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How is old age income security in India different from the systems in developed countries?
Research at Allianz has found that India’s pension system is globally the second least sustainable, with only Greece being worse off. India’s pension system is biased towards the organised sector and old age income is confined to voluntary savings in the unorganised sector. Income at retirement is far from adequate and public sector pension provisions are far behind the OECD ( Organisation for Economic Co- operation and Development) benchmark. Average income earners are unable to replace pre- retirement earnings compared with most OECD countries.
Usually, the less generous the public pension system, the better developed is the privately- funded one. So in Switzerland or the Netherlands, where the replacement rate from public pension schemes is below 40 per cent, we find pension assets of €55,000- 70,000 per capita, which is more than 50 per cent ( of per capita) GDP. In India, it’s 6.2 per cent relative to GDP.
What can be done to improve existing structures?
The list is long. ( Ensuring) strong growth of pension assets and incentives for private retirement savings, such as tax advantages, matching contributions, for mid- and higherincome earners ( will work). Regulations allowing the industry to offer large- scale products for private retirement savings on a cost- efficient and profitable basis would also help.
Is there a system ( such as the 401k in the US) that India can replicate?
Any retirement system is based on a country’s culture and economic structure. You cannot just transfer any system. However, referring to the main models, there are three possibilities.
The World Bank’s three- pillar model, in which retirement income is from three income sources: public pensions to cover basic needs, occupational pensions for an earningsrelated source and additional private savings. This model allows for risk- diversification.
If India opts a libertarian pension system, it is worth learning from the US experience— a DC ( defined contribution) system that requires employee participation, either compulsory or supported by automatic enrolment. Employee contribution should be characterised by high default savings rates with auto- escalation.
Each participant should have a customised ‘ target date glide path’ with mid- course corrections and operational structures capable of reducing investment and administrative fees. A more paternalistic approach, as found in Europe, would be the Dutch collective DC system.
There was a furore over insurers having to guarantee minimum returns on pension funds. How feasible is a guarantee on such a longterm product?
In some developed markets, such as in Germany, longevity coverage ( beyond the age covered in a financial plan) and guaranteed life- long pension income are USPs of life insurers. The cost of these guarantees, though, has become an issue in current lowyield markets and with regard to Solvency II ( European Union regulation for insurance companies).
Long- term care products are not available in India while rising healthcare cost is a major concern. So, can retirement products supplement health plans?
The primary function of a pension product is to provide life- long retirement income. Even so, from a marketing perspective, it may make sense to bundle a pension product with additional riders. This is quite common in developed pension markets.
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