 "EPF")
According to the Global Benefits Attitudes Survey, conducted by global professional services company Towers Watson, minimal social security benefits and inadequate awareness about suitable retirement savings vehicles is what makes employees in India put greater importance on employer-based retirement benefits.
As with R P Trivedi, a Nagpur resident. Six years away from retirement and he's happy his Employee Provident Fund (EPF) corpus will now provide a higher contribution towards his pension. Thus, helping him save some more for his sunset years as he has not been able to save much due to various family responsibilities.
Since September, the basic wage ceiling taken for calculation towards the pension arising out of one's provident fund calculation has been revised to Rs 15,000 a month, in place of the earlier Rs 6,500.
Every month, 12 per cent of the wage goes into the EPF account and the employer matches the contribution. Of the employer's contribution, 8.33 per cent goes into the Employees' Pension Scheme (EPS), which offers pension from the age of 58 years.
With the ceiling for pension calculation being raised, one is likely to accumulate more than double the amount one would have done under the earlier ceiling. For many salaried individuals, this can help relieve some anxiety with regard to retirement saving. Also, as EPF Organisation pays 8.5 per cent interest on the corpus, and completely tax-free.
Accumulation
Assume a 35-year-old employee earns a gross monthly income of Rs 50,000, with a basic of Rs 25,000. His average annual salary increase is 10 per cent and average inflation is taken to be seven per cent. His monthly expense is Rs 30,000 and he will retire at the age of 60.
As calculated by Certified Financial Planner (CFP) Malhar Majumder, the person will require Rs 3.67 crore to live through his sunset years, covering 20 years after the retirement.
If his employer deducts 12 per cent towards EPF under the new wage ceiling calculation of Rs 15,000, the individual will end up saving Rs 24.35 lakh in the next 25 years left for his retirement. He will also be eligible for a monthly pension of Rs 5,355 under the EPS. As against this, if his employer had deducted 12 per cent under the earlier ceiling of Rs 6,500, he would have accumulated only Rs 10.55 lakh and earn a monthly pension of Rs 2,320.
Now, although the new amounts are distinctly higher, as compared to the amount of money needed, of Rs 3.67 crore, the accumulation is far less. There is a huge gap to fill, though the increase in the wage ceiling taken for the calculation has taken care of some of it.
One who is 15 years away from retirement would save only Rs 3.86 lakh and be entitled to a pension of around Rs 1,300. This is under the old wage ceiling. Under the new wage ceiling, he will be able to save Rs 8.92 lakh and will get a monthly pension of Rs 3,213. This 10 years away from retirement will save Rs 4.82 lakh and earn Rs 2,100 as monthly pension under the new wage ceiling. The individual would have saved Rs 2.08 lakh and earned a pension of Rs 1,000 a month under the earlier one (see box).
In the 2014 Melbourne Mercer Global Pension Index, India's score remained unchanged at a grade of D, a score between 35 and 50. This indicates a system with some sound features but with major omissions or weaknesses. A D-grade classification might also occur in the relatively early stages of the development of a country's retirement income system, such as in India, China, Indonesia and Korea.
It is interesting to note that from last year, while the adequacy rate has decreased for India, which relates to whether the pension system provides adequate retirement income, the integrity rate has increased. This reflects the growing confidence in the pension system for delivering retirement benefits. For China, integrity scored lesser than its adequacy, said the Mercer study.
Many employers deduct 12 per cent towards EPF on the entire basic component of the salary, says Majumder. In such a case, as compared to the earlier calculation, the accumulated EPF would be much bigger. For instance, for someone who is 25 years away from retirement and earns a basic of Rs 25,000, against a requirement of Rs 3.67 crore, he would save Rs 1.58 crore and would earn a monthly pension of Rs 5,357. Those who have 20 years left to retire will accumulate Rs 1.35 crore and will be eligible for a monthly pension of Rs 4,285. And so on.
Even so, the difference between the amount required after retirement and the amount being saved is huge. For instance, those who are 25 years away from retirement and are contributing to EPF under the new wage ceiling will need another Rs 3.42 crore. This gap rises if the number of years for retirement go down.
Suresh Sadagopan, another CFP, says: "Lower EPF saving is one part of the problem. Another and bigger problem is that EPF subscribers keep withdrawing from the corpus. A study showed 80 per cent of EPF accounts have a balance of only Rs 20,000 or lower."
Towers Watson's global survey said most employees in India expect to retire by the age of 60 years, though they are not confident about being able to afford a long spell of retirement. Despite this, delaying retirement is not a preference, even if savings fall short. Most respondents said they would prefer to instead save more.
Among respondents younger than 40 years, the actual savings rate is 16 per cent, while the ideal level should be 24 per cent. In the 40-49 years and 50-plus age groups, the actual savings rate is a tad higher at 17 per cent but the ideal level should be 25 per cent, said the survey.
20-25 years to retire
"The retirement fund should have an equity exposure of 80 per cent of the surplus. This will be domestic equity with a cyclical bias. The remaining 20 per cent should be allocated to longer duration bonds and government securities. This is a tactical stance and need to be revisited, considering interest rate movements. Separate provisions to be made for near-term or other goals," says Majumder.
To earn Rs 3.42 crore in 25 years, one will need to invest at least Rs 25,500 every month in an equity mutual fund (MF) through a systematic investment plan (SIP), assuming the investment will earn an annual rate of return at 10 per cent.
According to MF rating agency Value Research, equity diversified funds have given 13.5 per cent returns annually in the past five years.
10-15 years to retire
"This is a fairly longish period and one can easily benefit from investment in equity and related products. Such individuals should allocate at least 50 per cent of their investible surplus towards equity MFs or equity exchange-traded funds (ETFs). The remaining amount can be allocated to a mix of fixed deposits and debt MFs," says Sadagopan.
To earn Rs 3.42 crore in 15 years, one will need to invest at least Rs 82,500 every month in an equity MF through an SIP, assuming the investment will earn an annual rate of return at 10 per cent.
He adds that such investors should also note that they need to start moving money from equity to safer debt instruments at least five years ahead of retirement.
"Hence, those who have only 10 years left for retirement should allocate a lower portion of their surplus in equity products, as they will effectively have only five years to invest before they start moving to debt products. Aggressive investors can move to balanced funds instead of debt funds," says Sadagopan.
