Pension Market in Sri Lanka & trend World-wide

Date : 10 t h December, 2012Niyat i Pandit Ganesh Sudrik

SOCIO ECONOMIC

Population of Sri Lanka in 2012- 20,277,597. 0.30% of the world´s population . Population Increased by 7.9% since 2001. Average annual growth is 0.7% between 2001- 2012.

Thus population is still growing but at a lesser rate.

MOVEMENT IN POPULATION

Decreasing trend in growth rate since the Census of 1953.Decline due to difference in birth and out migration.

DEMOGRAPHIC TRENDS

Population over 60 years old is expected to increase from 12.5% to 16.7% in 2021.

Improvement in mortality. Life expectancy is much higher for age above 60

years as compared to other Asian countries. Increasing number of people above 80+

BIRTH RATE (BIRTHS/1,000 POPULATION)

Source: CIA World Fact book

DEATH RATE (DEATHS/1,000 POPULATION)

Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Rate

6.43

6.43

6.45

6.46 6.47 6.49 6.52 6.01 6.07 6.13 6.2 5.92 5.96

Source: CIA World Fact book

POPULATION PYRAMIDIn 1990 In 2010

In 2020 (Estimated) In 2050 (Estimated)

PENSION A regular income paid to a person following

retirement from the service. Paid in instalments Pension systems exist to satisfy two main goals

to tackle poverty in old age by providing a minimum income

to smooth consumption over the life-cycle

PENSION SCENARIO IN SRI LANKA Access to Approved Pension Plan, not more than

10% to 15% of total population There are two major challenges facing the

existing pension system in Sri Lanka: coverage is low, with around 85% to 90% of

older people unable to access a regular pension; and,

even for those who can access a pension, many find that the actual level of the benefit they receive is well below the poverty line.

If Sri Lanka is to be successful in tackling old age poverty, there needs to be a fundamental shift in pension policy.

NOW WHAT?

TYPES OF BENEFIT Defined Benefit Scheme Defined Contribution Scheme Hybrid Scheme

DB WITH DCDefined Benefit Defined Contribution

Pension Easy to Understand and Calculate Pension Difficult to Predict

Easy to maintain if Membership is Large

With Current Technology not difficult to manage large

membershipUnlimited Liability on Provider Limited Liability on Provider

Transfer Values Difficult to Arrive Transfer Value Easy

Volatile Contribution Rates Smooth Outflow for Provider

Sensitive to Economic and Demographic Changes

Less Sensitive to Economic and Demographic Changes

Popular within Receiver Popular within Provider

World Moving from this Scenario Globally Accepted Schemes

FUNDING METHODS OR METHODS OF VALUATION

Numerous methods are available Method can be chosen depending upon the

situation Most Commonly used methods are

Current Unit Method Projected Unit Credit Method Aggregate Method

CURRENT UNIT METHOD

Step 1 : Expected CashFlow considering all decrements Based on Accrued Benefits

Step 2 : Taking PV of all future CashFlowsi.e. Value of past service liability on current earnings

Time Line

Year 1 Year 2 Year 5Year 4Year 3 Year 6…….

Projected Unit Credit Method

Year 1

Step 1 : Escalated Expected CashFlow considering all decrements

Based on Accrued Benefits

Step 2 : Taking PV of all future CashFlowsValue of past service liability on projected earning

Escalated Year

3

Escalated Year

4

Escalated Year

5

Escalated Year

6….

Escalated Year

2

Time Line

AGGREGATE METHOD

PV of Past Service Liability

PV of Future Service Liability

PV Future Service

Contribution

Entry Age

Current Age

NRA

Net Liability =PV Past Service Liability + PV of Future Service Liability

-{Accumulated Corpus + PV Future Service Contribution }

Time Line

Accumulation Phase Payment Phase

PAYMENT OPTIONS

Pay-as-you-go Company Manage Trust Fund

By In-house Management By Purchasing An Annuity from an Approved

Insurance plan

TYPES OF ANNUITY Level annuities Guaranteed annuities Inflation-linked annuities Joint-life or Last-survivor annuities Life + Return of Capital annuities Investment-linked annuities

RISK WITH CURRENT CONDITIONS

IssuesMost probable

reasonsLess accumulation phase &

long payment phaseDue to Retirement age

criteria

Longevity Risk Increase in Life Expectancy

Investment Risk Less deep Market for G. Sec Rates

Low NRR Availability to Only Lump sum benefit

Fall in Birth Rate & Improvement in Death Rate Urbanization

WORLD TREND FOR PENSION MARKET

Market Globally Europe/ UK, DB plans on PAYG, tax burden increasing Minimum Funding Requirement to Fund the scheme now

US 401k Plan, allows individual investment choice, Pension and medical bill to govt is around 26% of GDP

Gulf Countries have DB pension plan Recently Monetary cap has been introduced

India – Recent move to DC from DB, EPS 95 is Hybrid scheme with limited contribution and cap on

pension

WORLD TREND FOR PENSION MARKET

Indian Market Both DB & DC schemes are not new in India Govt., Banks , Nationalized Insurance Companies and

Certain Financial Institutions also Devised Defined Benefit Pension Scheme By Diverting Employer’s PF Contributions

..But have shifted to DC scheme with a cut-off date NPS option is made available to everyone Approved insurance plans are available Tax Advantage for contribution pension plans Benefit in Cash instead benefit in kind

PROFESSIONAL INPUTS ON PENSIONS

ROLE OF AN PENSION ACTUARY Scheme funding Investment Scheme design Managing risk Corporate transactions Individual benefits

REFERENCE

Death Rate & Birth Rate Statistics : www.indexmundi.com; www.statistics.gov.lk

Population Growth : www.nationmaster.com www.actuaries.org.uk/

THANK YOU