Should pensioners be allowed to invest more in stocks? A recent report by Crisil and the Pension Fund Development and Regulatory Authority (PFRDA), titled “Financial Security for Seniors in India,” suggests so. The report identifies problems in the pension sector as low coverage, low contributions and persistence.
For the unorganized sector, the report suggests that the government may consider providing a) flexible payment and withdrawal options, b) monetary incentives for low-income strata, c) exclusive pension schemes for women, and d) better financial knowledge and intermediation.
For the organized sector, the report suggests improving asset allocation. “This pillar’s retirement system is debt-oriented, relative to its global peers, which are heavily invested in equities. The debt imbalance is present despite the demographic advantage the country has and should benefit from in the long term. The young population has a long-term investment horizon, which necessitates a greater allocation to a long-term asset class such as equities for wealth creation, to meet the needs of years of decline. Additionally, there is a portion of the workforce that is not covered by any form of retirement product. The government may consider automatic enrollment of people who are part of the “employee-employer” configuration but who are not covered for various reasons, ”the report said.
Exposure to equities is an advantage and will provide an opportunity to optimize returns, beat inflation and preserve wealth for retirement, said Anil Lobo, India-Retirement business leader, Mercer. But it must be balanced and the choice must be left to pension policyholders. As subscribers may not be mature enough, they might be concerned during times of market volatility. For these subscribers, the life insurance fund of the national pension system, where the allocation is based on your age, is suitable.
“Recently, the PFRDA introduced, along with the life stage fund, two other conservative and aggressive life stage funds. These funds allow someone who can bear the risk to take more aggressive exposure to equities, ” he says.
On allowing subscribers flexible payment and withdrawal options, Lobo says it’s tricky. “Withdrawal flexibility should only be allowed under extreme conditions, as is currently the case in provident funds, otherwise it would defeat the objective of saving for retirement. It’s basically today’s income that is carried over into the future, ”he said.
Awareness of the need to create wealth for life after retirement is still lacking among employees. Today, with rising inflation and rising lifestyle costs, one should ideally expect post-retirement income of 70 to 80 percent of current income, Lobo adds.