Financials

Changing Paradigm Of Pension System In India

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<p>Are you looking forward to a beautiful Retirement life in India?&nbsp;</p><p>It's time you must rethink the happy retirement plans, argues the World's Pension Systems survey.&nbsp;</p><h2><span style="font-size: 14pt;">Global Pension Systems</span>&nbsp;</h2><p>The Pension Index maintained by The CFA Institute and consulting company Mercer, compared pension systems in 43 Countries. The database utilized statistics from the Organization for Economic Co-operation and Development (OECD) and other sources.&nbsp;</p><p>The report shows the top three countries with the best pension systems are: Iceland, the Netherlands, and Denmark.&nbsp;</p><p>India, however, ranked at 40/43. Thailand was ranked the lowest below the Philippines, Argentina, and India.&nbsp;</p><p>The US ranked 20th while newcomer Portugal came in at 24, Mexico in 29th place, and Mainland China was ranked 36.&nbsp;</p><p><strong>Recommendations</strong>&nbsp;</p><p>The report also recommended that the retirement age be lifted in the face of threats from aging populations, ballooning Government debt, and shrinking birth rates.&nbsp;</p><p>The report argued that existing socio-economic conditions like reduction in wage growth, rising inflation, and decrease in Investment Returns are also placing additional pressure on the retirement income systems.&nbsp;</p><p>With the decline in fertility rate and growth in life expectancy, the United Nations predicts the World population aged 65 or over will rise from 9.7% this year to 16.4% in 2050.</p><h2><span style="font-size: 14pt;">Pension System in India&nbsp;</span></h2><p>India has all the reasons to worry more about it. We are the second largest country on this planet in terms of population and a young nation in terms of the youth population. The population boom, if utilized properly, will put us years ahead, but if mismanaged can have a significant headache. We will have the same problems as Japan, etc., at one point regarding the workforce.&nbsp;</p><p>To perform well on a pension, India should take constructive steps like:</p><ul><li style="list-style-type: none;"><ul><li>Increasing the pension age,</li><li>Reducing Government debts,</li><li>Announcing a minimum level of support for the poorest people,</li><li>Reducing household debt.</li></ul></li></ul><p>&nbsp;</p><p>With an increase in the health infrastructure, life expectancy can be increased, further promoting higher labor force participation in older people leading towards more savings and limiting the retirement years. As individuals, we must understand that it's time to take the steering wheel into our own hands.&nbsp;</p><p>We need to look into the prospective investment avenues that will help us in the long term. One of the easiest ways to do it is by understanding that if your investment doesn't beat the inflation rate of the end tenure, then the investment is not worth it.&nbsp;</p><p>For instance, if you had invested X amount of money, which will be matured this year. This investment got you an 8% return then; it's not much worth it cause the current Inflation rate is 12.41%.&nbsp;</p><p>It's high time for employees, the government, and even organizations to address this issue. With changing dynamics of the economy and the shift towards industry 5.0, this minor today's issue will be a significant concern tomorrow.&nbsp;</p><p>&nbsp;</p><p><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/yugantarrathore/">Yugantar Rathore</a>&nbsp;</em></span></p><p>&nbsp;</p><h3><span style="font-size: 18pt;">Frequently Asked Questions Answered by Yugantar Rathore</span></h3><h2><span style="font-size: 12pt;">1. What is the new pension scheme of Govt of India?</span></h2><p>India's pension system shows a marginal improvement in the global ranking. In 2021 we were ranked 41 out of 44 countries. It will take us to make regulatory changes to strengthen the system more. The penetration of private pension systems in India is low, with 95% of the workforce being a part of the unorganized sector. Introducing New Labor codes will increase the system and coverage of the cover.&nbsp;</p><p>If we observe closely, we will also find that the government is decreasing the scope of the pension policy even in government jobs. Many job titles, like state teachers, are asking for old pension schemes. The people are not confident with the pension scheme based on investment in the secondary market. Nevertheless, taking regions into one's hands and opting for private funds is advisable because it will take us years to improvise the system. Currently, OPS was discontinued in 2004.</p><h2><span style="font-size: 12pt;">2. What is the difference between old and new pension scheme?</span></h2><p>Following are the observations on the difference between New Pension Scheme:</p><p>(NPS) and Old Pension Scheme (OPS).</p><ul><li style="list-style-type: none;"><ul><li>NPS is based on the Defined- Contribution Approach, while OPS is a Defined Benefit Scheme.</li><li>OPS is based on the last drawn salary, while NPS depends on a Corpus Fund. The Annuity Rate plays a vital role in the Purchase of the Annuity, making the pension Taxable.</li><li>OPS has no tax benefit, while NPS attracts benefits up to INR. 1.5 Lakh under 80C and additional benefits up to INR 50,000 under 80CCD.</li><li>OPS has coverage only for Government employees, while NPS will bring more employees under the pension umbrella.</li><li>NPS puts less burden on the government as the NPS is more dynamic and divides the expenses as it's an investment cum Pension system.</li></ul></li></ul><p>&nbsp;</p><h2><span style="font-size: 12pt;">3. What are the major factors that affect a person's retirement income?</span></h2><p>Various variables affect the Pension of an individual. The key ones include the following:</p><ul><li style="list-style-type: none;"><ul><li>Inflation is one of the key factors as it affects the buying capacity of money. So, the Value of money is not the same. The Significance of INR 100 was more in 2001 than today.<br />Presently, our Inflation rate stands at 7.4% (Headline Inflation). So, it's tough to choose a pension plan which will beat the Inflation rate in the year of retirement and after that.</li><li>The second vital factor is Medical Expenses. With time the medical expenses will increase, and the cost will also be significantly higher. So, one cannot only depend on the pension system to cover the Increasing Medical Expenses.</li><li>Contingency expenses are also a significant variable. Expenses related to debt, lifestyle, Traveling, Kid's education or kid's marriage is also a factor that will judge the efficiency of the pension fund.</li><li>Lastly, pension funds are also affected by Market Risk and micro and macro changes in the economy. If the pension scheme is based on the secondary market, the market trend will be an essential factor to consider.</li></ul></li></ul><p>&nbsp;</p><h2><span style="font-size: 12pt;">4. How are pensions protected from inflation?</span></h2><p>There are many ways to curb the effect of Inflation on pension funds. The key ones include:</p><ul><li style="list-style-type: none;"><ul><li>Develop investment habits for generating various sources of income after retirement. The Average Market return is around 12% which is good as one will not be the defendant only on the Pension for the expenses.</li><li>Using Investment in MFs and commodities is also a good option. The future of the global economy looks promising, with some hiccups in between. So, an investment made now will bear fruits in the long run. We have to remember that diversification is the key.</li><li>Starting early and staying long is also a good approach. The early one starts investing in the right Retirement plan to secure the future, and with the time value of money concept, the buying power of money decreases over time, so Buying shares today will allow us to<br />crack the right deals at the right time.</li><li>Planning well for the Pension is always a good strategy. The key variables to look into are the Tax benefits and the calculation of Contingency expenses for the future. Once we calculate it, we can find the best way to cover those expenses in the future.</li></ul></li></ul><p>&nbsp;</p>
KR Expert - Yugantar Rathore