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In India, the proportion of people covered by formal retirement plans is abysmally small.
In India, people generally pay more attention to children's education as against their own retirement needs. However, with advances in healthcare, increase in longevity is going to be a major challenge in the years to come.
To get more clarity on how an individual needs to prepare for retirement we spoke to Mr Sanjay Sachdev, President and CEO of Tata Asset Management. Mr Sachdev was part of various pension reform groups set up by IRDA and AMFI.
Excerpts:
Governments across the world are cutting back on social security schemes. How do you foresee longevity risk for the younger generation?
Longevity risk is an area of concern for everyone. In the wake of marking down of social security expenditure, this risk assumes greater proportions. Hence it becomes all the more important for people to plan for their own social security by investing early in life and following discipline with rigour across different life stages.
How big is India's problem of lack of retirement savings?
In India, 88 per cent of the workforce is employed in the unorganised sector and not covered by any form of retirement benefits. This leaves only 12 per cent of the population with some sort of retirement planning. While people above 60 comprise less than 10 per cent of our population today, this is set to rise to 20 per cent by 2050. Hence it is evident that we cannot be talking about being a young country eternally.
Most people do not comprehend the magnitude of the corpus they would need at the time of retirement. Longevity has been rising steadily over the years. So, while the productive age of adults continues to be around 30 to 35 years, there are almost an equal number of years to live after retirement. Over and above the challenges posed due to longevity, there is the added problem of inflation.
During one's productive years, salary revisions keep the pain of inflation at bay. However, after retirement, there is just the fixed income earned by the retirement corpus. In addition to inflation, retirees have to brace for the rising cost of healthcare. Hence it is imperative for a person to correctly estimate his retirement corpus and plan his savings accordingly.
In an emerging country such as India, is it possible for the retired to beat inflation without diversifying into equity?
To beat inflation post retirement, exposure to equities is necessary, even if it is a small allocation. Here one needs to appreciate the longevity risk which means that the retired too have a long life ahead of them.
What are the important steps to be followed while building a retirement portfolio?
Planning a retirement portfolio starts with risk profiling. This encompasses understanding specific needs, such as, time left for retirement, liabilities, lifestyle, etc. Accordingly, an asset allocation plan and a process of regular monitoring of portfolio based on life stage and market conditions are drawn up. The other issues that need to be considered are tax efficiency and liquidity.
Do you believe that EPF money should be invested in equity? Going by the experience of 401 K do you think it is advisable?
While there is a need to boost the returns of funds that are purely based on debt assets, it is imperative to be circumspect and not invest in equities indiscriminately. Equities provide inflation beating returns over the longer time horizon but are also subject to market risks. What we should learn from 401K investment experience is the need for proper risk management processes. A proper risk management process will go a long way to optimise returns while managing the risk.
How does India's retirement market compare with other countries?
In India, the proportion of people covered by formal retirement plans is abysmally small. According to Allianz, despite the effects of the current financial crisis, the global retirement market is expected to grow by 66 per cent by 2020, representing an annual growth rate of 4.7 per cent. Total pension assets will increase from 22 trillion euros, to 36 trillion euros.
One key learning from advanced countries has been the problems arising due to rising longevity. The number of beneficiaries has been rising and this has adversely affected the dependency ratio. While in the 1950s, there were 16 people to support a retiree, today there are only three people to provide this support. Thus the Direct Benefit model on which social security schemes were structured has failed. Therefore most countries are moving to the Direct Contribution model where a person is responsible for creating his own retirement corpus during his productive years.
In India, most retirement schemes have been predominantly debt-based whereas in other countries participation in equities has been steadily rising. But going forward, it would be necessary for retirement funds to increase participation in equities in order to build a large enough corpus to cover the journey of 25 to 30 years in retirement.
Do you have statistics on the life expectancy and likely retirees in India?
By 2021-25 life expectancy will be 69.75 and it will keep rising to 77.4 by 2051-56 according to prb.org report. By 2050, the number of people aged above 60 will account for 20.14 per cent of the population (Source – Population Division, Dept. of Economic & Social Affairs, United Nations Secretariat).
Currently no tax saving pension products are available from the mutual fund industry barring a few older schemes. Is it because regulation does not permit or is the industry averse to annuities?
The mutual fund industry is definitely not averse to annuity products or retirement-based products. We are seriously committed to develop the market for retirement products and have recently launched the Tata Retirement Savings Fund that has some unique features. However, there are some issues ranging from regulatory provisions to investment restrictions that need to be addressed and which can help the category leapfrog into its rightful place.
