The RBI report expresses the need to develop the pension sector, but fails to focus on other major issues
The Reserve Bank of India (RBI) in its latest Financial Stability Report (FSR) mentioned that more steps are needed to “boost the annuity market to deepen and widen the pension sector”. The RBI laments that though 40% of the pension wealth needs to be annuitized for a regular stream of income, this may not be providing the optimal outcomes in terms of returns. Moneylife Research has found that annuity products from insurance companies yield just about 6%-7% pre-tax at best
. Thus, RBI expresses the need to develop deferred annuity and other post retirement products, which ensure optimal post-retirement returns to subscribers. However, the FSR fails to address several other issues that riddle retirement products.
There is no dearth of retirement products available. Provident fund from the Employees' Provident Fund Organisation (EPFO), annuity and pension plans from insurance companies, retirement schemes from mutual funds, the national pension system (NPS) and the Atal Pension Yojana (APY) from the Pension Fund Regulatory and Development Authority (PFRDA), and other schemes offered by the post-office. Of these, incentive to sell is maximum for insurance products where regulation is lax and returns are the worst. Not surprisingly, insurance products are mis-sold the most. Therefore, there no need to develop and create more choice and confusion among consumers. There is a need to improve upon and promote right products effectively.
The FSR report also expressed a need to align investment framework for government employees. “The choice of pension funds and investment patterns should rest with an individual employee. There is a need for shifting the risk from employer to the employee, where the onus of ‘funding’ old age income security moves from the employer to individual employee, through his/her individual retirement accounts,” the report stated, with the focus to deepen and widen the pension sector.
The FSR fails to touch upon the product design, taxation or regulation of various pension schemes available. The products are all structured differently and fall under different rules of taxation, even through they are meant to serve the same investment purpose. For example, in NPS, the investment is locked till retirement, however, in the case of mutual fund retirement plans, the lock-in period is just five years and an exit load of just 1% charged if withdrawn before retirement. Under equity linked savings schemes (ELSS), the lock-in is just three years. Similarly, in PPF, the interest is tax-free where as for other fixed-income products targeted at senior citizens, such as senior citizens saving scheme (SCSS), the interest is taxable.
With the diverse structure of pension schemes, each product falls under different regulator. Therefore, PFRDA, Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDAI), all have their own set of rules governing each product category, creating more confusion for savers. The cost structure and tracking of mutual fund schemes has been made very transparent. This is not the case in insurance products.
The report further mentions that the socio-economic implications of nurturing pension sector can be derived from the fact that the government is presently spending about 2.2% of the GDP on pension payments, which, according to one estimate may reach 4.1% of GDP by 2030. The PFRDA seeks to ensure that benefits of a sustainable pension system reach out beyond present target groups without straining the fiscal discipline and simultaneously providing long-term investment funds for the economy, it states. However, for this to happen, several changes in the design, taxation and regulation of pension products is needed.