Pension Market in Sri Lanka & trend World-wide. D a t e : 1 0 t h D e c e m b e r,

Transcription

1 Pension Market in Sri Lanka & trend World-wide D a t e : 1 0 t h D e c e m b e r, Niyati Pandit Ganesh Sudrik

2 Population of Sri Lanka in ,277, % of the world s population. Population Increased by 7.9% since Average annual growth is 0.7% between Thus population is still growing but at a lesser rate.

3 Decreasing trend in growth rate since the Census of Decline due to difference in birth and out migration.

4 Population over 60 years old is expected to increase from 12.5% to 16.7% in Improvement in mortality. Life expectancy is much higher for age above 60 years as compared to other Asian countries. Increasing number of people above 80+

5 Source: CIA World Fact book

6 Year Rate Source: CIA World Fact book

7 In 1990 In 2010 In 2020 (Estimated) In 2050 (Estimated)

8 A regular income paid to a person following retirement from the service. Paid in instalments Pension systems exist to satisfy two main goals to tackle poverty in old age by providing a minimum income to smooth consumption over the life-cycle

9 Access to Approved Pension Plan, not more than 10% to 15% of total population There are two major challenges facing the existing pension system in Sri Lanka: coverage is low, with around 85% to 90% of older people unable to access a regular pension; and, even for those who can access a pension, many find that the actual level of the benefit they receive is well below the poverty line. If Sri Lanka is to be successful in tackling old age poverty, there needs to be a fundamental shift in pension policy.

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11 Defined Benefit Scheme Defined Contribution Scheme Hybrid Scheme

12 Defined Benefit Pension Easy to Understand and Calculate Easy to maintain if Membership is Large Unlimited Liability on Provider Transfer Values Difficult to Arrive Volatile Contribution Rates Sensitive to Economic and Demographic Changes Popular within Receiver World Moving from this Scenario Defined Contribution Pension Difficult to Predict With Current Technology not difficult to manage large membership Limited Liability on Provider Transfer Value Easy Smooth Outflow for Provider Less Sensitive to Economic and Demographic Changes Popular within Provider Globally Accepted Schemes

13 Numerous methods are available Method can be chosen depending upon the situation Most Commonly used methods are Current Unit Method Projected Unit Credit Method Aggregate Method

14 Step 1 : Expected CashFlow considering all decrements Based on Accrued Benefits Year 1 Year 2 Year 3 Year 4 Year 5 Year 6. Time Line Step 2 : Taking PV of all future CashFlows i.e. Value of past service liability on current earnings

15 Projected Unit Credit Method Step 1 : Escalated Expected CashFlow considering all decrements Based on Accrued Benefits Year 1 Escalated Year 2 Escalated Year 3 Escalated Year 4 Escalated Year 5 Escalated Year 6. Time Line Step 2 : Taking PV of all future CashFlows Value of past service liability on projected earning

16 Accumulation Phase Payment Phase Time Line PV of Past Service Liability PV of Future Service Liability PV Future Service Contribution Entry Age Current Age NRA Net Liability = PV Past Service Liability + PV of Future Service Liability -{Accumulated Corpus + PV Future Service Contribution }

17 Pay-as-you-go Company Manage Trust Fund By In-house Management By Purchasing An Annuity from an Approved Insurance plan

18 Level annuities Guaranteed annuities Inflation-linked annuities Joint-life or Last-survivor annuities Life + Return of Capital annuities Investment-linked annuities

19 Issues Less accumulation phase & long payment phase Longevity Risk Investment Risk Low NRR Fall in Birth Rate & Improvement in Death Rate Most probable reasons Due to Retirement age criteria Increase in Life Expectancy Less deep Market for G. Sec Rates Availability to Only Lump sum benefit Urbanization

20 Market Globally Europe/ UK, DB plans on PAYG, tax burden increasing Minimum Funding Requirement to Fund the scheme now US 401k Plan, allows individual investment choice, Pension and medical bill to govt is around 26% of GDP Gulf Countries have DB pension plan Recently Monetary cap has been introduced India Recent move to DC from DB, EPS 95 is Hybrid scheme with limited contribution and cap on pension

21 Indian Market Both DB & DC schemes are not new in India Govt., Banks, Nationalized Insurance Companies and Certain Financial Institutions also Devised Defined Benefit Pension Scheme By Diverting Employer s PF Contributions..But have shifted to DC scheme with a cut-off date NPS option is made available to everyone Approved insurance plans are available Tax Advantage for contribution pension plans Benefit in Cash instead benefit in kind

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23 Scheme funding Investment Scheme design Managing risk Corporate transactions Individual benefits

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