The most frequently asked questions that we receive here at Mint Money revolve around retirement planning. Especially recently, thanks to the changes in the New Pension System (NPS) and the realization that changing demographics and society warrants a more defined pension plan for individuals.
NPS was launched in 2004 for government employees and then extended to all citizens in May 2009. The idea is to promote a low-cost product to cater investing needs for retirement. At present, NPS charges 0.25% as management fee, lower than the 1%-plus management fee charged by mutual funds and unit-linked insurance plans.
A discussion around the need for structured retirement planning and the viability of a product like NPS was carried forward on day two of the Morningstar Investment Conference 2012 on 2 November in Mumbai. G.N. Bajpai, chairman, NPS Trust, and former chairman of the Securities and Exchange Board of India (Sebi) in an address centred on NPS, pointed out that financial products are still a “push” in the Indian context and not a “pull”. This means that the demand for financial products, more specifically the ones that address retirement planning, is low. Later, there was a panel discussion on why this segment has been slow to pick up.
Love for real estate, gold
Daniel Needham, managing director, Morningstar Investment Management Asia Pacific, showcased the break-up of the household assets in India and the US (2010) in a presentation. While 47% of Indian household assets are in real estate and 14% in gold and other physical assets, in the US these figures are much lower at 26% and 7%, respectively.
In the panel discussion on retirement planning, all four panellists agreed that the main reason for not choosing financial assets as a retirement tool is that Indians love to buy real estate and horde gold and on culture of expecting children to eventually provide for our old age.
But our traditional way of approaching retirement can backfire. With the social landscape changing in India and the nuclear family system taking over the traditional joint family structure, the future can be very different. This makes retirement planning very important.
But what we need to remember is that gold is not a productive asset and real estate is not liquid enough. So you cannot generate income by holding gold; you will only benefit if prices go up. In real estate, generating cash on a short notice may be a problem and here too prices can correct. Prasun Gajri, chief investment officer, HDFC Life, one of the panellists, said, “Since most of us have only seen real estate prices move up in the last 15-odd years, we feel that is the way the asset moves, but prices can correct too.” Needham who was moderating the panel rightly pointed out that most financial crises across the world began with the bursting of asset bubbles like inflated real asset prices—home prices often rise supported by high credit growth at such times.
Inadequate distribution network
Another reason for the lack of popularity of NPS is credited to poor distribution network. Bajpai, in his address, said, “Wherever the distribution network is not strong even strong products suffer.”
Even though some panellists argued that better tax treatment may help make NPS more popular, they were unanimous in praising the product for its low-cost structure and long-term focus. Explaining the need for a widespread distribution network, Bajpai said that the reason Life Insurance Corp. of India has around Rs.15 trillion assets under management (AUM) was purely because of a highly penetrated distribution model. As long as financial products are not very well understood (pervasive financial literacy takes time), they will remain a “push” business and demand will have to be created. Hence, the distributor is important to reach the last investor. Dominated mainly by banks, now some brokerages, including HDFC Securities and IIFL, which recently received permission to distribute it, are entering the fray.
Moreover, as stakeholders, including the government, realize the need for growing the pension industry, NPS is getting more attention. According to Bajpai, recently AUM has increased to Rs.22,000 crore as the state government and a handful of private companies channelize funds to this product. He added that the recent inflow is mainly thanks to the performance of the funds, adding that he expected the AUM of NPS to grow to around Rs.2 trillion in the next five years.
Lack of awareness
It was pointed out that lack of education and awareness was a major hindrance. Sundeep Sikka, chief executive officer, Reliance Capital Asset Management Ltd, one of the panellists on the retirement planning discussion, said, “The need to educate the investor is most important. Once awareness for retirement planning is created, investors will automatically choose the products that suit them most.” Hemant Rustagi, chief executive officer, Wiseinvest Advisors, also on the panel, agreed, “NPS as a product hasn’t taken off as investors are not aware and it is not marketed properly.” He added that the product itself has a lot of merit.
Gajri said, “Retirement saving is not the same as retirement planning.” What this means is that simply buying property, gold and investing in bank deposits is not enough. What retirement planning requires is calculating a retirement corpus, setting down specifically how much you need for expenses after you retire and for how long, discounting cash flows with inflation and scientific portfolio construction to invest in assets that will generate returns to meet these requirements.
So educating investors on the need to plan for retirement is one of the main requirements for pension products to gain momentum. Moreover, as of now pension products are available from many providers such as insurance, mutual funds and of course NPS. This creates confusion among investors on which product is the most suitable.
As pointed out by a member of the audience, it is easier to make a customized retirement portfolio with mutual funds rather than sift through the other available options.