‘Retirement Planning In India At Nascent Stage’

Burgeoning inflation, increasing lifespans and changing family structures are rapidly disrupting the dynamics of retirement planning in India. As former SVP for LatAm at global retirement solutions giant Principal Financial, Luis Valdes has seen it all before. He currently serves as president and CEO, Principal International. During his recent visit to Mumbai, Valdes spoke to editorial consultant for BW Businessworld, Aniruddha Bose, about key retirement planning trends in India. Edited excerpts:

What’s your take on India’s state of “retirement readiness”? Are we doing enough?
In my opinion, India’s state of “retirement readiness” and awareness of retirement investing is at a nascent stage. With a young population base of nearly 300 million+ people under the age of 35 in India, the stage is well set for raising awareness and promoting disciplined retirement savings schemes to enable retirement income security for all Indians.

Increased awareness of core retirement metrics such as target “Income replacement ratios” and saving “contribution rates” for retirement early on in life is only starting to get some attention at this point across the broader working population in India.

How is India poised vis-a-vis it’s global peers in terms of retirement planning systems?
India’s retirement planning systems are now seeing increased traction over the past two or three years, but they are still at a nascent stage. The existing EPFO scheme and exempt PF schemes offered by some employers are the main retirement and pensions investing programmess available to employees.

However, vast sections of unorganised and self-employed individuals do not have access to these retirement savings vehicles. PPF is an option, however Systematic Investments in Mutual funds and regular contribution in ELSS products that also offer tax benefits at the time of investment are good vehicles available to individuals to build a retirement nest.

Also the newly launched NPS scheme under PFRDA regulations seems poised for growth over the next decade as it is a voluntary retirement savings scheme.

How do you foresee the balance between physical assets and financial assets playing out in India?
In India, we are seeing a gradual shift towards an increase in financial assets as reward and return ratio between these broad asset classes is changing.

We expect that over the next decade, this ratio of financial assets could rise higher to around 70 per cent as investors shift their allocations to higher yielding Mutual funds and other market linked vehicles and in the long-time horizon morphing into multi asset classes including regional and global investment products. This is a normal trajectory that what we see in other countries across the world.

Most Indians continue to save in low yielding instruments such as Life Insurance, Savings Accounts of Fixed Deposits for their retirement. Is this going to lead to a full-blown retirement crisis in our country?
This tendency can probably be attributed to low awareness and low levels of financial literacy. So, increased investor education is an important initiative. As a thumb rule, around 10 per cent of a person’s income should be systematically allocated for retirement savings.

Starting early in life and saving enough gives investors a head start. Currently target risk balance funds and goal based target date products offered by mutual funds are great investment vehicles for meeting retirement goals.

Collectively the government and investment management industry can work together to create a more conducive ecosystem to address retirement income security.

How do you see the mutual fund industry playing a role in retirement planning? Does the largely open-ended nature of funds end up working to investor detriment by allowing them to act on their behavioural biases?
Mutual funds vehicle are very efficient solutions for long term saving including retirement. Open-ended equity and equity oriented hybrid funds as such help in wealth accumulation over the long term.

For retirement savings, ideally the investment tenure typically lasts over 25-40 years. However, as open ended funds offer liquidity, it is very difficult for the investor to maintain discipline and stay invested particularly when the markets are at the extreme ends...

Again, investor education, financial literacy and long -term investment discipline is key to mitigate behavioural biases.

Actively promoting and retirement investing metrics with support from AMFI and MF industry such as “Contribution Rates “and target “Income Replacement Ratios” would shift the dialogue to a more proactive approach.

What steps can the Indian government take to broadly make the populace more retirement ready?
The government could also spell out very clear taxation policies for retirement savings solutions for the long haul. Giving retirement solutions suitable tax incentives for both contributions and withdrawals at retirement is key.

The government could also permit the Mutual Funds Industry to operate notified portable “Defined Contribution” retirement schemes with suitable tax benefits to offer more choice to employers and employees - akin to privately managed 401(K) plans in the USA - and to drive innovation in the retirement savings market.

Other financial market initiatives such as having a deep and vibrant debt market are also important.

Do you see any similarities in investor behaviour between Latin America and India? Are there any initiatives that you drove as SVP for LatAm worthy of replication here?
To start with, each one of these emerging markets has a fast growing and very aspirational middle class. Each one of these markets are characterised with very similar retirement risks such as low replacement ratio and high risk of individuals outliving savings as people are living longer.
Unfortunately, there is very low awareness about this problem that looms in the future and individuals are not equipped to solve the problems on their own and actively looking for advise and solutions.

The government of India and the investment industry has an opportunity to work together to build a solid and robust multi pillar pension system with various providers and solutions with active participation of specialist private companies.