Problems arising due to the existing structure, Financial Management

Problems Arising Due to the Existing Structure

The problems that arise as a result of an increase in the population of older generation is universal in nature. Unless there are effective, old-age income related schemes in place, the dependence of the older generation on the younger is bound to rise. Governments the world over are devising ways to tackle this crucial problem; and India is not far behind.

An important phenomenon that is being universally observed today is a huge increase in the component of old-age persons (or the elderly) among the total population. This is a consequence of the vast improvement in medical technology and disease intervention. This is, in fact, a very welcome sign as compared to the ones that existed not so long ago, when epidemics used to wipeout sizeable chunks of the population. However, this also leads to some sort of demographic imbalance. The dependence of the elderly on the younger generation is rapidly rising. This inter-generation dependence is bound to rise unless there are schemes in place to tackle this growing trend. A very effective way of tackling this is to have appropriate pension schemes. However, pensions in India are either employment-driven or are available for purchase by the pension-seeker through insurance companies in the market, which are beyond the reach of a large percentage of the population.

One major problem in this regard is the importance a common man attaches to the concept of old-age income. In a country where even insurance is not properly understood, the task of generating enough awareness about the importance of pensions or a similar old-age income scheme is not an easy task. As far as employer-provided pension schemes are concerned, not all employees are covered under it, and even in cases where there is some semblance of coverage, it may not be sufficient in its real form, considering the inflation, interest rate scenario etc. On the other hand, it is equally difficult for the employers to provide for a viable pension option especially when the scheme is a defined benefit plan. Hence, it is not very uncommon to observe that most of the original terms laid out in the initial plans are either changed half-way through or are even dropped.

Pension accounts have always been associated with life insurance schemes. One main reason for this affinity is the actuarial involvement that is associated with the pension accounts as well. As the final price of a purchasable pension account or an annuity is dependent on the expected life term of the pensioner or an annuitant, the experience and knowledge of the actuary is very much drawn into the designing and pricing of a pension product. Besides, if life insurance takes care of the risk of a premature death, an annuity or a pension product takes care of the risk of excessive longevity. One might say this is the antithesis of life insurance and as such, very closely associated with it. Further, the business of life insurance is replete with acceptance of risks and as such the risk-assumption that is a part of the pension product can only be properly assessed and assumed by a life insurer.
The risks that are associated with an annuity or a pension product can be summarized as follows:

  • The number of individuals living up to the expected age of superannuation may go up as compared to the mortality rates applied. This possibility is very much on the cards, considering the factors discussed earlier viz., improvement in medical technology and disease intervention.
  • The actual period of survival of the annuitants beyond the age of superannuation may far exceed the expected or anticipated levels, which is once again an extension of the earlier factor.
  • The anticipated rates of interest on the investments may not be realized. This is especially so in the case of long-term investments, which an insurer may be constrained to make considering the term of the annuities, for a proper asset-liability management.

 

Posted Date: 9/11/2012 1:54:46 AM | Location : United States







Related Discussions:- Problems arising due to the existing structure, Assignment Help, Ask Question on Problems arising due to the existing structure, Get Answer, Expert's Help, Problems arising due to the existing structure Discussions

Write discussion on Problems arising due to the existing structure
Your posts are moderated
Related Questions
The key parameters taken into account while rating a debt instrument are as follows: 1. Industry Evaluation - This involves an evaluation of the

Credit rating agencies carry out credit rating. Companies appoint these agencies to assign credit rating for their corporate issues. The rating agencies may condu

Restrictions on Investments: A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment

Q. Describe Historical cost and future costs? Historical cost and future costs: another problem in the determine of cost of the capital arise on the accounts of the difference

The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by ____ the ordinary annuity interest factor by ____. (

Illustrate the in brokered markets according to trade intermediation. In brokered markets: In brokered markets, brokers execute an active search function to match buyers and

this case has been framed in order to test the skills

What are the advantages and the disadvantages of a new stock issue? A new stock issue increases funds and decreases the riskiness of the firm.  It as well tends to send a negat

Question 1 State the key functions of the financial market. Question 2 Define "Bill of exchange". What are its features? Give different types of cheques. Question 3

Example based on Valuation of Shares Share capital details & Types of Share Hatsun Agro private limited (HAPL) as on March 2008 had a total authorized share capital worth