Fact: Only 11% of the working population in India has any form of social security for old age. Although India's population is young, in the last three decades life expectancy upon reaching age 60 has risen by 15% and fertility rates have halved. The ratio of elderly to working-age people is expected to double in the next 30 years.

In the past 50 years, little progress has been made towards providing a viable alternative to the family as the main source of income security for the elderly. In an environment devoid of a social security system, the onus is on individuals to plan for their own retirement.

Professionals, self-employed people, and those in the unorganised sector have no means of guaranteed post-retirement income. Add to this the fact that life expectancy is expected to rise from 77 years to 85 years in the next decade. And that people of age 60 and above are expected to form 8.6% of the total population by 2016.

It becomes obvious that the task of retirement planning and pensions is immense and requires a holistic, far-sighted regulatory structure that ensures a voluntary-contribution pension scheme reaches the vast number of untapped people.

Investing in an annuity product is quite different from planning for retirement. The former is a once-in-a-while response at a time close to retirement, while the latter is a regular investment effort over a number of years.

The aim of retirement planning is to encourage sustained saving over nearly all of one's working years so as to maintain the current standard of living even after retirement. This is really the core of pension reforms.

Poor Awareness
Instruments used for retirement planning include provident fund, gratuity, superannuation, life insurance and even mutual funds. Lack of awareness of the options available is the biggest single reason why post-retirement planning is poor. People are unsure about how much to save, how much they will require later, what the inflation scenario is likely to become and what effect it would have on their lifestyle. Insurers must make efforts to bring about awareness of retirement requirements and subsequently how to plan for it.

Another aspect to bear in mind is that while each of the financial instruments mentioned above has its benefits, none of them wholly addresses the unique factors that define retirement planning, such as providing for health and flexibility in the vesting age. This is slowly changing as product development is based on consumer insights and is providing for the unique needs of long-term retirement planning.

Incentives can help accelerate transition
Retirement planning requires an individual to apportion a part of his/her earnings for decades. Hence it requires more incentives, with a long-ranging perspective. For instance, tax exemption of Rs 100,000 under section 80CCC is to incentivise accumulation.

The case for higher tax benefits for retirement planning is justified because of their far-reaching favourable impact on the development of capital markets and stimulation of investment in infrastructure and other long-term projects. Undoubtedly, there is scope for much improvement and reform in the Indian system. However, the demographics are compelling, so the sector will grow.

Types of Schemes
There are two main types of pension schemes - a defined benefit pension scheme for civil servants and those administered by the Employees' Provident Fund Organization (EPFO). Both appear to be unsustainable in their current form.

The civil servants' scheme operates much as it did prior to independence and continues to be financed directly from the budget. Because there are many more pensioners today and they are living longer, the government's pension bill is more than 1% of the GDP, or 15% of revenues. The World Bank study highlighted the adverse effects of the pension system on the rest of the economy. The growing fiscal burden of the civil service scheme threatens to 'crowd out' financing of other programmes and to add to India's burgeoning deficit. The EPFO helps to finance this deficit by investing exclusively in government-guaranteed debt but, as a result, deprives the economy of an important source of long-term finance.

As per OASIS (Old Age Social and Income Security) report, only 34 million (or less than 11%) of the estimated working population in India is eligible to participate in formal provisions meant to provide old age income security.

Note on OASIS
The Ministry of Social Justice and empowerment is entrusted with the nodal responsibility for care of older persons. The Ministry has been increasingly concerned with the issues of ageing, health and income security during old age as well its close links to mental and emotional well being.

As a culmination of the growing concern and coincidentally with 1999 being declared the "International Tear of Older Persons", the Ministry commissioned the national project titled "OASIS" (Old Age Social and Income Security) and nominated an 8 member Expert Committee to examine policy questions connected with old age income security in India. The project OASIS Expert Committee was mandated to make concrete recommendations for actions that the Government of India can take today, so that every young worker can build up a stock of wealth through his life, which would serve as a shield against poverty in their old age.

The other type of scheme - a defined contribution scheme which specifies the amount to be contributed for each individual. No specific benefit is promised. A separate account is maintained for each employee.