Retire the obsolete retirement conventions
I didn’t quite realise how fast time flew by and we are already in 2017. Many things have happened. My pop idol George Michael is no more. Wham was formed in 1982; 35 years have already passed by. I wonder what life will be 35 years from now.
By 2050, I will be among the 30 crore Indians projected to be over 60 and I don’t want to be counted among the 56% employees who feel they will be worse-off than their parents in old age (a finding from Willis Towers Watson’s Global Benefits Attitudes Survey).
I wish the retirement scene in the country would change in a few ways. I even wrote a wish list.
I wish we could capture and articulate what ‘retirement’ would mean to people in India 35 years from now.
Retirement will mean different things to different people. The government should broaden its research and gather data about the aspirations; and social, physical and financial needs in old age. Insurance company Allianz, in its Retirement Adequacy Income Indicator paper in 2015, ranked India among the lowest of 49 countries in retirement adequacy when considering factors such as: pension system coverage, non-pension wealth and housing, and out-of-pocket healthcare spend in old age.
In the UK, special long-term care products (such as health and nursing care) are being developed as part of pension and old age income products. I wonder whether homecare and related medical services could be included as part of ‘pension’ in India.
Many salaried employees are seemingly confused about the roles that gratuity, Employees’ Provident Fund, superannuation and the National Pension System (NPS) will play. Is there a possible shift in how people perceive these benefits today compared with three decades ago?
Gratuity: As gratuity is available to employees who exit their organization after at least 5 years of service, what relevance does it have to retirement? None, I think. If an employee does remain with her employer for 15-20 years and subsequently retires, chances are the company caps the benefit to the taxable allowance ceiling (currently Rs10 lakh though Rs20 lakh is proposed). Would it make more sense to increase the eligibility service requirement for gratuity to 15 years and remove the cap? This may be cost neutral in financial obligation for companies. It will also receive more appreciation from those employees who make it to eligibility.
Employees’ Provident Fund (EPF): It bothers me when EPF is called a ‘retirement’ plan. With so many withdrawals allowed, even the entire balance in some circumstances, our EPF is really designed as a savings account and not solely a retirement plan. The EPF should focus its effort on being the No.1 lifestyle savings account for the employed sector, providing a social security safety net. Apart from that, EPS95 should be removed. Provide for preferential tax treatment only for circumstances that meet the criteria of essential life needs. If the benefits are used for that next big holiday or lavish wedding, sorry, there should be no tax benefits.
The role of EPF in long-term financial planning should be communicated. Provident fund plans in countries such as Singapore or Malaysia have similar characteristics from which lessons can be learnt.
Superannuation: Until the NPS emerged, superannuation plans were the primary means to provide employees true retirement benefits through employment. However, developments over the past 8-10 years have altered the relevance and appreciation of these plans significantly. With the exception of employers who want to control what and how, there are a limited number of situations where superannuation plans make sense. This is compounded by the fact that many plans are designed to begin pension annuity payment when an employee leaves service. Pension starting at younger ages has little value; further, as the pensions do not increase over time, they lose to inflation. The role that these plans should play requires serious consideration, else they will soon become applicable only in niche cases. Providers will then not have enough commercial reasons to support these plans.
National Pension System: It is the most recent addition to the suite of retirement offerings in India. I hope it does not try to be everything to everyone in 2017. It has, and should continue to, focus on encouraging disciplined savings for an income in older age.
Withdrawals being allowed from tier 1 accounts concerned me initially. However, as long as the control measures set out in the current regulations stay as restrictive, it should be fine, as most NPS subscribers won’t have EPF.
If NPS is to be the universal long-term old age income savings vehicle, then it’s crucial to tie the tax benefits at the de-accumulation stage with old-age needs. This will reduce the risk of lump sum withdrawals. The Pension Fund Regulatory and Development Authority (PFRDA) has started to consider the long-term de-accumulation phase, and I look forward to this continuing in 2017.
Clarifying the purpose of each so-called ‘retirement’ benefit could be the first step towards banishing misconceptions and potential turf wars between policymakers or regulators. We have about 17 crore subscribers in EPF (it can be deduced that those covered under gratuity would be at least equal to this number) and about 3 lakh NPS (corporate model) subscribers. If we begin now, we won’t have to wait another 35 years to get it right.
Kulin Patel is head-retirement, South Asia, Willis Towers Watson.