As Outlook Money’s 40after40 Retirement Expo gathered steam with hot discussions and speeches, Deepak Mohanty, Chairman of the Pension Fund Regulatory and Development Authority (PFRDA), asserted that having a pension account in their savings portfolio is a must for everyone. “Why should you have a pension as part of your savings portfolio? Because it is like an Indian Thali, you need a little bit of everything. It should have a healthy mix of savings, equities, mutual funds, pension accounts, etc., to make it a wholesome meal. Pension should be on the menu of the saving portfolio,” Mohanty said.
Mohanty started his speech by congratulating Outlook Money and said, “It is very thoughtful of Outlook Money to have this programme on retirement, and not many think about it.” Mohanty emphasised the need for a pension account and said that people of all ages ask him when they should have done retirement planning, and he would tell them “Yesterday”. “That means it is already late. When people in their 30s start thinking about retirement, they get flabbergasted knowing the amount they have to put in to get a substantial retirement corpus,” he added.
Regarding the retirement corpus, he said there are different players, such as the employee provident fund, insurance companies offering retirement savings, mutual funds, and then PFRDA, which manages two funds, the National Pension System (NPS) and Atal Pension Yojana (APY). He said that when all that is put together, the corpus adds up to 16.5 per cent of the GDP; out of that, NPS is just 3.5 to 3.6 per cent.
“In rich countries, people retire with three incomes. But despite incomes, there is old-age poverty. The personal, social and healthcare costs go up. So, there is merit in starting early,” he stressed.
So, why don’t people in India do it?
Referring to surveys, he said less than a quarter of people in India think of retirement savings. Also, financial literacy is relatively low, at around a quarter. “Even people with good degrees lack financial knowledge. Globally, the average is around 1/3rd,” Mohanty said.
The PFRDA Chairman warned that one should be mindful of inflation risk and explained the rule of 72. “The rule of 72 suggests that if you have a crore rupee now, you will be happy, but with a 6 per cent inflation rate, in 12 years it will have the value of Rs 50 lakh, and in 24 years it will become Rs 25 lakh and in 25 years of working life it will be around Rs 12 lakh which is not a big corpus. Hence, there is risk.”
Explaining the power of compounding, he said it reverses the rule of 72 and should be followed.
Ruing the lack of financial literacy and formal sector employment in India, he said, “This is not happening partly because of the nature of the workforce. In our case, at least 80 per cent of the people work in the unorganised sector. So, there is no statutory social security available to them. Formal sector people have it. What can they do then? Miracles won’t happen; they will have to provide for themselves. It is a big challenge.”
Stressing the need for multiple pension accounts, he said, “It is believed if one head of the family has a retirement account, it is a financial nirvana for the whole family. It is not like that.” People who can afford it, he said, should also open accounts for their spouses and children.
Mohanty highlighted the need for an NPS account, saying, people who retire with a lot of money also don’t have happy stories as the money runs out due to lifestyle issues. “But if you have a pension, it helps you throughout life, and then it passes on to your spouse, and hence, it is helpful. It is not a substitute. Those who have not taken it must have it,” he said.
“The corpus has expanded to Rs 11 lakh crore and is giving very good returns as professional fund managers manage it. The return coming is 13.3 per cent. Take the debt-equity combination. If you don’t want risk, then you can take lifecycle funds. NPS gives you continuity,” Mohanty added.
IRDAI has relaxed the norms for submitting of separate proposal forms for buying annuity products from the proceeds of the National Pension System, thereby making the process more user-friendly and less time consuming