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When you step down...

Anjali Prayag

If you are over 40 and planning to enjoy the fruits of your labour in a decade's time, think again. How safe is your nest egg and how sure are you that it won't crack soon?

Given the changing social and economic milieu, the ageing population may need to juggle and plan its retirement benefits more cautiously than ever before.

In the Indian context, the absence of a social security system was not much felt earlier mainly due to the emotional and financial security afforded by the joint family system.

But with nuclear families increasingly being the norm today, what will happen to workers, now in their 40s, enjoying expenditure-oriented pay packets and uncertain about possible care by their children in their old age?

Given the high stress-levels at work, many executives are talking of retiring at 45, which is something their parents would never have dreamt of. Will they be able to sustain their current lifestyles post-retirement? And how good are the existing pension plans in our country?

According to projections made by the Population Foundation of India, a voluntary organisation working with the Central Government, the section of population aged above 65 years will rise from 5 per cent currently to about 15 per cent in the next 50 years . That is, from 75 million at present to 177 million in 2025 and 243 million in 2051.

The purpose behind long-term savings is to mainly provide for housing (because family homes are out of fashion), living expenses -- including travel and entertainment -- and medical expenses. Industry analysts say the biggest danger to long-term savings comes from inflation and not the day-to-day volatility of the stock market.

The recent muddle over IDBI Bonds has left the investing public uneasy. The institution's deep discount bond, issued in 1996, has been recalled due to falling interest rates. Those who hoped to make Rs. 2 lakhs in 2021 from their modest investment of Rs. 5,300 have been left disappointed. They have been forced to redeem their bonds in August 2000 for a paltry Rs. 10,600.

Says Srinivas Rao (40), who owned five such bonds, ``The product was packaged to lure small investors away from typical bank deposits and it did succeed in that. But just four years have gone by and investors have been left in the lurch. I'll now have to rework my personal finance portfolio.'' Rao will retire in 2018 from a public sector undertaking in Bangalore and he is determined to invest the redeemed money more prudently this time.

But what are the options before Rao and scores of others? Apart from life insurance and provident fund, do Indians have other choices? Says Shekhar Sathe, CEO, Kotak Mahindra Asset Management Co. Ltd., ``Where is the opportunity and where are the product s? As people realise the meaning of a market-driven system, they would be willing to invest in `other' funds, i.e., funds managed by the private sector. The insurance sector is opening up. Pension sector reform is not far away.''

Bank deposits that promised high returns of nearly 17 per cent four years ago, have sunk to below 10 per cent. Experts declare that 12-14 per cent is what people need to make both ends meet. This is the comfort zone but, contends Nikhil N. Khattau, CEO, Sun F&C Asset Management (I) Pvt. Ltd., ``People have to be ready to go up the risk curve. They have to look at mutual funds which have launched a monthly income scheme.''

But investor spirits are going to be further dampened, say sources in IDBI, when there will be more redemption calls from other bonds. ``Our call for redemption was like the brave mouse belling the cat. Several others will follow soon. Prominent among them will be IFCI and other banks,'' reveals the source.

The air of distrust in the markets has propelled people back to the `safety' of bank deposits, PPF and LIC products. However, statistics show that though the mutual fund industry is only one-tenth the size of the country's banking industry, the fo rmer is growing faster at 25 per cent compared to the latter's 5 per cent.

But how receptive are senior citizens to mutual funds? Replies Kotak Mahindra's Sathe, ``In greater numbers, but not large enough to be significant.'' Mutual funds are still equated with equities and therefore perceived to be volatile. But people are slo wly beginning to realise that mutual funds do have other schemes that invest exclusively in Government securities and bonds. Schemes evenly balanced between equity and debt are also beginning to gain attention.

The world perspective

Most retirement plans are being looked at afresh mainly due to two factors: The increasing life span of citizens and the high standard of living enjoyed by employees thanks to expenditure-oriented pay packets.

The former has thrown up several issues. For instance, for how long should corporates continue pension payments to retired employees? Should existing employees continue to fund the retirement benefits of the 60-plus population? The West has hit upon a ne w trend: of defined contribution and no guaranteed returns.

In India, too, there has been a conscious shift from defined benefits to a defined contribution plan. In the former, current employees fund the retirement benefits of past employees and this practice is, therefore, open-ended.

Sathe rationalises, ``One of the major drawbacks in the contractual saving, like the provident fund, is the salary structure.'' He points out that compulsory saving and employers' contribution is linked to the basic salary which is usually a small part o f the total compensation package. The bulk comprises allowances, especially the dearness allowance or the inflation adjustment to pay packages.

On the face of it, the compulsory savings of 10 per cent plus the employers' equal contribution seem large. In reality, it is a small proportion when you take the entire income into account. In the present circumstances, life insurance is inadequate both for survivors in case of death or the insured if he/she outlives the policy. In most cases, there is no scope to save for the future.

Liberalists say that with the rising numbers of senior citizens, the Government must shift the onus of savings to the earners rather than taking the entire responsibility on itself.

Another factor which differentiates the West from other countries is that employees there have more control over the kind of funds their earnings go into. In India, the private sector's penetration is negligible as most of the pension funds go into Gover nment coffers. ``It's not going to change in a hurry,'' says Khattau of Sun F&C.

While most countries have a retirement benefit plan for their ageing population, in India unfortunately, such plans are largely confined to the organised sector. The unorganised sector such as small businesses, the self-employed, farmers and farm labour, professionals and the unemployed ageing population, especially women, is badly off.

Interestingly, the ILO's World Labour Report, 2000, spells out such insecurities even in the industrialised countries. It says that despite the extraordinary successes achieved by social security pension systems, old age still spells insecurity for certa in groups in the population. The report says that women are particularly affected as their pension entitlements tend to be much lower than those of men and their life expectancy is higher.

The report suggests that pension systems must adapt to the increasing life expectancy and to changes in labour markets and gender roles. The benefits provided by non-contributory schemes are minimal and while they in no way replace earnings from work, th ey can still mean a lot to those who receive them, says the report.

Of particular interest in reform projects, says the ILO, is the relation between pensions and gender. Many women reach retirement age with low or even zero pension entitlements because of their unpaid work-careers or related factors such as the marginal, temporary or informal nature of much of their employment.

The ILO analysis concludes, ``Contributory social security schemes remain the instrument best suited as the main source of retirement income for workers in the vast majority of countries.'' The main priorities, it says, should be increasing pension cover age and improving governance.

Here and now

In all companies, provident fund and gratuity are the statutory retirement benefit plans while the pension scheme is optional.

Though most companies make gratuity an unfunded provision, the trend today is of companies using current cash flows rather than resorting to the future funding method.

In the past, superannuation was used as a retention tool; the sum accrued to the employee only at the time of retirement. Now there is a conscious shift towards reducing the vesting period.

According to Ashok Reddy, Director, India Life Pension Services Ltd., ``Liberalisation will be in the form of corporate trusts deciding where to invest the fund money. Right now, it's mandatorily the Government bonds. With liberalisation, a few players w ill be licensed to decide on where to invest these funds.''

India Life Pension offers advisory services to companies on managing pension funds. Reddy says any employee of a client company can log on to the computer to know the status of the investments.

What is the worth of PF and gratuity in the current economic scenario? Says Sathe of Kotak Mahindra, ``Viewed in isolation, it is the best because it is the only one available with tax benefit. Individuals should supplement that with long-term investment s in diversified equity funds like K 30 and K MNC.

``In my view, every earning person in low and medium-income group should save at least 20 per cent of current gross income for a minimum period of 15 years. This saving should be supplemented by life and medical insurance. Life insurance cover shoul d be at least five times the gross annual income. Appropriate asset allocation will depend on the age, income levels, specific family circumstance and career path. As the insurance and pension sector reforms proceed, more products will becom e available,'' he predicts.

But what are the choices available at present?

Bank deposits and some other safe debt instruments. The capital market is so volatile that people are shying away from investing in stocks. The small investor is still opting for bank deposits and mutual funds.

Pragmatists would recommend a combination of the so-called safe deposits with some mild-risk borne investments such as mutual funds and a minute investment in the high-risk stock market.

Most important of all, pension planning should start early in one's work-life.