With the World Bank tipping the Indian economy to oust China in terms of growth rate by next year, the Indian economy has never had it better.
However, the danger lurking behind the attractiveness of Indian markets, something that can destabilise the growth by putting immense pressures on the government exchequer, is the ability to take care of its elderly. While the total population size is expected to grow by 49% between 1991 and 2016, the number of elderly persons is expected to double to 8.9% of the population by 2016, 13.3% by 2026 and 20-24% by 2050. Are we prepared to handle this?
In the current scenario, the young Indian population is at the cusp of a three-part change which makes retirement planning even more important for an individual.
One, increased life spans from 62 yrs in 2004 to 66.5 yrs in 2010. This is expected to increase further with the availability of better medical facilities. Two, rapid urbanisation leading to enhanced migration and changes in social structures of India. Nuclear families are on the rise as compared to the traditional joint family system which used to serve as an umbrella to shield the aged. And three, increasing medical costs along with increasing life span and decreasing number of working years may soon overpower the financial capacity of the family to take care of the elderly.
As a result, pensions have come out as one of the burning requirements of the population. Not surprisingly, the pension market in India has witnessed an exponential growth.
Given the lower average age of Indians, the accumulation for retirement category of products has witnessed exponential growth and the trend is likely to continue. The de-accumulation category represents the annuity products, which are designed to provide a regular income to the annuitant.
In the accumulation for retirement category of products, there are limited options such Public Provident Fund, Post Office schemes and Unit Linked Insurance Plans around pensions. With the change in ULIP norms, insurers are now required to provide a minimum 4.5% guaranteed return, which is far lower than the inflation rate of 8%. This means, an erosion of value for investors and requires a fresh look at the pensions product structure.
Other products have investment limits leading to a narrow customer segment that can invest in such plans.
The Pension Fund Regulatory and Development Authority launched the New Pension System (NPS) at an extremely low cost. However, since its launch, NPS has been able to gather only 30,000 accounts amounting to R40 crore from the unorganised sector. The key challenge here is the lack of distributor interest, and limited distribution channels to sell the product due to the low margins.
Given the lack of social security, it is important that we prepare for the future. Prepare for this market of retirees, and provide them with a framework that enables them to live with dignity and contribute to the economy. NPS — arguably the world’s cheapest pension scheme — needs to be actively promoted and taken to the masses. Insurance agents should be allowed to sell NPS.
The challenges of pension de-accumulation as highlighted need to be addressed with introduction of annuities — monthly income plans that provide immediate income to retirees and guarantee returns for long-term. Stronger pension reforms will mean a more secure senior population and provide a further boost to the Indian economy. Retirement has to go from being nobody’s problem to being everybody’s problem, because in this problem lies a great opportunity, an opportunity that cannot be ignored anymore.
Hopefully Budget 2011 will offer solutions.
The author is managing director, MetLife India Insurance