bond market: how should retail investors maximize pension returns? Sumit Mohindra of ICICI pension funds explains

When it comes to maximizing returns in pensions and pensions, the Indian market is nascent as the percentage of people receiving pensions or annuities is still quite low. One investment avenue that offers retail players a safe and relatively lucrative option is underwriting NPS (National Pension Scheme) corporate bonds, according to Pension fund management company ICICI SA

“The coming credit cycle would see many companies tapping into the corporate bond market to fund their capital spending needs. They generally issue bonds with a healthy spread over government securities ”, Sumit mohindra, the CEO said in an interview with ETMarkets. “This would allow underwriters to generate a higher yield compared to ordinary government securities. Retail investors should ensure that they are providing an adequate allocation to Scheme C within their NPS portfolios in order to benefit from the above phenomenon. »Edited excerpts:

What are the benefits of subscribing to NPS corporate bond funds? What should retail investors watch out for?
NPS Corporate Bond Funds help underwriters gain exposure to high quality corporate debt within the Indian economy. The coming credit cycle would see many companies tapping into the corporate bond market to fund their capital spending needs. They generally issue bonds with a healthy spread over government securities. Thus, policyholders would be able to generate a higher yield compared to ordinary government securities. Retail investors should ensure that they are providing an adequate allocation to Plan C within their NPS portfolios in order to benefit from the above phenomenon.

The percentage of Indians receiving pensions or annuities is still quite low. What do you think government and industry can do to resolve the problem?
Government and the private sector will need to work together to ensure that the message about the importance of retirement planning is conveyed to as many Indians as possible.

India is a country with a large young population. Therefore, using a simplified and digital onboarding process would help them better understand and reach a wider audience.

The earlier you start planning for retirement, the better your chances of building up enough savings to lead a dignified retirement life. It’s not much different from what you are used to during their working years. Given the large size of the population, it is unfair to expect that only government or one agency will carry it out. This is of the utmost importance, but there is a clear public-private partnership approach.

There are many myths that prevent people from planning for retirement and these need to be addressed appropriately by the industry. The case in point is the taxation of annuity income. What is not considered here is that an individual does not stop having a job because taxes have to be paid. In addition, no one knows what the tax system will be 15 to 20 years later. Regardless of taxation, we believe it is essential to ensure at least a steady flow of income, which provides great comfort in old age, although we may not realize it now.

Another myth is the reliance on planning for retirement through means such as real estate rentals. These are good to go. However, they should go beyond the basic minimum requirements that should be met by a guaranteed source of income. This can only be provided by an annuity product.

In the event that rental income is the only source of income, what if there are no tenants for a few months or if rental prices drop, as seen during the pandemic? We believe that basic requirements should not be subject to volatility and should be guaranteed for life for peace of mind. Annuity products are the only ones that can offer this guarantee and are therefore essential.

In terms of retirement offerings as a product or market category, what is the way forward? What are the growth opportunities envisaged by ICICI Prudential Pension Funds Management?
According to a latest study from the Longitudinal Aging Study in India (LASI), 12% of Indians are over 60 years old, up from 8.6% in 2011. In fact, a market study indicates that by 2050, the number of people in the 60 plus the group would be more numerous than those of less than 15 years. The growth rate of the elderly is set at 171%, compared to the total population growth rate of 27%, according to Dragonfly Market Research. This, together with the fact that the average life expectancy is also set at around 75 years, indicates significant growth in the size of the market. With the onset of the pandemic, people are now turning to stable cash sources to provide the warmth of consistency during uncertain times.

We believe that the annuities segment has a lot of potential in the years to come. As the economy recovers, it would not be surprising if more of the liquidity is consolidated in the annuities segment. We have seen the annuities segment of ICICI Prudential Life Insurance grow 120% in fiscal 2021, compared to fiscal 2020 and the 3-year CAGR stands at 94.6%. Likewise, our NPS pension fund assets under management increased by 73.66% in FY2021 compared to FY2020, while the 3-year CAGR stands at 48.12%. .

As an organization, we are moving digitally by providing our services online, including streamlined integration. We are also fortunate to have a regulator that strives to make the same thing possible.

What should be the balance between public and private sector entities when it comes to expanding the social safety net at the population level?
To safeguard the interest of the general population, the government established the Swavalamban regime in 2010 and Atal Pension Yojana in 2015. It had also made the NPS mandatory since 2004. Subsequently, all state governments also have do the same. But to cover a larger part of the population, which includes the unorganized sector as well as the poor, we would need subsidized or condominium schemes like Atal Pension Yojana.

In the private sector, however, the opportunities are vast as we still have a huge population that must protect their social security. Large organizations now offer retirement solutions in the form of employee benefits. Organizations must now make their employees aware of these retirement solutions.

In India, the total body of retirement savings amounts to approximately Rs 30,000 billion, or 14% of our GDP. Compared with countries like the Netherlands and Australia, this is very low, where pension assets represent almost 191% of their GDP.

How has the pensions and retirement environment in India evolved over the past decade?
According to the 2011 census, around 12-13% of the workforce was covered by various pension systems. To bridge the gap between the organized and unorganized sectors, the Swavalamban scheme was launched in 2010 and Atal Pension Yojana (APY) was launched in 2015 to encourage saving as a habit for retirement living. APY is a government-backed pension scheme overseen by the PFRDA and has seen robust growth from 96 lakh subscribers in fiscal year 2017-18 to Rs 3.19 crore in October 2021.

We believe that we are in a phase of transition. India has always had a common family system where there was always someone to take care of the elderly. However, even with nuclear families, people expect child support. He is now slowly sinking into the fact that the same will not always be possible. Plus, people don’t want to depend on someone else. These changes, we believe, will ensure that awareness of retirement planning will increase exponentially in times to come.

In the NPS industry, we have witnessed an exponential growth of 38.18% in assets, in FY2021, compared to FY2020, with a 5-year CAGR of 36.58%. Each month, we see the addition of more than 5 lakhs of subscribers. Awareness increases as people begin to realize that they have to plan for their future.

How did you approach the issue of ensuring adequate returns for investors in the current scenario of deeply negative real interest rates?
The negative real rates in the current scenario are the result of excess liquidity within the system leading to lower rates. This cash is needed to combat the adverse effects of the pandemic. As the crisis emerges, we expect rates to rise. Thus, real rates may not stay in negative territory for long. At the same time, the presence of stocks in NPS portfolios would help underwriters protect their retirement corpus from the damaging effects of inflation in the longer term.

What is the growth that you see in assets under management (AUM) for the current financial year and for the next?
The NPS has seen robust growth in assets under management from Rs 118,303 crore in fiscal year 2015-2016 to Rs 6,87,468.76 crore as of November 30, 2021, a fivefold increase. Relatively young subscriber base and the likely addition of 1 crore of new subscribers, including 90 lakh from the government-backed APY, PFRDA expects over 22% growth in fresh fund inflows. approximately Rs 1.25 lakh crore in fiscal year 2022.

Supratim Bandyopadhyay, President of PFRDA, recently said that depending on market conditions, AUM is expected to increase by more than 30% to reach almost Rs 7.5 lakh crore in fiscal year 2022. At ICICI Prudential Pension Funds Management Company, we are seeing healthy growth in policyholder contributions. We ended fiscal 2021 with a growth of 68.87% compared to fiscal 2020 and also in the current year we continue to experience rapid growth in contributions. We saw 111.5% growth in the first half of fiscal 2022 compared to the same period last year.

Looking ahead, we believe we are only scratching the surface. We expect the industry to grow exponentially in the years to come and we would like to be prepared with the right people, the right processes and the right technology and play an important role in the growth of the retirement space. .