"Devising a Pension Model in India Operational Issues"
Devising a Pension Model in India Operational Issues S. P. Subhedar Sr. Advisor, Prudential Corporation Asia Ltd. 17th November 2001 1 Agenda • Pension Model for India • Focus of the Seminar - Pillar II • Operational Issues - Roll out strategy - Motivation for people - Marketing - Distribution - Intermediaries - Key functions of pension system - Contribution collection - Record keeping - Fund Management - Administration Costs - Withdrawals - Annuitisation and pay out • Conclusion 2 Pension Model for India • Pension model getting evolved : - a very modest flat rate, means tested and tax financed pension - Pillar I; - defined contribution fully funded individual retirement accounts - Pillar II ; and - personal and occupational pensions - Pillar III. • This is in line with the World Bank solution for pension reforms advocated in 1994. 3 Focus of the Seminar - Pillar II • Current focus is on the defined contribution fully funded individual retirement accounts as recommended by the OASIS Committee. • The IRDA has submitted its report on implementation of the system to the Government. • System being devised is for non-salaried section of the working population. • Magnitude of the task : - large number - more than 280 million ; - geographical spread 3.3 million sq. km ; - low education level of target segment ; - low awareness of financial matters. • Operationalisation of the system - a big challenge. 4 Roll Out Strategy • Should the roll-out be at one go or should it be in a phased manner ? • Sustainability of the system - how quickly a critical mass of AUM is built up. • Initially, the system could be introduced to affinity groups, trade associations and similar other bodies. • Employers with five or more employees and who do not provide any retirement benefit to provide access to the system to their employees. • Access will be limited to deduction of contributions from salary and its remittance. • This will facilitate collection at lower costs. • Extend the coverage progressively. • Roll out at one go would have cost implications unless large funds are made available. • Experience of Stakeholder Pension in the UK 5 Motivation for People • How would people get motivated to join the scheme ? • Tax relief can act as motivation up to a limited extent - shift from “EET” to “TEE”. • Creating mass awareness to build up old age income. • As a long term measure, the awareness must get created at early stage in one’s life - perhaps at school level. • What could have immediate impact ? • It would need massive campaign . • Funding of the campaign. • Role of NGOs in the process. 6 Marketing • Marketing of the concept. • Marketing of the products. • The role of Indian Pensions Authority in this process. • The role of different participants : - Trust based integrated service provider; - Professional fund managers; - Contribution collection agencies; - Annuity providers; - Individual retirement advisors; and - Other intermediaries . 7 Distribution - Intermediaries • Who would distribute the product : - Retirement Advisors - could be individuals or corporate entities. - Level of advice. • Training and certification of the Intermediaries. • Indian Pension Authority could set up self regulatory body similar to the Insurers Association of India and its Councils. • The self regulatory body could undertake training and certification of intermediaries. • Compensation to intermediaries. • Stakeholder Pension experience in the UK. 8 Key Functions of Pension System • The four key functions central to any pension system are : - contribution collection ; - record keeping ; - fund management ; - benefit pay out. • The Trustee Organisation to function as integrated provider of the above services . • The services could be provided through: - in house resources ; or - from external source. 9 Contribution Collection • Channels (Points of Presence ) for collection of contributions : - bank branches ( over 64,000 ) ; - post offices ( over 154,000 ) ; - private initiatives in constructing Points of Presence ; - employers who provide access to the system to their employees ; - affinity groups ; - could be pension advisors. • Transfer of funds to the Fund Managers ; • Transfer of application to record keeping and account maintenance agency. • Issue of account statement. • Transaction cost and time. 10 Record Keeping • Service provider : Integrated provider’s own organisation ; Assistance of specialist providers as depositories. • Advantages and disadvantages associated with multiple depositories. • Centralised data provides : - national access; - total portability; - no tying up with POP; - high initial set up cost; - cost effective operations. • Distributed data would be similar to the Public Provident Fund administration : - access limited ; - portability limited ; - account tied to the POP/cluster of POPs ; - little initial set up cost; - higher subsequent cost. 11 Fund Management • Product design. • Equity exposure. • Guarantees. • Hand holding in the initial years. 12 Administration Costs • The charging structure needs to be clear, simple, easily understandable and readily comparable. • Costs a major issue, as these impact net rate of return on accumulation. • What could be the charging structure : - fixed charges ? - variable charges ? - contribution related charges ? - asset based charges ? - combination of contribution related and asset related charges ? • Cost structure could be : - one time fixed charge ; - contribution related charge initially; - asset based charge later. 13 Administration Costs (Contd..) • The costs could be classified as follows : - One time fixed cost : account opening charge ; annuitisation cost - Contribution related cost : distribution ; collection and transfer. - Asset related : record keeping ; fund management ; exit and switching ;trustee fee • Pension payment would be made by the annuity providers - payment cost: - related to amount of pension; and - would be built into the pension rates. 14 Withdrawals • Should withdrawals be allowed during the accumulation stage ? • Normally pension saving should be inaccessible until retirement. • In India, most individuals have very little access to formal credit in times of need. • A complete ban on withdrawals could be a deterrent for joining the system. • For some individuals, the retirement account could be the only saving. • Access to these savings on limited scale may be made available for highly critical needs. • Disincentives may be put on withdrawals. 15 Annuitisation and Pay Out • Two distinct phases in the life cycle of participants : - accumulation stage during working life ; and - pay out stage upon retirement. • Compulsory annuitisation and balance pay out. • Life insurers to be the annuity providers. • Issue of adverse selection. • Creating the post retirement payment structure - a big challenge. • Process of annuitisation - choice of annuity provider. • Pay out to be made directly by the annuity providers to the pensioners. 16 Conclusion • A general population pension of the type proposed is the need of the hour. • A massive educational programme is needed to create awareness. • Other operational issues are also complex. • Success of the proposed pension system depends on how these issues are addressed. 17 Thank you 18