India Finance Brief

Everyone drinks more during a recession, they want to forget - Christian Audigier

As an asset class, pension funds control close to $30 trillions of public money worldwide. Given the longer tenure of investments, most of them are parked in equity funds of home country or emerging economies. Pension funds are considered by many, not without reason as vital clog in the global financial ecosystem

The grand recession of '08 impact us all, directly or indirectly. While direct impacts were in areas of employment, business growth and dampened spirits, many don't realize that retirement funds have taken the brunt of the great collapse. Average employees' pension fund assets have shrunk immensely and could possibly spoil retirement plans in the long run. Many funds of developing nations have lost anywhere between 8% and 50% in asset value. This has gone unnoticed by many for the simple reason that its retirement money and would 'bounce back' sooner or later and valuation norms aren't strict as the money is 'long term'

Statistics by World bank tells us that countries like Chile, Peru, Estonia and Lithuania whose pension funds are heavily invested in the market have lost anywhere between 30% - 50% of fund value during recession. This is alarming as pension funds work on the concept of liability funding and depend heavily on demographic characteristics. A 40% shortfall would mean that a person retiring today would have 40% less than what he would have got if he had retired a year ago! Unfair, so to say the least

Coming to India, where most of retirement schemes work on the concept of 'defined benefit', it is astonishing to learn that the government has not taken major steps to phase out guaranteed payouts for retirements (PAYG). The cohort of public sector employees who had joined in the 1980s would retire in the next few years and the EPFO kitty is woefully inadequate to fund their payouts. Haphazard planning has ensured that retirees would be draining a considerable sum of money from the fund at the expense of new employees. What essentially is being done here is to rob peter to pay paul!. Such a ponzi scheme is fiscally unstable and bound to widen our already widening deficit to alarming levels

So what needs to done in developing nations like India to revamp pension systems and wade through recessionary times?

1. Continue PAYG only for a limited cohort of employees - NPS has fairly solved this issue of fighting the menace of PAYG. Though NPS can be made mandatory for other employees (who joined before '04), the policy makers should divide the employee base to exclude a few cohorts from PAYG and make them adopt NPS. This gives direction to pension planning and also reduces unfunded liability
2. Big boys play it smart - Government must have faith in the power of long term investments through pension funds. This can aid in countering the effects of recession viz. unemployment and cash crunch. An emergency sinking fund can be formed out of existing pension funds for the government to dip in during tough times
3. Allowing phased withdrawals - In the next 30 years, where 'defined benefits' schemes would rule the roost, its crucial that subscribers have the option of taking out their funds in a phased manner and reduce fluctuation in fund value. Quite similar to SWPs that mutual funds have
4. Making PAYG safe and secure - Instead of allotting funds from government borrowing, it would make sense to institute a buffer fund with reliable data of demographics. Also haphazard borrowing to fund pensions should be avoided

In a well managed financial system, a retirement scheme should not just act as a provider in times of retirement but also as a 'unemployment insurance cover' and 'poverty alleviator' for the elderly. Having a 'zero pillar' component(a minimum guaranteed payout) would ensure that our retirees are fairly insulated from the shocks of recession and can take full advantages of the benefits equity markets provide for a safe and sound retired life

About the author:

Salar Mohamed Bijili is an MBA graduate in Marketing from SIIB. Writes on economy, finance and Insurance. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it