India continues to be among the countries with the
lowest values when it comes to measuring pension systems, according to the Melbourne Mercer Global Pension Index 2018, published by Mercer, a human resources consulting firm, along with Australian Centre for Financial Studies and Monash University.
India finds itself in the lowest category and has slipped from last year's ranking as well.
CNBC-TV18 caught up with Preeti Chandrashekhar, business leader, Mercer India and Gaurav Mashruwala, financial planning expert, to understand what are the shortcomings in our pension and retirement set up and what are the best options that working individuals can go for to secure our post-work life.
Watch the video . here Little unfortunate that instead of showing any improvements, at the headline levels there is a marginal deterioration. What is happening with India, what does the study say? Chandrashekhar: Though I agree and it is a fact that we have slipped in ranking but overall if you see, we have actually done a lot of reforms in the country. We have improved from our own absolute ranking in the past 2-3 years and on an absolute level we are pretty much at the same level.
What has happened is there were certain changes in the way things were calibrated on some of the questions and because of which some countries have sort of edged over the others and some others have gone down.
However, if you look at just India, there have been a lot of reforms off-late. We have seen a lot of aspects like the Atal Pension Yojana for the unorganised sector, we have seen the Employees' Provident Fund Organisation (EPFO) itself taking huge strides in terms of embracing technology and communication. It is really improving, it is becoming a lot more transparent and then you also have the Pradhan Mantri Yojana for the retired people. So, there are a lot of things which the country is doing.
We also need to understand that a country that has got such diverse demography and social aspects, any reforms that you undertake have to be aligned to all the other reforms that are happening across the country and it is really challenging. If you compare with some of the other countries whom we may think are doing pretty well, our challenges are very different. So, we have started things, it will take time before we actually see the differences it is going to make in the country but it is there to stay.
If we talk about some of the details and some of the parameters that this index when you talk about access to pension systems or the affordability of this, take us through some of those details as well, how does India stack up compared to some of the other emerging market countries? Chandrashekhar: Let me look at countries who are just above us. Mexico is just above us in the ranking, China is just above in the ranking. We are actually scoring much better than Mexico in quite a few things but the fact that Mexico has a better coverage in terms of its private pension plans as compared to India, it scores above us in that.
China, for instance, is actually scoring lesser than us in quite a few things but because of the fact that China does not allow you to tap into your retirement pool below a certain age, just makes it less available, less accessible for people to be able to dip into the retirement kitty. So, those are the small things which propel those countries slightly higher and because it is scoring and each one has its own weightage, that is why you see some countries scoring above us.
Within these different factors that the index takes into account, where is India doing well and which are the spots where there is a weakness here? Chandrashekhar: Where India is doing well is, there is increased transparency, increased communication that is there with respect to the understanding of the pension system. Where we are not doing so well is, our exposure to the private pension world is very less in India, we are just about 6 percent. I think that is an area where we can actually push things.
If you look at our retirement system, especially the employers sponsored, if I look at the organised sector specifically, you look at the provident fund, you look at gratuity, all of them are a lump sum and after certain vesting criteria at least for gratuity. I have access to the money. So, they are all lump sum amounts which I get paid during the course of my employment.
Now because of UAN etc, the provident fund authorities, it is becoming difficult for me to go and sort of withdraw the money but largely they are all lump sum plans. So, we do not have retirement plans per se and the access to that money very early in life just makes it so much easier. We tried that with NPS (national pension scheme) a few months back but then there was so much hue and cry that it had to be pushed back.
People want flexibility, they want greater choice on access to money when they want but with that, there is a certain responsibility that comes. So, I think we need to bridge the gap between my wanting something and realising that I am responsible for the consequences in some sense.
The whole setup here in our country, Preeti mentioned a very important point, the access to private sector plans or private sector options with respect to retirement and how you see this? Mashruwala: I feel we should have more options but I have also seen times when these options weren't there at all. So, it is a kind of evolution that is happening from a system where it was only defined benefit and we only had the provident fund, gratuity, superannuation and then mutual funds, insurance products, then NPS coming in is a step ahead and then kind of variance coming in. So, yes there is growth, there are various options coming in. Is there a certain amount of choice that I can make but is that sufficient? Certainly not. Are people open to it? Yes and no, in the sense that in cities where there is more disposable income people are little concerned and they want to do it but in other places the entire thing is, "my child is my retirement plan", still continues. Just a wider question on whether countries where there is a greater sort of state-sponsored retirement system, whether they score higher because in India a concept like social security doesn't exists. Your best friend is EPFO which is essentially your own money which is being pooled in through the years? Chandrashekhar: All countries who are scoring really well have state sponsored social security and there are countries where almost 80 percent are covered whereas in India it is very miniscule. Clearly, because of the fact that they have been having a pension system for so long, they need to obviously have aspects around assets backing them, so, that sort of further strengthens it. For us what is happening is, we are a very young country as compared to some of the other countries, we have a very strong GDP growth, so that works in our favour but the fact that a lot of the pension promises that we have are not necessarily backed by assets, then that makes our score a tad lower as compared to some of these countries and that makes a lot of difference. Most of these countries would have in some sense a social security safety net for employees. The point here is that where do you begin because as we just establish in the last part of the conversation we don’t have the luxury of social security, so at what age do you start what is the first step? It is sort of long daunting task to look retirement? Mashruwala: Normally, when people ask me I tell them the day you started your first job. Ideal time because the day you started your first job you are going to retire someday. Also earlier in the years, the financial responsibilities are less, so if you can do it great but those are also the years when you want to splurge world in my pocket, so it is a balancing act. Plus you are building assets, you might be buying your car, buying a house so there is more eating into that savings pool. Mashruwala: So, it is both ways but sooner you start better it is. There is nothing like this particular age, but normally I tell people don’t go beyond 30-35 years. As in then, it gets into a tricky situation not because you have less years, it is just that other bigger responsibilities start coming on to you, dependent parents, maybe later on children and their expense and we will still support our children we will continue to do so. So sooner you start better it is. That is true and it ties in with the point that you were making earlier as well at what age are you going to retire, I guess that becomes a critical question in terms of determining of much I need to save up, right? Chandrashekhar: Fair point, so if we look at some of the younger generation they feel they are going to burn out at the age of maybe 35-40 years. If they don’t burn out also they feel that they want to make sufficient money so that they can continue doing things at their own pace, things which they really wanted to do all these years with a financial security behind them. So, the basic thing that we have to look at is how do you define retirement, is it 35, is it 40, is it 50 or is it 60. Right now we think anywhere around 58 to 60, or maybe in rare case 62.
For me, if I start my planning I have to think okay given this current job or whatever I am doing right now in terms of gainful employment when do I think I will stop that or at least slow it now so that I think I am actually going towards a retirement, so that is important. And to Gaurav’s point retirement just means that my current set up changes that does not mean that I sort of – it is the old typical picture that you have in mind and somebody sitting in a nice easy chair and reading a newspaper at the age of 60 may not be true now.
Lifestyle needs continue to be what they are but income streams might be very different. Now some of it is happening by default because most of us are contributing to the EPFO. Many of us have already started sort of contributing to our SIPs and there are some mutual fund sort of investments happening, but the question is segregation and that is where financial planning comes in, what do you tell people, let us say 35 year old who needs to now segregate his monthly savings after taking care of expenses in to the retirement corpus, into maybe child’s future corpus so that segregation has to happen. What should you do and simply invest by default in a mutual fund is that good enough? Mashruwala: No, that is not. Let us restrict to retirement and again there you have two options one is kind of assured returns or a product where you don’t have control so your EPF. Even if rate changes it is not in your control and then we have insurance plans, we have National Pension System (NPS) and we have mutual funds which are market linked, define contribution to technically and where you have control. Now here let us look at all three their pros and cons.
When it comes to mutual fund complete flexibility. If my fund is not performing, I move out, no questions asked if more variants come, if more options come up, I can invest globally, I can look at different asset classes, more flexibility I am likely to move out also or may use this for something else that is one.
That is the biggest catch that at some point you redeem some other expenses come up. Mashruwala: Then at the same time what happens for example insurance is not giving me investment into equity across the globe. It is not giving me gold. So then why I am deprived of that. Let me drill it down little further. We discussed the basics of pros and cons of a mutual fund. The insurance sector is offering you a lot of so called retirement plans. First of all, help us deconstruct and understand this product, what kind of investment are we talking about here, are these largely traditional policies? If you are looking at ULIPs do they make sense what is the kind of return one can expect in a so called retirement plan? Mashruwala: So when it comes to traditional plan it is more or less clear because they have a mandate as to how much will go in Central government security, state government securities and other. So that is more or less traditional plan is more or less a debt product with some play on interest rate if they at all do it. When it comes to ULIP you have an option between two asset classes’ equity and debt. Gold is still not thrown in and the other things so there you chose. The only inflexibility there is that if my particular ULIP is not performing it is not very easy for me to move out. So, there could be all other ULIPs performing but my ULIP is not performing or there is new variant that has come in to that extent my hands are tied.
ULIP would have predominantly investments in market related instruments, very minuscule percentage of mortality, expenses they have brought down drastically. But this entire thing of rigidity in terms of not being able to maneuver is somebody like me as a planner will not be happy at 35 what happens at 50 I can invest globally, I am not allowed, mutual funds gives me that.
So would you advise people to opt for these retirement plans or not? Mashruwala: Insurance as of now no, I would encourage between the mutual fund and NPS if I feel this person is going to be very frigid or something I would say go for NPS tier 1. Tier 2 again, though tier 2 as of now they say it is easy moving out but the system is such that it is not that very easy. But I am still happy with NPS because worst case scenario I can even change my fund manager. Leave aside the asset class and they have been adding more assets alternative fund investment all those things. So if NPS itself becomes more open I would recommend NPS more. As of now, I do a combination of mutual funds and NPS. Your thoughts on this in the experience that you have in Mercer to its whole range of clients plus personally the kind of products and options we have here? Chandrashekhar: You touched upon the retirement products. Retirement products essentially the kinds that we see with the insurance companies offer and they claim that their retirement products are nothing but products where at the end of the period you are allowed to convert them into annuities. Now if it comes to that so what we have to look at is the difference between this versus the others as Gaurav mentioned during the phase when they are actually growing.
Because once they become annuities whether it is NPS or is this product you still right now have to go back to an insurance company to purchase the annuity. I mean everybody is treated the same it does not matter who you are so that is the way it is right now. But during the growth phase what is really happening is one is these retirement products that you have I mean you are tied to them. You pay a premium, you are not very sure on the transparency the kind of flexibility you are allowed as he said if supposing you basically you don’t have any exit choices and even if you have the exit clauses it is rather heavy.
There is also another point I would like to add here that between NPS and mutual fund, the latter give you a lot of flexibility. For instance, NPS would allow your money to grow but the liquidity is far low. So, if I am waiting for something and I am 30 years right now most of the people what happens is physiologically they say oh god I have to wait for 30 more years before have access to the money versus a mutual fund where – that is the whole point. So you say that I am allowed flexibility, but I need to be disciplined to make sure that flexibility I use again to plough it back into retirement only and not use it for my Switzerland holiday. So that is the point.
As both of you have highlighted that it is perhaps NPS and mutual funds that are a better choice when you are generating the corpus. So now let us say you have touched 55 years or 60 whichever is your age retirement and you have this big lump sum amount maybe whatever Rs 50 lakh or 1 crore depending on how much you have accumulated now what do you do? Now, what is the next step? Mashruwala: So I compare this to cricket stumps, three of them. One you need liquidity for emergencies. Second regular income and third your money needs to grow at a rate higher than inflation. Because we are living so first is provide for contingencies, maybe 3 months, 6 months reserves and that would be in a savings bank linked to a fixed account or fixed deposit or liquid fund or whatever.
When it comes to regular income annuity is an option. We also have certain government products in terms of post office monthly income schemes, senior citizens -- there is an upper cap. Because so all of them would have like 15 lakhs senior citizens savings scheme. Post office monthly scheme is I think 4.5 lakhs, 9 lakhs that is not sufficient in most cases.
Now beyond that purchase annuity is one or create a kind of artificial so you can probably do a systematic withdrawal plan for mutual fund or you do a step up kind so you keep opening a fixed deposit every month before retirement.
So that after that every month I have a national saving certificate and residual has to go in equity as an asset class. Now, which vehicle do you chose whether you go for mutual fund, whether you pick up at annuity which would have that, whether you do it directly? It depends on the skills and the time that you have and the corpus. But you need all three plus if there are any financial goals left such as out daughter’s marriage or sons marriage you may want to provide for it or you may have to provide or you may have an illness which is so critical that we don’t even have enough good health plans. We do have them now, but again I am comparing with past. So then that is a thing but these three cricket stumps you have to protect otherwise you will be bowled out.
That is well put but on the point of options specifically when it comes to buying annuity basically ensuring that you get steady monthly income after retirement. How do you rate some of the annuity plans that we have here in India. What is the best option as Gaurav mentioned you can also do a systematic withdrawal plan from your mutual fund so what would you prefer? Chandrashekhar: If you look at the annuities that are there in the market typical annuities that company are providing they are regular fixed annuities. You just have a few product which give increasing annuity just about 2-3 percent nothing beyond that so you don’t have Index linked products in the market that is how it is. So the most common options that we have seen is life annuity, and then you have where you give the insurance company the amount and there is an annuity paid throughout once life. Correct me if I am wrong but I think the actual payout amount is quite less in this kind of annuity product would that be correct? Chandrashekhar: It is so if you look at the general return it is around 5 percent at best if I just really stretch it could be about 6-6.5 percent nothing beyond that. So, the return on these is very low because the longevity risk is actually borne by the insurance company so in that sense when they are saying that if I started at 60 I am likely to pay it for the next 20-25 years because they are bearing the risk so that is how they peg it, that is one. But for me as an individual, if I decide that I don’t want to sort of go in for life annuity there are people who like the idea that they say that I have paid the entire amount and all I am getting is this amount.
What if something happens to me then what happens to my beneficiary so there are other options available like return of capital product or you have products where you have annuity paid for a certain period and if the person survives that period then it is paid for life so it is annuity certain plus life combination.
Each one as you get more options the more expensive it gets for people. But compare it with your systematic withdrawal plan. Systematic withdrawal plan is good because it helps you, you are with the market for a big part especially if you trying to convert your lump sum into a systematic withdrawal plan you are with the market so you are to some extent able to manage inflation. But the issue there is a drawdown so when will that draw down really happen you may outlive that. I firmly believe don’t put all your eggs in one basket. Just look at the proportions based on what all you have, what are the kind of support systems you have around beyond just your retirement and just go accordingly.
As we are looking back at everything put together what is the key advice that you would like to give to people when it comes to planning for retirement? Mashruwala: I already mentioned don’t treat as a bullet event. Retirement is not a bullet event. It is a continuous thing or continuous funds requirement going to last for 10-15 -20-25 years so don’t be so rigid be flexible look at options. Newer variants will come in and you will have to maneuver it. You can’t just say that I will put it on auto pilot works, it doesn’t. Your final thoughts?
The second important thing for people when they are changing jobs and the fact that in India, the access to money is so very easy before I actually retire we should avoid really avoid leakages when we change jobs. I think that is really important that I get a nice lump sum when I am like 30-35 years if I am getting gratuity I feel very happy about it and now it has become Rs 20 lakhs, so Rs 20 lakhs is a decent amount for somebody who like 40-45 whatever then I just get tempted to do sort of splurge that should not happen.
Chandrashekhar: I have just two points to make, one is when you are talking about retirement planning the key thing is we decide it depends upon when I am starting and when do I want to retire. I think these two are critical questions that need to be answered that is one.