table on retirement addressed these and other issues. The panel included H. Sadhak, CEO, LIC Pension Fund; Vikramaaditya, CEO, HSBC AMC India; Tarun Chugh, chief, Alternate Distribution, ICICI Prudential Life Insurance; Gaurav Mashruwala, CFP, director, A Cutting Edge; V. Srinivasan, CFO, Bharti AXA Life Insurance, and Gautam Mitra, director, OptiRisk Systems. Excerpts:
-1.jpg "(From left) Vikramaaditya, V. Srinivasan, H. Sadhak, Gaurav Mashruwala and Tarun Chugh")
People have many dreams about retirement. In your experience, are most of them able to fulfill these?
MASHRUWALA: Retirement planning is a big concern for everyone. You pray for a smooth transition with family, friends and enough funds. I won’t make any false promises: to live the dream retirement, you need to get real, develop a plan that can help you achieve it and follow it religiously. However, the people who come to me have a vague idea about when they want to retire or what they want to do in retirement. Actually, they do not understand how to go about planning for their retirement.
VIKRAMAADITYA: Studies reveal the lack of planning for retirement among Indians, but a lot is changing with the increase in the number of nuclear families. People realise that there is no social security and that they need to plan for their own retirement as they can’t depend on others. This is motivating them to consider retirement planning. Many people are eager to learn about the making of a successful retirement plan. Unfortunately, most of them wake up to it very late in the day, when they are close to retirement.
SRINIVASAN: According to an AXA study, Indians start planning for retirement much later than their counterparts in developed countries like the UK. Today’s retired population started planning for it only when they were in their late 40s or entering their 50s. However, the situation has improved as the current working population has started to plan much earlier. Many of them start scouting for a sound retirement plan by their mid-30s.
CHUGH: People think retirement planning is only about quitting work. Actually, it is about building options for tomorrow by working towards it today. This is why, in India, most retired people barely manage to maintain their lifestyles, have drastically low or no money, and become financially dependent on their children.
SADHAK: India is not an exception to the retirement dilemma and debate. In this regard, the decision to introduce the New Pension System is very timely. As we are a young country with an average age of about 26 years, the awareness about retirement planning is not as high as it should be. But this is changing fast due to the high growth of the elderly population. The growth rate of this segment is 3.8% as opposed to 1.8% for the general population. This will force people to look at retirement planning more seriously in the coming years.
Is it because of financial illiteracy that retirement planning has so few takers? Do you think we are doing enough to spread awareness about its importance?
SRINIVASAN: You are right. A lot can be done on this front for the larger good of the business and the investor. Those who want to learn about it are usually the ones who already have an idea about the kind of financial planning they require. This issue cannot be addressed by a single financial product manager; it needs a collective effort by the suppliers of financial products. For instance, it might be a good idea to create a corpus like an investor education fund that will work towards spreading financial literacy.
VIKRAMAADITYA: The answer to the issue of financial illiteracy lies in everybody doing his bit to work towards it. Everybody, including the industry and the investors, stands to benefit from financial literacy. A product manufacturer does not have the budget to do it single-handedly.
MASHRUWALA: I do not think financial literacy is an issue only in India. Look at the sub-prime crisis in other countries. It is proof that the problem exists everywhere. If we need to make people financially literate, it must begin at home and in schools. Till a child reaches the age of about 22, he only learns to spend. Either he spends his pocket money or helps in buying stuff for the home. Therefore, he is exposed only to the power of spending. During his higher education and while working, he learns how to earn, not how to manage money. We need comprehensive financial education. We need to educate people about income, expenses, assets, liabilities and about synchronising all these. One aspect cannot be taught in isolation.
SADHAK: I have been hearing about this issue since the opening of the mutual fund industry in the late 1980s. In the past 20 years, a lot has been done to improve financial literacy. However, it has still not reached the level where it can start showing results based on investor behaviour.
Is the existing slew of products adequate for retirement planning? Is innovation required to make these products attractive to investors?
CHUGH: On the accumulation front, I am comfortable with the existing options to build a retirement corpus. There is plenty to choose from based on one’s risk profile. Currently, the demographic profile is tilted towards a longer lifespan, with increasing longevity. So, it is going to be a big challenge for life insurance companies to price the longevity risk. However, the companies that manage the accumulation as well as the payout phases have an advantage.
SRINIVASAN: There is no need to make more products available on the de-accumulation side as we are still a very young country. One thing that life insurance companies must be allowed to do is to invest in derivatives as it is essential for developing products like variable annuities.
This issue is already being debated a lot. However, any further discussion on the subject is welcome. It will actually allow insurance companies to position the product properly and control its pricing.
SADHAK: There are too many products for accumulating a corpus. Is it disadvantageous? No, and there is more innovation in the offing. A good example is the New Pension Scheme and the kind of fund variants within it. The only option currently in the payout stage is annuities, but here too, a lot of change is yet to happen.
MASHRUWALA: I am satisfied with the options available on the accumulation front. However, we don’t necessarily need to look at retirement products as there are other ways to do the same. In the payout phase, the product has to be like a tripod. The three legs—liquidity, growth and regular income—point in different directions and are equally important. If I put money in a savings bank account, I don’t get growth. Gold and equities promise growth, but not regular income. For regular income, I have the post office monthly income scheme. We need either an independent or a common product that takes care of all these aspects.
Is there a specific product that offers the kind of innovations that will help insurers take on the longevity risk?
MITRA: Yes, there are some innovative products that give us an idea about how this risk can be handled. Companies are coming up with products such as longevity bonds. This is a very interesting way of dealing with longevity risk—the insurance company passes it on to somebody who is willing to take the risk. But as longevity bonds have just been launched, the buyers’ reaction is not clear. Unless a thorough study of the change in demographic pattern is conducted, it will be tough to price the product.
It has been three months since the NPS was launched, but there have been few takers. Is it proving to be a damp squib?
SADHAK: Globally, pension has been regulated by a single regulatory authority to unify the cost structure, the service, and the product structure. So the NPS is an important step in the sphere of retirement planning in the country. We have introduced one of the most important retirement products and it is going to be highly successful. However, it will take some time to mature. The NPS is aimed at all people and they must make use of it. The system is completely technology-oriented and technology-led. With defined contributions setting the way for the future, the voluntary pension scheme is a landmark product in India.
SRINIVASAN: I also believe that it is a step in the right direction. Hopefully, it will get more people into the retirement fold. One of its objectives is that the cost of investment should be low. I completely agree with this idea, as over a period of 30-40 years, the power of compounding magnifies the impact of the cost of investment on the final corpus. However, one must recognise that along with the cost, quality should also be considered.
You can opt for a product with the lowest cost, but are you getting the right quality? What we have failed to understand is the need to set up a separate company to manage the NPS funds. The decision to not allow insurance companies to become points of purchase is also difficult to explain as it prevents the NPS from finding more members. As there is no commission for the seller, there is no reason to bar the insurers from selling the scheme.
MASHRUWALA: In the current form, I will not recommend the NPS to anyone. I am not happy with the proposed default option of asset allocation, where a maximum of 50% is offered in equities. This means that the remaining amount must be in debt, even though there are other products, the Employees’ Provident Fund and the PPF, which give an assured 8.5% return with tax benefits and a guarantee of corpus.
VIKRAMAADITYA: We have discussed several aspects of the NPS, but one of the most important factors when we are looking at retirement planning is to consider the real rate of return. The nominal rate is good to know, but to create wealth, you need to beat inflation and, therefore, have real returns. I do not debate that there is a place for fixed income and debt in people’s portfolios, but depending on life cycles, there is a place for 100% equity in some portfolios.
Take my example. When I started working, somebody told me to invest in RBI relief bonds because they were tax-free. I followed the advice, but regret it now. In hindsight, I think I could have invested 100% in equities because I had the ability to handle such high risk. Had I done that, my money would have grown at least 10 times during that period. This is why I am convinced that there is a place for equity-rich portfolios. We must, however, always focus on real returns while creating a corpus for retirement.
CHUGH: The NPS in its current form seems to be a disintegrated and disjointed system. We cannot move forward in this manner. The entities that have joined this system know that they are not going to make a profit. The pension industry is in a nascent stage. It offers low-cost fund management to subscribers, but it does not assure them that they will have the best fund managers who will achieve consistently good returns. For the NPS to work, the product must be advertised aggressively and people must be made aware of its benefits.
Do you think that the default asset allocation of the NPS has any advantage? Why not leave the choice entirely to the investor?
MITRA: I find the default option in the NPS very useful and interesting. Considering that financial literacy levels are not so high across the globe, the default option helps those who cannot decide what they want. Even in the UK, there is a default option that helps the masses get the most from their investment and optimise returns. Therefore, I don’t think the default option should be completely done away with.
I work with specialists in asset liability management and pensions in the UK. Individual asset liability management and life-cycle planning is picking up. This concept of lifecycle financial planning is becoming extremely important even in advanced economies.
Its purpose is to avoid situations where asset values fall short of liabilities (bankruptcy or technical insolvency). The scope for assetliability management is essentially limited to the asset side against the backdrop of guaranteed pension payments. With asset-liability management, one chooses the investment portfolio in order to match the liabilities (otherwise known as hedging of liabilities).
My overall view on the NPS is that defined contributions is the way ahead in retirement planning. It is good to see the Indian government working towards a universal pension scheme that is voluntary and contributory.
