In A Nation Of Savers, Employees Are Inadequately Prepared For Retirement – Willis Towers Watson
- If not acted upon soon, in the next decade or two, India might be faced with the critical challenge of retirees having inadequate income
- Willis Towers Watson recommends a comprehensive and periodic assessment of retirement adequacy that duly incorporates the impact of inflation, living expenses and return on assets, on post-retirement income
New Delhi, 19 February, 2016 —Willis Towers Watson’s latest study titled Understanding and Preparing for Retirement Adequacy discusses the challenges for individual employees in saving for retirement in an India that is grappling with globalization, inflationary pressures, economic volatility and changing lifestyles – all at the same time.
Willis Towers Watson, for the first time, has devised modelling techniques quantifying the impact of inflation, living expenses and return on assets on the Net Replacement Rate (NRR), which is an effective measure for adequacy of post-retirement income. NRR is the percentage of an employee’s post-tax pre-retirement income that is paid through post-tax post-retirement annuities (including employer sponsored programmes). There is no measure of the most appropriate NRR, however, based on global experience, a 55% to 65% NRR can be considered reasonable.
Kulin Patel, Director, Willis Towers Watson India said “Various Willis Towers Watson studies have revealed a discomforting observation that employed millennials are not confident of their planning for retirement. Ironically, this is despite Indians saving more than their counterparts in the western world. Lack of awareness, unrealistic assessment of what to expect on retirement and a shortsighted approach to retiral savings are potential causes of this concern. However, India’s young demographic profile, affords employers and employees a window of opportunity to begin effecting simple and tangible steps to tackle the critical issue of retirement inadequacy. Employers should use retirement planning tools to understand the effect of their retirement plans on the overall savings for employees and must play a key role in educating them.”
Vivek Nath, Managing Director, Willis Towers Watson India added “It is high time that employers seize the opportunity to embed employee financial well-being into their EVP, especially educating and preparing employees for retirement. Else, a decade or two down the line, the country could be facing a distressing scenario of retirees having inadequate income over a retirement period potentially longer than their earning lifetime.”
Examples illustrating the impact on NRR and Sustainability in Retirement
Impact of inflation on Net Replacement Ratio
General Inflation Rates
Scenario 1: General Inflation: 6% annual
Scenario 2: General Inflation: 7% annual
Scenario 3: General Inflation: 8% annual
While planning for retirement, most people usually understate the impact of inflation on retirement corpus.
As shown in the graph above, a 100 basis point increase in inflation can lead to an approximate 20% drop in the NRR and an approximate 9 year decrease in income sustainability in retirement for profile 1 who is a fresher aged 22 years with an annual salary of INR 360,000. A fresher aged 22 years needs an NRR of at least 40% to be able to sustain for a minimum of 19 years in retirement.
For profile 3 and 4 who are relatively senior employees with a higher annual salary, a 100 basis point increase in inflation can decrease the NRR by about 3-5% approximately, whereas a 200 basis point increase in inflation can almost double the decrease in the NRR to about 8-10% approximately.
Impact of living expenses on NRR
Living Expenses
Scenario 1: Living Expenses as a % of Annual Income:
Between 35% to 50% depending on age
Scenario 2: Living Expenses as a % of Annual Income:
Between 45% to 60% depending on age
Scenario 3: Living Expenses as a % of Annual Income:
Between 55% to 70% depending on age
As shown in the graph above, a 10% increase in living expenses can lead to an approximate 14% drop in the NRR and an approximate 7 year decrease in sustainability in retirement for profile 1 who is a fresher aged 22 years with an annual salary of INR 360,000.
For profile 3 and 4 who are relatively senior employees with a higher annual salary, a 10% increase in living expenses decreases the NRR by about 9% approximately.
Profile 1 – Fresher , Aged 22, Single, Male. Salary Assumed is 360,000.
Profile 2 – Associate with 5-6 years of experience, Aged 28, Married, Male. Salary Assumed is 840,000
Profile 3 – Middle Management, Aged 35, Married, Female, 2 children, Dual Income Family. Salary assumed is assumed to be INR 3,000,000.
Profile 4 – Senior Management, Aged 40, Married, Male, 1 child, 2 dependent parents, Dual Income Family. Salary assumed is assumed to be INR 8,500,000.
NOTES FOR THE EDITOR:
Base Assumptions used for the illustrations
| Assumptions | Value | ||||||
| Discount rate | 8.00% | ||||||
| Investment Portfolio Mix | Age (in years) |
High Risk (equity and property) |
Medium Risk (fixed income instruments) |
Low Risk (Government Securities) |
|||
| 35 | 50% | 30% | 20% | ||||
| 45 | 40% | 25% | 35% | ||||
| 55 | 20% | 15% | 65% | ||||
| > 55 | 10% | 10% | 80% | ||||
| Expected Return on Assets | High Risk (equity and property) |
Medium Risk (fixed income instruments) |
Low Risk (Government Securities) |
||||
| 15% | 9% | 7% | |||||
| Salary Increase (Inflationary) | 9% | ||||||
| Salary Increase (Merit and Promotional Increases at ages 30, 40 and 50 years) |
15% | ||||||
| General Inflation | 7% | ||||||
| Rental Inflation | 5% | ||||||
| Increase in Medical Expenses (inflationary and base increases) | 10% | ||||||
| Automobile Inflation (Passenger Vehicles) |
3% | ||||||
| Education Inflation | 10% | ||||||
| Increase in Living Expenses on Spouse’s Career Break | 160% | ||||||
| Proportion of Corpus used to Purchase an Annuity | 50% | ||||||
| Proportion of Living Expenses that continue immediately post retirement | 80% | ||||||
| Decline in Living Expenses at later ages | Age (in years) |
70 | 80 | 90 | |||
| Value | 15% | 15% | 15% | ||||
| Base Increase in Medical Expenses post retirement | Age (in years) |
60 | 70 | 80 | 90 | ||
| Value | 15% | 15% | 15% | 15% | |||
