The Hindu Business Line : Time to wake up to retirement planning

Social security will be a big challenge for the Government two decades from now if individuals don’t plan more actively towards retirement. Estimates suggest that by 2025, people aged above 60 will account for 14.5 crore of the Indian population. Factors such as nuclear families, increase in life expectancy and advancement in the medical field are likely to lead to a longer retired life.

As per the recent survey conducted by the National Sample Survey Organisation (NSSO), during 2004-05 about 94 per cent of the workforce was employed in the unorganised sector, and many did not have access to any formal provident fund facility.

Only 20 per cent covered

Recently, MetLife India Insurance Company conducted two surveys — the International Employee Benefits Trends and the sixth annual United States Study of Employee Benefit Trends.

According to the survey, over 80 per cent of Indian employees have done no retirement planning independent of mandatory government plans.

Developed countries have fared far better, with only 58 per cent of the employees in Australia, 46 per cent in the US and around 30 per cent in the UK not taking steps to determine income need or resorting any sort of retirement plan.

One interesting finding in the survey about India is that nearly three out of four employees say they are concerned about outliving retirement savings. Only one of every three has taken steps to determine their retirement needs. Thus, only 20 per cent have planned for retirement.

Mr Deepak Satwalekar, CEO of HDFC Standard Life, points out that while we continue to talk of demographic dividend in terms of a young India, we fail to acknowledge that there is a growing population of over 50 years of age.

What an individual has to understand is that while taking advantage of tax breaks is important, even more crucial is to save beyond that, as tax-driven savings will not help one live comfortably on retirement.

Tip of the iceberg

The proportion of Indians covered by the mandatory retirement savings avenues such as EPF (employees provident fund) and PPF (public provident fund) appears relatively small. The EPF has 4.4 crore members and during the year ended March 2007, the money collected was Rs 19,462 crore, averaging Rs 4,423 per annum per member.

The PPF ended 2007-08 with a collection of Rs 2,769 crore, down 31 per cent from the previous year. Among mutual funds, two retirement schemes — UTI Retirement Benefit Plan and Templeton India Pension Plan — together manage a corpus of Rs 622 crore, which is a fraction of AUM (assets under management) of Rs 5,84,000 crore.

However, the expansion of the private insurance industry does appear to be helping improve the corpus of retirement savings. Pension plans managed by insurers have been growing at a faster pace vis-À-vis the traditional options.

According to Met Life, new premium income for pension plans is growing at 37.5-40 per cent annually. A substantial proportion of premia collections for insurers are coming from pension plans.

Mr Pranav Mishra, Senior Vice-President and Head of Sales at ICICI Prudential Life, estimates that pension plans accounted for a third of the new premium collected by the insurer in 2007-08. For HDFC Standard Life, the proportion is estimated at 40 per cent.

In the light of these numbers, a ballpark estimate suggests that about Rs 30,000 crore of the total insurance premium (Rs 93,000 crore) collected by the insurance industry from single, regular and group premium last year probably went into pension schemes. Currently, insurance accounts for 4.1 per cent of GDP, while corpus related to pension accounts for about 1.6 per cent of this; this indicates that the industry still has sizeable potential to expand.

Inadequate savings

Taking into account the current cost of living, if a 40-year-old requires Rs 15,000 a month to lead a reasonably comfortable life, on retirement 20 years later the same would translate to Rs 40,000 a month at an inflation rate of 5 per cent. To sustain this monthly income until he is 80 years old, he would have to target a corpus of Rs 79 lakh at the start of age 60, and it should earn a return of 2 per cent after adjusting for inflation. One can, therefore, imagine why Rs 4,400 per month saved through the EPF will be woefully inadequate to fund this retirement corpus.

Employees of the unorganised sector do not access the EPF. Even government employees may have to do their own retirement planning, as the government moves from a defined benefit pension to defined contribution pension for its new employees. It’s time for individuals woke up to their retirement needs for a secure and peaceful retired life.

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