Pension reforms: India, the land of eternal optimists?
Incomes and living standards have improved, but not the preparedness for post-retirement life
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' - A higher 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 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 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 coming down 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.
All of this suggests that the seller has to 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. However, there is a 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.
Incomes and living standards have improved, but not the preparedness for post-retirement life
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' - A higher 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 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 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 coming down 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.
All of this suggests that the seller has to 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. However, there is a 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.
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