ART on Micro Pension – Challenges: Supply Side Perspective

Tata Dhan Academy02/12/2014

Hearty Welcome

What is Pension• Pension is a series of payments receivable in

periodical intervals.

• Pension is the word conventionally used for the benefit received on post-retirement/received as Social Security benefit from Government

• In other cases it is referred to as “Annuity”.

Pension – What For

• To lead the life on own legs

• Required due to Socio-economic changes

• Required due to mortality and morbidity changes. Decrease in mortality rate leads to increase in demand for pension.

How Pension Benefit is funded• By Employer - as a part of CTC/as a

Statutory Requirement

• By Government - as a Social Security measure

• By individuals – “Early Birds” – who fund for their future through investing in Pension Fund/Pension Fund arrangements.

Type of Pension arrangement• Defined Contribution Scheme

• Defined Benefit Scheme

• Hybrid of the above

Pension - ChoicesA Pension Fund gives the choices of

• The event which commences the Annuity

• The time of commencing the event on the happening of the event

• Lump Sum Benefit – Called Commutation

• Type of Pension

Superannuation Fund

• This is the fund administered before commencing the annuity.

• Requires a good and competitive return

• To be invested as per Statutory Requirement for approved Superannuation Schemes.

Annuity Fund

• This is the Fund administered after annuity commences.

• The investment must be suitable to the long term liability nature.

• To be invested as per Statutory Requirement for approved Superannuation Schemes.

InvestmentThe assets are kept invested in Bond,Equity,

Debentures, etc. Adequate liquid fund is also ensured to pay the benefits out of the fund.

Matching the term and nature of the assets and liabilities is a way of significantly reducing the risks involved. 

ie. Holding portfolio of assets that will behave in the same manner as the liabilities.

Investment Pattern

No Type of Investment Percentage of Regulations under

Regulation 3(b)

1 Central Government Securities Not less than 20%

2 Central Government Securities, State Government Securities or Other Approved Securities

Not less than 40%

3 Balance to be invested in Approved Investments, as specified in Schedule I, subject to Exposure/Prudential norms as specified in Regulation 9

Not exceeding 60%

Risks in Pension Schemes• Investment risk

• Level of pension purchased depends on the terms of annuity (annuity rate) at the time of purchase.

• Risk of failing to meet the beneficiaries needs due to inflation, etc.

Risks - Continued

• Fall in Market value before retirement reduces the lump sum benefit payable(in case of Unit-linked Plans)

• Non- payment of contributions by Sponsor due to their poor financial status or non-liquid funds.

• Unaffordability of contributions defined in real terms (due to inflation).

Investment Risks• The following investment risks are borne in

mind and are to be avoided to ensure good net returns

• Liquidity

• Volatility

• Default risk

• Diversification

• Mismatching

Advantages of LIC’s Schemes• MOST TRUSTED BRAND WITH WIDE NET

WORK ACROSS THE COUNTRY• Security• High returns• High Liquidity• Periodical Actuarial Valuations

Advantages of LIC’s Schemes

• Hassle-free Administration

• Speedy pension settlement & WIDE RANGE OF ANNUITY OPTIONS

• Low expenses In managing the funds

• Complete Transparency

Key factors in Pension Fund Management

• Interest Rate

• Inflation

• Longevity

• Statutory Requirements

• Technology Development

• Socio-Economic Environment

Challenges

• PENSION PRODUCT IS OF LONG TERM NATURE AND REQUIRES A LARGE PURCHASE PRICE.

(MONTHLY PENSION OF 570(ROC)/745(NON-ROC) REQUIRES THE PURCHASE PRICE OF 100,000 APPROXIMATELY)

• UNDER MOST OF THE CASES, ANNUITY IS OF FIXED AMOUNT DURING THE LIFE OF THE ANNUITANT. DUE TO THE FIXED NATURE, INFLATION MAY ERODE THE MONEY VALUE OF THE PENSION.

ChallengesSELLING OF PENSION PRODUCT IS

DIFFICULT BECAUSE

• PEOPLE ARE WILLING TO INVEST IN THE PENSION PRODUCTS ONLY AFTER CETAIN LEVEL OF AGE/INCOME.

• PRODUCTS OFFER LESS INCENTIVES TO SALES FORCE THAN CONVENTIONAL PRODUCTS.

Impact of Longevity

• Increase in Longevity makes the liability of the Insurer more.

• This leads to decrease in annuity rates

Impact of Inflation

• Inflation and the value of annuity are inversely related

• Increase in Inflation will reduce the purchasing power of annuity if the amount is fixed

• Index Linked Annuity Arrangements are available to overcome/reduce this effect

Impact of Interest Rate• When interest rate increases the liability of

the Insurer decreases.

• This will enhance the Annuity Rates.

Key issues in administration

• Spreading awareness of Pension

• Data availability/requirements

• Discontinuance of Contributions

• Change in Technology

• Change in Regulatory requirements

Invest for Pension and Be Happy

THANK YOU