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Incomes and living standards have improved, but not the preparedness for post-retirement life. The Allianz Global Investors report of 2009 puts India and China right on top of the list of 26

surveyed countries in greatest need of pension reform, only next to Greece. India has the second-highest ‘Pension Sustainability Index’ — A higher value of the index for a country means

that the pension system needs large-scale reforms and much greater pension coverage. The Index uses a wide range of sub-indicators such as demographic developments, public finances and

pension system designs to systematically measure the need for further pension reform. HSBC also recently conducted a global study in 2011 on retirement savings based on interviews with more

than 17,000 people across 17 countries. One of the questions was “Overall, do you think your generation will be better or worse off in retirement compared to you parents’ generation?” The

findings are interesting. Respondents in North America and Europe think that their parents are enjoying a golden age of retirement, which will not be repeated when they come to retire. The

main drivers behind these concerns also reveal why it is that Western respondents are particularly gloomy, with the erosion of traditional types of pension — those provided through the state

and employers - being a key concern in developed markets. However, in stark contrast, in emerging markets of Asia and the Middle East, we see the traditional dependency in old age being

transformed into greater financial self-reliance, fuelled by rapid improvements in household incomes and living standards. People in emerging markets, particularly Indians, hold a more

confident and optimistic view of retirement. Another question asked in the survey was “How important is it to you, and how well prepared are you for the following statement — Having enough

money to live on in retirement”. Going by the response, India has the lowest ‘Pensions Preparedness Gap’ in the world! If one were to correlate the above two data points, it appears that

perhaps Indians are being lulled into a false sense of comfort regarding their retirement as they are comparing their life standards with their parents and believe that they will have better

retirements than their parents and also feel that their high savings rate will ensure that they are well prepared for their retirement. Also, what is not perhaps obvious to them is that

they might be living in a higher inflationary environment than their parents as well as they might live more than their parents lived. Both of these things put together will mean that they

will need a much higher income in retirement to live comfortably and if anything, the reliance on the traditional family support system is coming down due to urbanisation and rise of nuclear

families. To make things worse, unlike the West, India does not have a comprehensive social security system, which encompasses good healthcare and pension benefits. All of this suggests

that the seller has to do a proper financial need analysis of the client, assess risk profile and then suggest a suitable premium contribution towards retirement saving. Given the long-term

nature of pension products, proper advice needs to be offered throughout the lifetime of the product to ensure customer satisfaction. However, there is a need to simplify the entire sales

process and arrive at thumb rules to make the advice simple yet relevant, taking into account individual circumstances for most clients. The winds of change Pension products especially on

unit linked chassis had great success in India until 2010 and contributed over one fourth of top line of life insurers, primarily for the following two reasons * No medical underwriting

required at the point of sale as death benefit was optional * Relatively low charges and liquidity and/or ‘premium holiday’, after the erstwhile minimum lock in period of three years In

2010, IRDA introduced compulsory annuitisation for a pension policy even on surrenders and mooted a guaranteed rate on the premiums paid. Most life insurers did not participate in pension

space since then and only a few came out with single premium unit-linked products, citing difficulty in honouring an onerous guarantee on regular premium products. Very recently, IRDA has

come out with new pension guidelines to promote life insurers’ participation in the pension space following a drought of products as most insurers stayed away from this space, citing

inability to manage high guarantees. The key highlights are that all pension products shall have explicitly defined assured benefits that are applicable on death, surrender and vesting which

is disclosed at the time of sale and at the time of vesting, with compulsory annuitisation and no ‘open market option’ is allowed to the policyholder. Quality of advice if key! This means

selling such a pension product will have to be a proper advice-based sale. Otherwise, the company risks serious market conduct issues. Given the fact that there is limited liquidity (up to

one-third of the corpus can be commuted) in the new pension plans, the sales process must take into consideration the following aspects: * Customer willingness to pay for long-term pension

needs, in addition to more immediate needs such as child saving and education * Other sources of income of the prospect during his/her retirement years such as rental income, interest income

etc * Other pension savings such as employee provident fund, public provident fund, NPS, etc * Likely retirement age and hence, the period of contribution * Likely vesting date which

affects the period of accumulation and hence, the annuity amount * Inflation expectations * Pension income being what percentage of pre-retirement income (say 30% or 50%) _— The writer is

director and head, product management and persistency, Max New York Life Insurance _