Investment corpus in the Indian pension sector is estimated to reach greater than US$ 1 trillion by 2025 as the sector move forward to realize its full growth potential after the passage of the Pension Fund Regulatory and Development Authority (PFRDA) Act 2013, according to the CII – EY Report on Pensions Business in India.
The Report highlights that pensions business in India presents an attractive opportunity because of India’s changing demographics, an inadequate pillar one (Government funded) pensions system, and the presence of a vibrant insurance and funds management sector.
“In line with India’s demographic transition, the need for protecting old-age income security would underpin the growth of pensions market in India as the focus sharpens on expanding the coverage of National Pension System (NPS) in the private sector and the insurance companies, even as mutual funds assume greater role in the Indian pensions market”, said Mr Chandrajit Banerjee, Director General, CII.
The report adds that from a global perspective, pensions systems are key drivers of the infrastructure sector and provide stability in capital markets because of the long-term outlook of pension funds. Given the huge need for long-term funds for the emerging Indian economy, the pension sector has a potential to play an increasingly important role in meeting this demand.
The report estimates the current retirement funds corpus in India to be in the range of Rs 12 -15 lakh crore, more than one-third of which lies in the Employees Provident Fund, the principle source of retirement planning for workforce in the organized sector. Private pension is estimated to contribute a share of 24% in the total corpus while the Pension and annuity products offered by the life insurance companies constitute a share of 16%. The Public Provident Fund and the NPS both accounts for a share of about 2.5% each in the total corpus.
By 2030, 12% of India’s population will be in the age bracket of 60+ years, which translates into ~ 180 million people. Because of the sheer numbers, this will be a very large population — much larger than the population of many developed countries.
According to report estimates, for a person earning Rs 10 lakh per annum at the age of 30 and retiring at the age of 65 years, the retirement corpus would cover expenses after retirement for another 8 years only, whereas he or she can be expected to live much longer (around 16 years or more) according to current life expectancy rates. Furthermore, the annuity income would barely cover half the expenses after retirement.
Management of inflation, longevity and investment risks is important for plan members and pension providers. The sector requires the expertise of actuaries in designing, pricing and risk management of pension plans. The pensions business provides an opportunity for insurers to pool mortality and longevity risks, for fund managers to provide adequate returns and for distributors to reach out to the masses who have no access to retirement plans.
In terms of distribution channels, a fundamental rethinking of conventional distribution models is required to increase accessibility to pensions, especially in rural areas. Ideas such as auto-enrolment through the banking/ post office system, which could also give a huge boost to the system, have been explored in this study.
On the policy, regulatory and business-level solutions for building a stronger pension system, the report recommends increasing the focus on Governance, Risk & Compliance (GRC), coordination among regulators in the country (as well as with regulators abroad), effective management of inflation and longevity risk by insurance companies, cross-border movement of retirement funds and the role of regulators in supporting customers and sellers through appropriate guidelines and regulations.