The investment corpus in pension sector to reach $1 trillion, says report

Investment corpus in the Indian pension sector is estimated to cross $1 trillion by 2025 as the sector moves forward to realise 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.

India, the report highlights, presents an attractive opportunity because of the country’s changing demographics, an inadequate pillar one (Government funded) pensions system, and the presence of a vibrant insurance and funds management sector.

From a global perspective, the report adds that 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.

Commenting on the report, CII Director General Chandrajit Banerjee said, “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.”

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 organised sector.

Private pension is estimated to contribute a share of 24 per cent in the total corpus while the pension and annuity products offered by the life insurance companies constitute a share of 16 per cent. The Public Provident Fund and the NPS both accounts for a share of about 2.5 per cent each in the total corpus.

By 2030, 12 percent of India’s population will be in the age bracket of sixty plus (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.