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.