The Allianz Global Investors report of 2009 puts India and China right on top of the list of 26 surveyed countries in greatest need of pension reform, only next to Greece. India has the second highest ‘Pension Sustainability Index’ – Higher the value of the index for a country means that the pension system needs large-scale reforms and much greater pension coverage. The Index uses a wide range of sub-indicators such as demographic developments, public finances and pension system designs to systematically measure the need for further pension reform.
HSBC also recently conducted a global study in 2011 on retirement savings based on interviews with more than 17,000 people across 17 countries. One of the questions was ‘Overall, do you think your generation will be better or worse off in retirement compared to you parents’ generation?’ The findings are interesting. Respondents in North America and Europe think that their parents are enjoying a golden age of retirement, which will not be repeated when they come to retire. The main drivers behind these concerns also reveal why it is that Western respondents are particularly gloomy, with the erosion of traditional types of pension – those provided through the state and employers – being a key concern in developed markets. However, in stark contrast, in the emerging markets of Asia and the Middle East, we see the traditional dependency in old age being transformed into greater financial self-reliance, fuelled by the rapid improvements in household incomes and living standards. People in emerging markets, particularly Indians, hold a more confident and optimistic view of retirement.
Another question asked in the survey was ‘How important is it to you, and how well prepared are you for the following statement - Having enough money to live on in retirement’. Going by the response, India has the lowest ‘Pensions Preparedness Gap’ in the world! If one were to correlate the above two data points, it appears that perhaps Indians are being lulled into a false sense of comfort regarding their retirement as they are comparing their life standards with their parents and believe that they will have better retirements than their parents and also feel that their high savings rate will ensure that they are well prepared for their retirement. Also, what is not perhaps obvious to them is that they might be living in a higher inflationary environment than their parents as well as they might live more than their parents lived. Both of these things put together will mean that they will need a much higher income in retirement to live comfortably and if anything the reliance on the traditional family support system is reducing due to urbanisation and rise of nuclear families.
To make things worse, unlike the West, India does not have a comprehensive social security system, which encompasses good healthcare and pension benefits.
The winds of change
Pension products especially on unit linked chassis had great success in India until 2010 and contributed over one fourth of top line of life insurers, primarily for the following two reasons –
- No medical underwriting required at the point of sale as death benefit was optional
- Relatively low charges and liquidity and/or ‘premium holiday’, after the erstwhile minimum lock in period of three years
In 2010, IRDA had introduced compulsory annuitisation for a pension policy even on surrenders as well as introduced a guaranteed rate on the premiums paid. Most life insurers did not participate in pension space since then and only a few came out with single premium unit linked products citing their difficulty in honouring an onerous guarantee on regular premium products. Very recently, IRDA has recently come out with new pension guidelines to promote life insurers to participate in the pension space following a drought of products as most insurers stayed away from participate in this space citing inability to manage high guarantees. The key highlights are that all pension products shall have explicitly defined assured benefits that are applicable on death, surrender and vesting which is disclosed at the time of sale and at the time of vesting, with compulsory annuitization and no ‘open market option’ is allowed to the policyholder.
Quality of advice is key!
This means that selling such a pension product will have to be a properly advised based sale else the company risks serious market conduct issues. Given that fact there is limited liquidity (up to one-third of the corpus can be commuted) in the new pension plans, the sales process has to be advice based taking into consideration the following aspects:
- Customer willingness to pay for a long-term pension needs, in addition to more immediate needs such as child saving and education
- Other sources of income of the prospect during his/her retirement years such as rental income, interest income, etc.
- Other pension savings such a Employee Provident Fund, Public Provident Fund, NPS, etc.
- Likely retirement age and hence the period of contribution
- Likely vesting date which affects the period of accumulation and hence the annuity amount
- Inflation expectation
- Pension income being what % of pre retirement income (say 30% or 50%)
All of this suggests that the seller has to be do a proper financial need analysis of the client, assess risk profile and then suggest a suitable premium contribution towards retirement saving. Given the long-term nature of pension products, proper advice needs to be offered throughout the lifetime of the product to ensure customer satisfaction basis changing life style and life stage of the client so that the product can be kept relevant decades after it has been sold. However, there is need to simplify the entire sales process and arrive at thumb rules to make the advice simple yet relevant taking into account individual circumstances for most clients.
The author is Director and Head Products and Persistency, Max New York Life