Skip to main content

Old and Poor

To continue the conversation from my earlier blogposts ( Link : 1 and 2 ) and the last CMF meet, this post will attempt to briefly summarize the micro-pensions market in India. This summary may be ambitious for a single post, the fact that it might just be accomplished says more about the market and less about my summarizing skills.

Historically, public pensions, in their modern form began in United Kingdom in 1908 a few decades after the Poor Laws. These were a set of liberal welfare reforms that targeted the poor (hitherto considered by society to be moral degenerates and only worthy of the workhouses).   This first pension scheme in the UK offered 5 shillings per week to every individual over 70 without the adequate means. While the majority of the worldwide pensions market is captured by the USA and the UK, countries like Canada, Australia, the Netherlands and Hong Kong are also notable for their pension plans. A remarkable feature of some of these schemes is that they are compulsory and linked to their employment benefits. The reason why this works is that almost everyone is employed in the formal sector so almost everyone has a pension plan.
A country like US can possibly afford to spend 5% of its GDP on social security because around 45% of its population pays taxes on income whereas the equivalent in India is only 3%. A universal pension scheme in India is considered to be unfeasible given the state of affairs (and by affairs, I mean the deficit). This drawback is an opportunity for private players to enter the market and for state governments to step up their role.
India has old age pension schemes (NOAPS) and EPF/PPF schemes but the new pension system (NPM) envisages a move toward defined contribution (DC) schemes from defined benefit (DB) schemes which are a burden on the exchequer.
Currently the most popular broad-based pension products in India are as follows:
Provident Funds
National Pension Scheme-Lite
LIC pension plans
UTI Retirement Benefit Fund
ICICI Prudential Life Stage Pension

The rates of return on provident funds are fixed at around 8-8.5% (depending on whether it is an EPF or a PPF account). The rate of return on the latter three, while not fixed, have an average of 10%. The transaction cost (exit or entry load) is nil with provident funds but can be a flat fee or a percentage of the corpus. The payouts of the UTI pension scheme and the provident funds have better tax treatments (close to exempt) while there are deductions in the NPS and Life-Insurance scheme.
Successful penetration of the above mentioned products is hindered by several challenges:
Low levels of literacy, specifically among the informal sector. This is linked with subsequently low levels of trust and awareness of such products.
Lack of formal documentation. (One issue we are coming up against in the field is the lack of accurate ID proof and misrepresentation, therein)
Lack of extensive distribution channels. Agent driven channels are more expensive due to issues of commissions.
Lack of IT infrastructure that helps in facilitating transactions
Problems with annuities when income flows aren’t constant.
Problems with spreading the corpus at maturity over the benefit period
Behavioural constraints

Currently, only 12% of India’s population is covered by a retirement plan. Almost all of them are in the organized sector. Improvements in health-care and increasing life-spans lead to increases in longevity risk. India’s elderly population is expected to constitute 20% of the total population by 2050 and at the way things are going, they might not have a way of sustaining themselves by then.

Comments

Popular Posts

Vocationalisation of education in India: Current Scenario, Key Challenges and New directions

“Every handicraft has to be taught not merely mechanically as is done today, but scientifically. This is to say, the child should learn the why and wherefore of every process.” - Gandhi’s Philosophy of Education

The greatest challenge in Indian education system today is to provide skill based education to the youth. This is exacerbated by a mismatch in demand and supply for the skilled workforce. The penetration of vocational education and training remains poor not only in rural areas, but also in urban regions where there is a higher installed capacity to impart the same. This post is an attempt to make the readers understand the need of vocational education in India. Also, this is an attempt to summarise a few recommendations on the same. 
A recent survey (61st round) conducted by the NSSO found that:

1. The percentage of population that completed primary education was 70%, but less than 10% went on to complete a graduation course and above. Almost 97% of individuals in the age bracket…

Rockstar of Financial Inclusion: Business Correspondent Model of India

About Author:  Jatinder Handoo is a social business enthusiast and a branchless banking practitioner. Currently works at FINO PayTech Ltd and is based out of Mumbai. He is reachable at jatinder.handoo@fino.co.in
India is a hot bed of financial exclusion. A country which houses nearly 16% of the global population  has more than 65% of its people outside the formal financial system (Global Findex 2012). The Indian banking system has adopted multiple approaches to make universal financial inclusion a reality right from early days Indian post-independence banking system. Be it bank nationalization in 1969 or formation of Regional Rural Banks. Formation of NABARD or fostering microfinance through Bank-SHG linkage programme in early 90’s. A shimmering ray hope was rekindled with the growth of JLG based microfinance, however later studies made it clear that the model is credit led, concentrated predominately in the southern region of India thus could not be seen as painting complete financial…

A Platform for Knowledge - Enabling people to learn ..

I received a rather interesting link/website via my email today. The link read as MR University and all I could think of was, "Ok, this must be another website portal of some university or college". Well, on clicking the link and looking through the contents of the site, I was pleasantly surprised. The site http://www.mruniversity.com/ is an online education portal or platform that allows users or teachers to upload short videos on topics or lessons they wish to impart. First topic that I come across is Development Economics.
The intent of the website is eloquently put out by the two economists, Tyler Cowen and Alex Tabarrok in the intro video. What started as a blog focusing on economics and its various implications in understanding why things are the way they are around us, has now an interesting addition. A video portal titled MRUniversity or Marginal Revolution University that focuses on online education with subjects pertaining to economics. It brought back to my mind,…