PENSION MARKETS AND

PRODUCTS IN INDIA
 PRODUCTS
What is the right product?
 Flexibility in time and
amount of deposit
5
Low tax benefit 4 Account in your own name

3
Paid to nominee if you die 2 Portability of the account
or after retirement
1

Pension payment for the Earn Interest on your

rest of your life deposits

Save in this acount till your Opportunity to change

old age your choices
Urban Rural
 THEORY AND PRACTICE
• The idealised retirement pension product design

- all workers are covered by the arrangements

- participation is mandatory
- costs are shared by workers, employers & government
- contributions are fully vested and preserved throughout the
full working life of the contributor
- benefits deliver an adequate earnings replacement rate
sufficient to maintain living standards in retirement

• In practice this has not been comprehensively achieved and

the current international trend is a retreat from one or more of
these features because of financing pressures
ACHIEVING THE BEST BALANCE
• With voluntary pension schemes the central issue is what balance to
strike between public policy objectives and achieving high pension
take up

- Economic: Sustainable public spending

- Financial: Prudent and orderly investment practices
- Social: Wide coverage & adequate retirement incomes

• There are many difficult judgements that need to be exercised here

in India’s case including political judgements

• The ADB products expert accordingly followed an options approach

to product design
 PENSION ACCUMULATIONS
• Summary of Recommendations

• Accumulation Phase:
- Four investment choices (conservative/moderate/balanced/lifecycle)
- Default option – conservative

• PFRDA regulated fees with full disclosure rules

• Minimum balance rules that protect against fee erosion of small accounts
• Level playing field for tax treatment of pension and competing investments
• Level playing field for Pension Fund participants
• Investment spreads limited to three PF’s at any one time
• One free switch permitted annually
• Consider subsidies for contributors whose incomes are too low to benefit from
tax breaks
 BENEFITS
• Benefits Phase

- Minimum preservation age of 60 years

- Mandate life cover as a survivor benefits scheme (Rs. 100K
cover on a reducing scale from age 30 to zero at age 60 with
premiums debited to Tier 1 accounts)
- Accumulations above a stated amount to be annuitised as a
life annuity
- Term annuities to be offered and indexed annuities available
under market conditions for high worth retirees
- For those with insufficient balances to purchase annuities
phased withdrawals to apply
 SUNSCRIBER SERVICES
• Subscriber Services

- Plain language advising on investment options and PF

performance
- Accessible and speedy complaints resolutions mechanism
to be instituted
- Financial advisory services to be offered
 NPS MARKETS
Growing the NPS market
 IDENTIFYING THE CONSTRAINTS

• NPS is to be based on voluntary

participation with minimal public subsidies
for contributors

- Participation levels therefore will be

driven principally by consumer sentiment

NPS pensions will be sold not bought

IDENTIFYING THE CONSTRAINTS

• Savings preferences presently operate

over relatively short-term time horizons
and are investment driven

- A psyche change is required for

voluntary pensions to gain a foothold in
the market

Psyche change must be actively cultivated

IDENTIFYING THE CONSTRAINTS

• Pension products have a low profile

presently among Indian consumers

- Effective profiling of pension utilities for

workers is required

- Achieving this will require long term

commitment
IDENTIFYING THE CONSTRAINTS

• Lack of data on the savings capacities and

preferences of workers for informed decision
making

- Evidence led decision making is not possible

until the necessary data sets are created

ADB data is a good beginning but more is required

KEY OBJECTIVES OF THE ADB SURVEY

1. Assess the potential size of the market in India

for NPS pensions at the present time

2. Provide a facility for segmenting that market

3. Provide guidance for shaping NPS marketing

and sales strategies
 SIZING THE MARKET
• Total size of the Indian labourforce = 425 million
(excludes child labour)
• Of these 85% (363million) are paid workers
• Of the 363 million 5.5% ( 20 million) are ready
immediately to join the NPS based on three criteria:
1. Financial capacity to pay adequate pension
contributions (based on reducing discretionary
expenditure and not redirecting existing savings)
2. High interest in the pension option
3. Aged 30 to 50 years
 SIZING THE MARKET
• 20 million unorganised sector workers are ready immediately to join the NPS if
effective sales and marketing tools are put in place

• The 20 million estimate is conservative as:

1. Some older and younger workers will join
2. Some contributors will switch existing savings to pension contributions

• Importantly the composition of the 20 million includes significant numbers of

rural workers as well as urban workers and includes workers on modest incomes
(<Rs. 30000 a year) as well as higher income groups

• Future NPS growth needs to focus on capturing real increases in earnings and
time series data needs to be created for this purpose
 SEGMENTING THE MARKET
• Farmers = 5.8 million
• Small Retailers = 5.3 million
• Street Vendors = 0.7 million
• Self-employed = 3 million
• Small/medium manufacturers = 0.3 million
• Skilled/semi-skilled wage earners = 2.5 million
• Salaried employees in small firms = 1.5 million
• Others = 0.7 million

• Over 50% of these have incomes of less than Rs. 100K a year.
 ENTERING THE MARKET:
Cross Selling
• 19% have neither a bank or Post Office savings accounts
• 8% bank exclusively with the Post Office
• 56% bank exclusively with banks (one in eleven of whom have
accounts with more than one bank)
• 17% have both Post Office and bank savings accounts and
• 44% are customers of life insurance institutions

• Conclusions
- banks and life insurers are positioned be the key players in
cross selling
- nearly 20% of the prime audience is outside the ambit of
cross selling opportunities
 ENTERING THE MARKET:
Public Confidence
INSTITUTION Percent That Actively Mistrust the
Institution
India Post 0-2%
Nationalised Banks 0-2%
Regional Banks 7-30%
Cooperative Bans 14-32%
Private Banks 45-57%
Chit Funds 26-53%
LIC 1-9%
Private Insurers 35-58%
Mutual Funds 10-35%
Employers 31-38%
 ENTERING THE MARKET
The Role of Commissioned Agents
• Sales efforts based on agent sales forces are problematic
for the NPS that must operate on small margins to
promote participation by lower income groups

• Seeking alternatives to existing practices will be

important

• For NPS commercial partners there may be opportunities

to explore this issue more generally for other financial
products where commission taking is causing problems
 ENTERING THE MARKET:
Public information and Education
The Thematics of the NPS
1. People may fall into poverty in old age as they are not saving enough
presently to maintain living standards in retirement (already resonating)
2. There will be less joint and extended family support for the aged in the
future (already resonating)
3. A comfortable retirement is worth saving for (already resonating)
4. Pensions are a means of providing financial security for wives and other
family members of contributors (not resonating)
5. Longevity is extending and with it the need to save more for old age (not
resonating)
6. The financial capacity of Government to financially support the aged will
continue to be limited (not resonating)
7. Opportunities for extending working life into old age may be more limited
in the future (not resonating)
8. Economic restructuring may mean periods of unemployment for those in
traditional occupations
 ENTERING THE MARKET:
Delivering the Message
• The data points clearly to a number of issues that need to be considered
carefully and “planned in” before launch:

1. Heads of households are the key financial decision makers (90% of

households) so targeting marketing efforts will be important
2. 20% of agricultural and wage workers (1.5million) are illiterate and a
further 20% (4 million) are functionally illiterate so oral messaging will be
important
3. Financial literacy is low generally so supportive financial advising systems
will be important
4. Media access and habits vary greatly between segments with relatively
low penetration except for high income groups so media advertising will
need to be segmented and targeted
5. Scheduled castes & tribes exceed 10% in most segments and are high in
some (>30% for wage workers) so NPS network access strategies will
need to be sensitive to these customers access preferences
 ENTERING THE MARKET:
Test Marketing?
• Because of its size and complexity there are obvious
dangers in attempting national implementation of the
NPS from a cold start
• The experience of unsuccessfully marketing voluntary
pensions in the past in India should be seen as
salutatory also
• Test marketing offers an opportunity to assess products,
sales & distribution approaches, financial advisory
services, monitoring & evaluation tools and management
information systems
• It is possible from the data to identify optimum test
marketing locations
 CONCLUSIONS
1. There is a significant dormant market for
voluntary pensions in India that extends across
economic sectors and occupational groupings
and down the income distribution

- Capturing this market will be primarily a

matter of effective marketing
 CONCLUSIONS
2. The ADB project demonstrates the value of
evidence led planning and the national data set
created as part of the project provides a sound
foundation to guide the NPS implementation
plan

– For PFRDA continuing in this vein by

extending and supplementing the data over
time will be important for long-term growth of
the pension market
 CONCLUSIONS
3. There are lessons also for the Indian financial sector
generally in respect of other financial products

- The data reveal marketing opportunities among low

and lower middle income earners that to date
appear not have been exploited fully by the Indian
financial sector

- Investing in evidence led decision making to develop

these markets will be important for growing
banking, insurance and equity markets generally in
India