Allocate more of you pension money to equities for better returns

But it should be balanced and choice should be given to subscribers

Should pension subscribers be allowed to invest more in equities? A recent report by Crisil and the Pension Fund Regulatory and Development Authority (PFRDA), titled “Financial security for India’s elderly,’’ suggests so. The report identifies problems of the pension sector as low coverage, low contributions and persistency. 

For the unorganised sector, the report suggests that the government can look at providing a) flexible payment and withdrawal options, b) monetary incentives for the lower income strata, c) exclusive pension schemes for women, and d) improved financial literacy and intermediation.
 

For the organised sector, the report suggests improving the asset allocation. “The pension system under this pillar is skewed towards debt, compared with global peers, which are strongly invested in equity. The debt skew is despite the demographic advantage the country has and is expected to enjoy over a long term. The young population has a long-term investment horizon, which calls for greater allocation to a long-term asset class such as equity for wealth creation, to meet the needs in sunset years. Additionally, there is a section of workforce which is not covered under any form of retirement products. The government can look at auto enrollment of people who are part of the ‘employee–employer’ set up but are not covered due to various reasons,’’ the report says.
 

Exposure to equity is an advantage and will provide an opportunity for optimising returns, beating inflation and preserving wealth for retirement said Anil Lobo, India Business Leader-Retirement, Mercer. But it should be balanced and the choice should be given to pension subscribers. As subscribers may not be mature enough they could get worried during periods of market volatility. For such subscribers the lifestage fund of the National Pension System where allotment is as per your age is suitable.
 

“Recently the PFRDA has brought in along with the life stage fund two other funds-conservative and aggressive life stage funds. These funds allow someone who can withstand the risk to take a more aggressive exposure to equities,’’ he says.

About allowing subscribers flexible payment and withdrawal options, Lobo says it is tricky. “Flexibility of withdrawal should be allowed only in extreme conditions like it is allowed in the provident fund now because otherwise, it will defeat the whole purpose of saving for retirement. This is essentially today’s income being deferred for future,’’ he said.
 

Awareness about the need to create the wealth for life after retirement is still lacking among employees. Today with the increasing inflation and rising lifestyle costs, one should ideally plan for a post-retirement income of 70-80 per cent of current income Lobo adds.