price (the most favorable option for the
Indian annuitants) at the rate of Rs.580
per month. In my pension scheme, a senior citizen would be entitled to receive
monthly payments at the rate of 9 percent
per annum for 15 years. Monthly pension
amounts at the age of 65 years under both
schemes are given in Table 6.
System Requirements
Because the Indian economy is expected
to continue expanding at a rapid pace, this
kind of growth is possible. However, in order to control expenses, specialized agencies will need to maximize performance in
the areas of front-end services (collecting
contributions and disbursing benefits),
record keeping, fund management, and
the provision of annuities. An existing
wide network of banks, post offices, and
life insurance company branches will provide front-end services capable of reaching every corner of the country. Similarly,
commercial banks, merchant bankers,
and depository participants will assume
responsibility for record keeping, and investment analysts will be responsible for
fund management. Life insurers will use
their knowledge and skills to determine
the amount of the annuity payment after
Such a pension system
would help to amass
money that can be
suitably invested in the
country’s infrastructure
and in the development
of debt markets.
DIGITALFES / ISTOCK
retirement. Such a large accumulation of
pension assets could be expected to generate many employment opportunities.
It’s an ambitious project, but India
can develop the required framework using its pool of skilled fund managers and
qualified actuaries who can maximize
risk-adjusted returns and estimate the
annuity amount depending on the rate
of life expectancy.
Such a system would help to amass
money that can be suitably invested in the
country’s infrastructure and in the development of debt markets. It will also serve
to reduce stock market volatility in India.
But the most gratifying aspect will be the
assurance of a better standard of living for
today’s young workers when they retire.
PRAKASH BHATTACHARYA is an
assistant professor in the Department
of Management Studies, NSHM College
of Management & Technology in
Durgapur, India, and may be contacted
at Prakash.bhattacharya@nshm.
com. This article is adapted from his
presentation at the January 2008
Living to 100: Survival to Advanced
Ages International Symposium in
Lake Buena Vista, Fla. To read his
original paper, go to http://www.soa.
org/library/monographs/retirement-
systems/living-to-100-and-
beyond/2008/january/mono-li08-1b-
bhattacharya.pdf
This article is solely the opinion of its author.
It does not express the official policy of the
American Academy of Actuaries; nor does it
necessarily reflect the opinions of the Academy’s
individual officers, members, or staff.
TABLE 6 Expected Monthly Pension at 65 Years in Indian Rupees
Assumptions
Government of India bonds
100 percent equity
Monthly pension as per LICI
I
RS 1,728
RS 2,408
II
RS 1,870
RS 3,508
III
RS 2,030
RS 5,311
Monthly pension as per
senior citizens’ pension scheme
I II III
RS 2,235 RS 2,419 RS 2,624
RS, 3,114 RS 4,536 RS 6,868
Source: Author’s calculation based on the assumptions
APPENDIX A—Calculations
Rs.300 × 12 × ( 1.01)
39 + Rs. 300 × 12 × ( 1.01)
38 × ( 1.04) + Rs.300 × 12 × ( 1.01)
37 × ( 1.04) 2 + . . . + Rs.300 × 12 × ( 1.04)
39
(Please note that monthly compounding has been avoided as it would complicate the calculations further.)
= Rs.300 × 12 × {( 1.01)
39 + ( 1.01)
38 × ( 1.04) + ( 1.01)
37 × ( 1.04)
2 + . . . + ( 1.04)
39}
= Rs.3600 × ( 1.01)
39 {( 1.04/1.01)
40 – 1}/ {( 1.04/1.01) – 1}
= Rs.3600 × {( 1.04)
40 – ( 1.01)
40}/ { 1.04- 1.01}
= Rs.397,336
Wealth available for retirement planning at the age of 65 years: Rs.397,336 × 0.75 = Rs.298,002
Similarly, if r = 1.5%, the value of wealth would be = Rs.3600 × 0.75 × {( 1.04)
40 – ( 1.015)
40}/ ( 1.04 – 1.015) = Rs.322,486
If r = 2.0%, the value would be = Rs.3600 × 0.75 × {( 1.04)
40 – ( 1.02)
40}/ ( 1.04 – 1.02) = Rs.349,915
If r = 3.0%, the value would be = Rs.3600 × 0.75 × {( 1.04)
40 – ( 1.03)
40}/ ( 1.04 – 1.03) = Rs.415,250
If r = 5.0%, the value would be = Rs.3600 × 0.75 × {( 1.05)
40 – ( 1.04)
40}/ ( 1.05 – 1.04) = Rs.604,797
