Skip to main content

Pension Plans and Risk

India's demographic dividend will help protect the retirees' income for some years

 

In 2013, the Saradha Group financial scam threatened to bring down the ruling government in West Bengal. The group ran fraudulent investment schemes, collecting thousands of crores from lakhs of investors, promising astronomical 50% returns. However, it did not use investors' money to build assets, but took it from new investors to pay the older ones. It was a classic example of a Ponzi scheme.

It is ironical that while governments try to stem such fraudulent investment structures, they themselves perpetrate these schemes. In 2014, the US Congress announced severe cuts in the pension benefits of one million employees covered under the Pension Benefit Guaranty Corp (PBGC). PBCG is a government agency that protects the pensions of almost 1.3 million people covered by more than 200 pension plans. The largest cuts are proposed for the younger employees, and the smallest for the older ones. Newer employees are forced to fund the deficit in investment earnings to pay older pensioners.

Aren't there uncanny similarities between Saradha and the PBGC? Both were money pooling schemes that needed a constant flow of new money to keep their operations afloat. The schemes kept growing until pay outs to existing members exceeded the cash inflow. Both are in a state of collapse because of over-commitment and under-delivery.

Do pension plans in our country bear the same risk as in the US? There are two kinds of pension schemes--defined benefit and defined contribution. Under defined benefit, the employer or sponsor promises to pay a specific amount to the employee as pension during his retirement years. This amount is predetermined and based on parameters such as annual contribution during working years, years of service, life expectancy and investment returns. Using actuarial calculations, the sustainability of the pay out is determined. The pensions of most government employees and army personnel in India are defined benefit programmes.

In a defined contribution plan, the employer and the employee make regular contributions to the fund. There is a promise to contribute a fixed amount, usually a percentage of the employee's income, during his working years. There is no obligation to pay a fixed amount during retirement. The employee can choose the investment vehicle and the amount he accrues depends on his and the employer's contribution to the fund and the term of growth. Members are entitled to benefits in proportion to what they have contributed. This is a more sustainable and equitable way of building a pension fund. The National Pension Scheme in India is an example.

The defined benefit plans are a cause for concern. When there is a change in the economic growth, investment returns or demographic expectations on which the benefit pay outs are based, the quantum of pay out is threatened. So, if the return on corpus fall due to slow economic growth or if the pay out tenure increases because of a rise in pensioner life expectancy, the stream of periodic payments or projected returns may not be viable, resulting in benefit cuts.

Should we be concerned about the defined benefit plan in India? I don't think so. These tend to fail in countries with ageing populations. India has a young population, an advantage over developed countries. The number of people in the working age group surpasses that of retirees. This demographic dividend will ensure that even defined benefit plans protect the retirees' income for some years to come.


 
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Impact of Demonetisation

The government's move to demonetise `500 and `1,000 currency notes will immediately impact reserve money and money supply in the system along with the balance sheet of the Reserve Bank of India, the sole authority in the country for accepting currency notes and coins as legal tender. ET explains the interplay of currency, reserve money and money supply. 1. What is currency in circulation? It is the total value of currency (coins and paper currency) that has ever been issued by the central bank minus the amount that has been withdrawn by it. Currency in circulation comprises currency notes and coins with the public and cash in hand with banks. It is a major liability component of a central bank's balance sheet. 2. What is reserve money? It is essentially the central bank's money . It is also called high-powered money , base money and central bank money . As per the definition, reserve money equals currency in circulation plus bankers' deposits

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now