An effective social net is the need of the hour

MUMBAI: The insurance and pension business is all about providing guarantees. The beneficiary expects guaranteed income at retirement and guaranteed survival or death benefits.

Insurers and pension fund managers take the risk off an individual’s personal balance sheet, put it on their balance sheet, pool it with others and find ways to hedge it in the marketplace, so that they can provide some comfort to these beneficiaries who relied on them.

The situation facing life insurance and pension fund managers today is very different from the one faced by their predecessors. The risks are much greater and the uncertainties are terrific.

For example, pension and medical benefits, if completely funded, may face insolvency problems. The capital markets are much more globally integrated and more volatile.

Faced with the twin requirements of being micro-social guarantors and managers of ever-increasing risk of the economic order, fund managers absolve themselves from these twin roles and quietly proclaim them as wealth managers.

The biggest fear of those who have wealth but no fresh working income is that they are going to run out of money. If at all they are untouched by the fear, it is not because they are out of danger, but because they have, what management experts say, lump-sum-illusion.

So what insurers and pension fund managers do is provide guarantees that will have a stream of income for life, regardless of how long they live. There are people at one end of the spectrum who plan for retirement and worry about running out of money, but they have done some good planning.

At the other end, there are people who have done very little planning and have accumulated very little and don’t know what they are going to do.

Of course, in India, we have a vast majority of people with no current disposable income to plan for future. Even at present, the unorganised sector with some disposable income does not know the institutional mechanism to plan for future.

The big problem is that conventional wisdom is wrong in respect of old age. The world revisits its definition of old age. When in 2026, India may have an average life
expectancy of 75 years, how can working age stop at 60 years?

In the US, a couple at age 60 today has a 62% probability that one of them will be alive past 90. So they are not planning for 15 years, they are planning for 30 years or more.

India has started witnessing the same phenomenon even now and it will be more acute by 2026. It is a thumb rule to have work- life retirement planned to coincide with life expectancy at birth.

It is redeeming to know that India is likely to generate a birth rate of 1.2 by 2026 and per woman replacement rate may fall below 2. This will give less youth pressure for old to retire from work life early.

The economy must slowly but steadily adjust to this reality so also the life insurer and pension fund manager.

To plan for such demographic transitions, India has to focus on greater risk management and risk prevention and mitigation. For this, the country has to look at institutions like life insurers and may be pension fund managers, too.

They have to guarantee the citizens for a fee, which they should realise for their expertise in managing funds in a dynamic and risky market.

The writer is director, National Insurance Academy, Pune