Household savings in India are titled towards physical assets like real estate and gold. Such is the allure of owning property and the gold constitute nearly 64% of all household investments. Physical assets propose poor returns and low Liquidity. Gold has been in a downtrend for two to three years now. Housing prices, though volatile, are also moving at a sluggish pace.
According to the RBI, the year-on-year growth in residential property prices strike to nearly 28% in January-March 2013. Leaning too much on physical assets can burgle them of a comfortable retirement because their savings may not be able to match inflation. Also, the challenge in current financial investment avenues for retiral savings is that the investment objectives are very different. While inflation has averaged 10% over the past five years, the real return on the formal pension assets has hardly been positive.
According to a study by the OECD, the pension assets in 24 countries had a real return of over 2% between 2008 and 2013. But India was not among them.The impact is evident in the net replacement ratio (NRR) in these countries. The NRR is the individual net pension entitlement divided by net pre-retirement savings. If the last drawn salary was Rs 1 lakh and the pension is Rs 80,000, the NRR would be 80%. A 200 basis point difference in the rate of return over a 30-year period of saving would lead to a difference of 8-12% in the NRR. It is good that Indians now have access to a pension system that has all the right features.
The NPS is gradually gaining popularity in India. Continuing to improve education and communication will help to increase coverage of pension arrangements for the working population in the organised sector. The NPSallows greater allocation to equities, discourages premature withdrawals and offers greater transparency and flexibility. It also has an evolving investment governance framework and oversight mechanism.