2023 witnessed a series of compelling discussions shaping the retirement narrative in India. A recent study shows India’s retirement preparedness Index moved up three ranks since the year before. However, the study, conducted by Max Life Insurance, also showed that nearly half of participants have not started saving for retirement, 61% worry they will run out of retirement savings in 10 years, while 90% Indians in the 50+ age group regret not saving earlier for retirement.
Moreover, India’s retirement systems leave a lot to be desired as evidenced by the 2023 Mercer CFA Institute Global Pension Index (MCGPI) report, where India ranks 45 among 47 countries in the index. Notably, India’s ranking has slipped from 41 out of 44 countries in 2022, to 45 out of 47 countries in 2023.
This may be an opportune time to bring spotlight to areas that need closer attention with regards to retirement landscape in India.
Retirement Preparedness
A significant factor contributing to inadequate retirement preparedness in India is the lack of prioritization. “Urban Indians are too busy in their routine lives to think of retirement,” says Shiv Bidani, co-founder of National Finance Olympiad, an initiative to promote financial literacy in India.
Preparedness refers to several things ranging from finances in retirement to staying physically active and passion pursuits. “Poor planning and financial management during their working lives [leads to] a lack of hobbies and interests during their working lives as well as a lack of skills for post retirement living,” he says.
Bidani points out that while urban Indians in government sector are well covered by pension schemes, private sector employees have to “figure something out.”
Investment Preferences
Culturally Indians are known to prefer certain types of investments for their retirement. “In traditional societies, gold, jewelry, land remain significant investment choices,” says Bidani. “Societal and cultural factors include peer pressure, traditional love for gold and land and [detached] houses (not apartments).”
Retirement planning, he adds, is more of an informal process. More recently, though, interest in equities has grown significantly both in urban and non-urban populations with improved communication and the advent of digital investing platforms. Peer pressure and the influence of local brokers, who are incentivized to promote investment and insurance products, remain the primary drivers of this trend.
Unlike small-town investors, the more affluent in the metropolitan cities show a preference for a broader spectrum of assets. “The high-net-worth individuals (HNIs) and ultra-high net worth individuals (UHNIs) tend to invest in art, unlisted companies, portfolio management schemes, alternative investment funds (AIFs), property (both domestic and foreign), as well as stocks (local and foreign),” notes Bidani.
Financial planning for this cohort also includes a great deal of tax structuring through family trusts or Hindu Undivided Family (HUFs) to ensure tax effective incomes both during their pre- and post-retirement lives, he says.
Retirement Planning
When people prepare for retirement, the financial planning revolves around two main possibilities. Firstly, it involves preparing for the scenario where you might not live long enough to support your family, which is addressed through insurance. Secondly, financial planning also considers the possibility of living a long life, focusing on planned investments to ensure you don’t outlive your resources, says Bidani.
For many Indians, pension comprises a significant part of their income in retirement. The following are key constituents of pension schemes that help individuals secure their financial future. These schemes include both defined contribution and defined benefit plans, providing individuals with options to save and receive benefits based on their employment and financial circumstances.
- Provident fund (PF): This is a type of retirement savings fund where both the employee and employer contribute a fixed percentage of the employee's salary. As a defined contribution plan, the amount contributed is predetermined.
- Gratuity: Gratuity is a benefit that provides a lump sum amount to an employee upon retirement or resignation. It's a defined benefit plan because the amount is linked to the last drawn salary and the number of years of service.
- New pension scheme (NPS): This is a relatively recent pension scheme that is gaining popularity. It is a voluntary, long-term retirement savings scheme designed to enable systematic savings. It operates as a defined contribution plan, where the final pension amount depends on the contributions made and the returns on those investments.
Government pension schemes are restricted to government employees, PSU sector, railways and defence employees. However, since government pensions are inflation adjusted, “government pension burden is becoming a risky financial situation and will take one generation to change from target defined benefit pension schemes to defined contribution schemes,” Bidani contends.
Bidani notes “in the private sector, fewer companies offer traditional pension plans.” For the private sector, pension schemes are very limited and may include provident fund, gratuity and, in some cases, pensions/annuities, he notes.
However, it’s those working in unrecognized sectors - segments of the Indian economy where workers are not formally covered by labour laws and social security measures -- who really struggle in retirement. “For unorganised sectors, there is really not much security available for post retirement,” says Bidani. “These people keep working till they can and are reliant on their children for support.”
Need For Strategic Reforms
India ranks around 45 out of 47 in the Global Pension Index. Significant reforms are needed to ensure protection to retired Indians. India is currently one of the youngest countries, but “in 20-25 years, we will have significant ageing population retiring,” warns Bidani. “Unless protection by way of post-retirement sustenance income is assured there could be anarchy.”
Currently, post-retirement income is only provided to retired government employees. There is no formal mechanism for private sector and unorganised sector to get adequate post retirement income – let alone sustenance wage equivalent.
“They need to fend for themselves and plan suitably,” says Bidani. While, culturally, Indian retirees are also supported by their children as part of joint families, “this trend is changing with nuclear families becoming prevalent,” he adds.
Further, retirement education in India is limited, primarily consisting of fragmented financial planning initiatives sponsored by insurance companies and mutual funds with a focus on product promotion. “Certified financial planners are usually quite young and also affiliated to some financial institution and, therefore, biased towards products of their companies,” Bidani says.
He recommends making pension contributions mandatory, regardless of service duration, to help build a retirement fund for individuals. One approach is the introduction of a single Universal Account Number (UAN) for provident funds, simplifying the transfer and tracking of PF balances for employees—a significant improvement in the past decade, he notes.