Principal Retirement Advisors Pvt. Ltd was set up in India last year after almost 15 years of Principal Financial Group operating as an asset management company here. As retirement advisors, their work model is to largely approach employees through their employers and help them create individual retirement solutions. Their services go beyond investments as they also offer advice related to estate planning and insurance. For this, they charge a fee. Larry D. Zimpleman, chairman, president and chief executive officer, Principal Financial Group, talks to Mint Money about the pension system in India and what challenges the financial sector regulations pose.
In India, you have been operating as an asset management company (AMC), but last year you entered the financial markets as a retirement advisor. Why?
We came to India somewhere in 1998-99. The original premise was that private retirement savings and systems were going to get more and more important around the world. We believe that India needs to create a more robust private retirement system.
Principal’s core strengths are in global asset accumulation and asset management, which is also the reason why we are experts in retirement and pensions and also why we chose to enter India as a pure AMC. But in the 15 years that we have been here, I would say there has been little to no progress in creating a robust private pension system. So as Principal Retirement Advisors, we thought we rather get on with building the platform in anticipation of the government to create the private pension legislation.
Give us some insight into the retirement systems of other markets. Where do you see India in this?
Let me start with a popular description that is used to explain how countries think about this. It’s called the first pillar, second pillar and third pillar approach. The first pillar is essentially government provided, the second pillar is private, often employer-based, and the third pillar is also a private pillar, usually an individual or retail pillar. Different countries use different combinations of these three pillars to arrive at the retirement income. Now the first system was the Chilean system in 1981. It was based on a modest first pillar because they wanted the state to support only those who couldn’t save on their own, they then had a mandatory and somewhat larger second pillar. Since then they have modified the system to continue with the second pillar of mandatory savings and then put a third pillar tax incentivized for both individual or employer based contributions. Now in the US, you have a larger first pillar that may provide for half the retirement income. The second pillar is employer-based and tax incentivized and the third is individual’s voluntary savings and could be tax incentivized. But if you look at Australia or New Zealand, they are extreme in the sense that they have a high required mandatory contribution and very modest first pillar.
A preferred model would be to have a modest first pillar, a more robust second pillar with tax incentives and then the third pillar of individual contribution again with tax incentives.
Coming to India, in the context of the pillars, I would say it has appeared fairly complex because it depends on whether you are a government worker or in the unorganized sector or in the organized sector. But regardless of the complexities, I think it’s not formed well enough to be doing the job it needs to do.
But we now have a National Pension System (NPS) that is being considered by many employers to build that second pillar. But NPS is struggling to penetrate among individuals, the primary reason being lack of incentives to the distributors. But if you look at other products like health or car insurance, it’s increasingly becoming important because there is enough awareness about it.
It’s always been interesting to me that in general insurance, for instance in car insurance, countries have no problem making it mandatory. Even to people it makes sense, but there is nothing that says that if you are working, you need to save for your retirement. That’s a problem. This is also why financial literacy is important. For instance, in the US, we don’t impart financial literacy in schools and then we wonder why people take on too much debt, buy houses they shouldn’t buy and then we have a financial crisis.
The good news is that today there are some very effective, often web-based platforms that can really help people come up the curve of financial literacy. So now if you can answer some basic financial questions, you can put in place a basic financial plan.
Are you interested in becoming a pension fund manager of NPS? Are you looking for a partner?
Of course, we would certainly like to become a pension fund manager; it’s what we have primarily come to India for. In our AMC business, we have a committed partner in Punjab National Bank and we believe that, as things stand, we don’t need to look for new partners as and when the government decides to open up the sector to foreign companies.
Do you recommend NPS to your clients?
We will first recommend that they begin with taking advantage of the tax investments. This will naturally mean that we will recommend investment into the Public Provident Fund (PPF) and National Pension System (NPS). Further, accumulations will then be based on recommendations thrown up by our proprietary retirement planning model. With people’s aspirations and inflation on the ascend, we have no doubt that most of us will have to accumulate beyond the mandatory and tax-driven savings.
However, what needs to be appreciated is that most people need to be coached into recognizing and quantifying their goals in a manner relative to their future income stream. We also recognize that as one progresses these plans need to be reviewed to cater to changing goals, needs and incomes. We will also assist our clients with planning post-retirement payouts and risk management like getting optimum insurance covers, drafting a will and so on.
Post 2008, we have seen some tightening of regulations the world over. While regulators in many parts of the world keep a closer watch on market practice, regulation in India have focused on transforming the products. How do you see such reforms?
I think the regulators need to focus on transparency and disclosures and not control market practice. If you look at the US, there is no lack of transparency. There is far too much detail on every component of a mutual fund. The prospectus that comes along is so thick that it’s meaningless to the average investor. There is certainly no lack of transparency but whether they read it or understand it is a different issue. The need really is to simplify things. Probably have a two-page disclosure report that has all the relevant information. In India, I believe the scheme information document (SID) is aimed at doing exactly that.
But what is happening right now is that we see the regulators controlling the market practice. For instance, how much commission you can get, where you can sell, can the product be front-ended? Regulators should focus on transparency and disclosures and market practice will take care of itself. An informed customer will be the best regulator of market practice.
But for a layman who doesn’t understand financial products, shouldn’t there be some control on market practice?
I would challenge a little bit the notion that companies are out there to missell. I don’t know a company that’s not pro-consumer. I am not saying that this has never happened but those companies are not going to be around for a long time.
How do you view the recent regulatory reforms in India?
The weight of regulatory community in recent times has been towards the more extreme end of the continuum. In India, it has not been as much about the changes in regulation as it has been about their pace; making it, relatively speaking, more involved and challenging. But then individual regulators go back and forth and depending again on who is in power or what kind of constituency they represent can often have a big impact too. We see that in the US. So with President Obama we sense there is a leaning towards pro-consumers regulatory reforms. Typically, when Republicans are more in control like in the case of the Bush-II (regime), it was felt there wasn’t a very heavy regulatory hand which, it is argued, could be a part of the financial crisis.
India is now contemplating adopting a single regulator model. What are your views?
What I find interesting is that different regulator model is held as the regulatory model of the day and then it changes over time so it seems like in most cases it develops with functional regulation (multiple regulators). Then there are few countries for instance Canada is an example, United Kingdom, UK, was an example Japan is an example that a number of years ago went for a single regulator.
Then you find that they kind of become super regulators and often then what happens is that they become bit of a bureaucracy unto themselves and they become so powerful that it begins to concern the government and the private sector certainly I think that’s true of FSA in UK and FSA in Japan. So to me all of this is like a pendulum, it swings one way and then it swings back the other way.
But if you look at what happened in the United States it’s interesting. Post the financial crisis we stayed with multiple regulators but in order to make them talk to each other we have a Financial Stability Oversight Council (FSOC) and so the purpose of FSOC is make functional regulators talk to each other and not be a super regulator. What they intend to do is make regulators including the state regulators meet at least once a quarter and at least talk to each other. There is a specific mandate within FSOC to look for bubbles that might be developing in the economy. It’s a kind of a balance between functional regulator and super regulator, whether that works is yet to be determined.
No comments:
Post a Comment