Overview of retirement adequacy and impact of NPS

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1 Overview of retirement adequacy and impact of NPS Anuradha Sriram 21 August 2015

2 Retirement adequacy - What is the issue? 2

3 We are a country of high savers Average annual savings as a percentage of income Age China India 18 to % 20.6% 25 to % 24.3% 35 to % 25.0% 45 plus 30.5% 22.4% Total 34.6% 23.5% Over a quarter of respondents invest their savings in property in India and China but do not perceive a housing crash as a major risk to adequacy of retirement funding Many save in bank deposits and insurance where returns are typically low and would not keep pace with inflation * Source: TW Savings attitudes survey (India and China) Towers Watson. All rights reserved. 3

And the net replacement ratios are not bad too As published by OECD INDONESIA HONG KONG JAPAN MALAYSIA UNITED KINGDOM SINGAPORE NEW ZEALAND KOREA PHILIPPINES UNITED STATES THAILAND SRI LANKA GERMANY

4 And the net replacement ratios are not bad too As published by OECD INDONESIA HONG KONG JAPAN MALAYSIA UNITED KINGDOM SINGAPORE NEW ZEALAND KOREA PHILIPPINES UNITED STATES THAILAND SRI LANKA GERMANY CANADA INDIA OECD34 PAKISTAN AUSTRALIA VIETNAM FRANCE ITALY CHINA Average (mean) earners OECD South Asia East Asia/ Pacific % The net replacement rate is defined as the individual net pension entitlement divided by net preretirement earnings, taking account of personal income taxes and social security contributions paid by workers and pensioners * Source: Pensions at a Glance Asia/Pacific Towers Watson. All rights reserved. 4

5 Are we saving in the right investments though? APPENDIX TABLE 3: GROSS DOMESTIC SAVING AND INVESTMENT Per cent of GDP at current market prices Amount in ` billion Item Average to SRE Per cent of total * Average to Household Saving (Net) (a+b) ,308 18,329 20,037 a) Financial Assets ,748 8,083 7,195 48% 36% b) Physical Assets ,560 10,246 12,842 52% 64% Source: RBI annual report 2013 (CSO data) SRE : Second Revised Estimates. *: First Revised Estimates Towers Watson. All rights reserved. 5

6 The apathy of the formal pension system India s formal pension system is a mere 12% Of GDP Growth Rate USD 10-Year CAGR (until 2012) Total Assets 2013 (USD Billion) % GDP (Local Currency) Australia 18.2% 1, % Brazil* 20.4% % Canada 7.0% 1,451 80% France 4.6% 169 6% Germany** 10.3% % Hong Kong 14.4% % Ireland 12.7% % Japan*** 5.0% 3,236 65% Netherlands 9.1% 1, % South Africa 13.2% % Switzerland**** 8.2% % UK 9.3% 3, % US***** 6.5% 18, % Total 7.3% 31,980 83% ^ Source: Global Pension Assets Study 2014 ^ Based on assets estimated as at 31 December 2013 * Refer to the full report 2015 Towers Watson. All rights reserved. 6

7 What are the issues then.. Very little social security and Low Mandatory benefits providing sub optimal income replacement Lump sum retiral benefits Increasing Life expectancy Persistent and high inflation 2015 Towers Watson. All rights reserved. 7

8 How can NPS play a role? 8

9 National Pension System The Journey and its about to step up Retirement Benefits National Pension System (NPS) Mandatory Voluntary EPF/EDLI/EPS Gratuity Leave Encashment Superannuation DC National Pension (only entitlement Pension DB System (NPS) and C/F mandatory) Post retirement Medical PFRDA established Interim basis established by an Ordinance Central Government employees with effect from 1 January 2004 implemented April 2008 S No NPS All Citizens Model launched April 2009 NPS Lite Model launched 2010 No of Subscibers as on 31st March 2015 NPS Corporate Model launched late 2011 Pension Fund Regulatory and Development Authority Act 2013 No of Subscibers as on 31st July 2015 Percentage Growth Total Contribution as on 31st March 2015 NPS Corporate Model becomes more popular Budget 2015 introduces more tax benefits for NPS. Companies asked to give option between NPS and EPF Partial withdrawal allowed in select cases Total Contribution as on 31st July 2015 Percentage Growth AUM a s on 31st March 2015 AUM as on 31st July 2015 Percentage Growth Scheme 1 Central Government 1,511, ,552, % 27, , % 36, , % 2 State Government 2,630, ,732, % 29, , % 36, , % 3 Corporate Sector 373, , % 4, , % 5, , % 4 Unorganized Sector 86, , % % % 5 NPS Swavalamban 4,146, ,468, % 1, , % 1, , % Total 8,748, ,251, , , , , Source: PFRDA website as on End July Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 6

Who s who in the NPS structure Regulator Mostly Public / Private Sector Banks, and Investment

India (SHCIL) NPS Trust Supervision of PFMs * The fund manager enrollment process is under way for

10 Who s who in the NPS structure Regulator Mostly Public / Private Sector Banks, and Investment firms Point of Presence Trustee Bank Central Recordkeeping Agency Axis Bank National Securities Depository Ltd. (NSDL) Pension Fund Manager Custodian 8 empanelled Fund managers* Stock Holding Corporation of India (SHCIL) NPS Trust Supervision of PFMs * The fund manager enrollment process is under way for this year Annuity Service Provider 7 Firms empanelled Source: PFRDA 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 10

11 Key Parties in the NPS 8 Empanelled PFMs HDFC Pension Management Company Ltd ICICI Pru Pension funds Management Comp. Ltd. SBI Pension Funds Pvt. Limited LIC Pension Fund Limited UTI Retirement Solutions Limited Kotak Mahindra Pension Fund Limited Reliance Capital Pension Fund Limited A proposed PFM to be floated by BSLI 7 Empanelled Pension Providers Life Insurance Corporation of India ICICI Prudential Life Insurance Co. Ltd. Bajaj Allianz Life Insurance Co. Ltd SBI Life Insurance Co. Ltd. Star Union Dai-ichi Life Insurance Co. Ltd. Reliance Life Insurance Co. Ltd. HDFC Standard Life Insurance Co. Ltd. 64 Points of Presence ICICI bank, HDFC Bank, SBI etc Source: PFRDA 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 11

12 Investment choice is at two levels 1. Selection of PFM All Fund managers have same fund options and same guidelines and investment patterns 2. Selection of asset classes Active Choice Choose allocation Auto Choice Default allocation based on age G Up to 100% in G (Government Securities) C Up to 100% in C (Corporate Bonds) E E Up to 50% in E (Equity) Auto Choice Sample ages from prescribed allocation table 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 12

13 Details of NPS Details of NPS Taxation Section 80 CCD (1) within the overall 80 CCE Description For Employees Employees own contribution of 10% of Basic salary within the overall cap of 1.5 lakhs Revised Limits after budget 2015 In addition to above under 80 CCD 1 (B) A new section which gives benefits only for contribution to NPS 10% of the (Basic+DA) within the overall 1,50,000/- 50,000/- 80 CCD (2) Contributions made by employer of upto 10% of the (Basic + DA) in addition to the benefits under 80 CCE 10% of the ( Basic + DA) Section Description For Employer 36 (1)(IV)(a) 10% of the salary (Basic +DA) of employer contribution can be deducted as Business Expenses from the P&L 10% of Basic +DA 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 13

14 Details of NPS Details of NPS Benefit Payment Withdrawal & Exit Usage of Corpus Lump sum Pension Before age 60 Up to 20% Min of 80% At age 60 Up to 60% Min of 40% At age before 60 (balance less than Rs 100,000) At age at or after 60 (balance less than Rs 200,000) Option to take all as lump sum Optional deferment of proceeds at retirement Up to age 70 Up to 3 years Partial Withdrawal can be done 3 times during the lifetime with a minimum gap of 5 years Partial Withdrawal is allowed upto 25% of the contributions made by the member excluding contributions made by the employer. This is for the following purpose - Marriage - Children education - Building/purchase of house - Medical emergency list of 13 critical illness provided. 25% NA 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 14

15 Annuity Purchase option Annuity Option Description Tier Description II Life Annuity Annuities payable for annuitant s life Life Annuity with return of purchase price Annuities payable for annuitant s life Return of original purchase price to beneficiary on annuitant s death Life Annuity guaranteed for 5/10/15years Annuities payable to annuitant/ beneficiary for 5/10/15 years irrespective of the annuitant s existence If annuitant lives beyond the stated years, annuities payable for his/her life Joint Life Last survivor Annuities payable to annuitant for life and after death to his/her spouse (if alive) for life Joint Life Last survivor with return of purchase price Annuities payable to annuitant for life and after death to his/her spouse (if alive) for life Original purchase price returned to beneficiary on spouse s death 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 15

16 Key Components of the Charges Intermediary Charge head Service charges* POP (Maximum Permissible Charge) CRA PFM charges Initial subscriber registration Contribution uploads and Transactions Rs 100 Contribution uploads: 0.25%**, Min Rs 20 and Max Rs 25,000 Other transactions: Rs 20 Opening charges Rs 50 Annual Maintenance cost per account Rs 190 Charge per transaction Rs 4 Investment Management Fee Prescribed 0.01% p.a.**** Method of Deduction To be collected upfront Through cancellation of units Through NAV deduction*** *As at October 2013 Offer Document ** Minimum charges apply *** Custodian charges are in addition of % p.a for Electronic segment and 0.05% p.a. for Physical segment **** Revised effective 1 August 2014 Source: PFRDA 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 16

17 Impact of NPS Overall, there is recognition that the NPS will play a significant part in pension provision in India in the medium term. However, the perception is that it will really take off once NPS is given a level playing field as far as tax, as compared to other retirement avenues in India The following would propel the growth of NPS in future Additional tax incentives implementation of fungibility between EPF and NPS introduction of the guaranteed returns product greater awareness and a robust investment governance and performance record 2015 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 17

AGENDA. 1 Background. Need for Pension Reform. 3 NPS Introduction. 4 Features of NPS. 5 Current status of NPS

AGENDA. 1 Background. Need for Pension Reform. 3 NPS Introduction. 4 Features of NPS. 5 Current status of NPS Pension Fund Regulatory and Development Authority New Delhi AGENDA 1 Background 2 Need for Pension Reform 3 NPS Introduction 4 Features of NPS 5 Current status of NPS 2 DEMOGRAPHICS Nearly 100 million