Health and retirement go together

by Hansi Mehrotra

15th November 2016

The joys of being young – earning your own income, spending it on the latest gadget without having to explain it, feeling invincible. The idea of growing old and infirm without adequate support is just…far-fetched. Surely, we would do well in our careers or start-ups that we won’t end up like you, grandma. Any mention of retirement or pensions just induces a yawn amongst millennials. This may be one of the many reasons why many young people don’t consider saving in pension funds.

It’s easy to accept this lack of investor awareness or maturity as the main reason for why Indians don’t buy financial products. But as someone with a couple of decades in the finance industry, I still have issues with the Indian pension system. I would like to share my perspective before suggesting possible solutions.

Firstly, it’s confusing to be bombarded by many disparate lines of communication about financial products. There are mutual funds, insurance policies, pension system etc – all talking about similar topics of investing for various goals. At times, they contradict one another. Why can’t the finance industry sing from the same hymn book? Don’t they all have separate roles that complement one another? I know I should get a well-qualified, experienced and fiduciary financial adviser who can explain all these, but since there so few of those around, that’s not an option for most.

Secondly, assuming I have to handle my finances myself, what is the right order of priority? I get told I need to save for retirement before I pay my rent and groceries, or generally enjoy life. Does anyone really believe that anyone will save for my retirement ahead of shorter-term needs and wants? That’s building a roof before putting in a foundation when building a house. It’s unlikely that I will travel a time machine and wake up as a 70 year old tomorrow. I understand it could be case of the frog not feeling the water getting warmer until it’s too late. Perhaps there should be more research on how healthcare costs in retirement are likely to be way more than I can imagine, and I won’t get any attention at the government hospitals because they will over-crowded and broke.

On the other hand, I did get jolted out of the invincibility illusion when a relative was diagnosed with an illness and Michael Schumacher had a skiing accident. It made me think about how I would pay not only for the medical bills but also for living expenses when not being able to work for years. I wasn’t surprised when I read that a medical emergency is what puts most Americans into credit card debt. It made me build an emergency cash fund and buy some health insurance to cover medical expenses. Until I quit to do a start-up, I had not worried about this because I was covered by a group policy through my previous multi-national company employer. Given that more than 85% of Indians don’t work for large employers, and indeed are being encouraged to create jobs through start-ups, do they really have to wade through confusing and expensive private health insurance?

Once the emergency scenario is addressed, I, like most people, focus on medium-term priorities of buying a house and children’s education. But I worry about the share market volatility as my time horizon is less than five years. Why isn’t there a financial product which invests in equities but switches to a capital guaranteed product once the goal is, say three years away, in which I give up some of the upside for limited downside?

Finally, coming back to retirement, I am comfortable with the idea of locking my savings in return of significant tax advantages. But I need a) transparent regulations that don’t keep changing b) good long-term returns through exposure to good low-cost investment options and flexible asset allocations that can change with age, and c) flexibility to do whatever I want with my accumulated corpus at retirement age.

This last point is quite significant. I don’t appreciate being forced to buy an expensive income stream through an annuity. If I was responsible enough to save for my retirement, it’s unlikely that I would be stupid enough to splurge all of it just to queue up for a non-existent social security. Why the insistence on annuities, especially without an explanation of why the returns are lower than inflation?

Industry people tell me that I am not a typical investor. Maybe. They say most people are irrational. Hmm. My question is what if they are not. Even if we assume they are, let’s take it as a given that we can’t change their thinking. The finance industry would do well if it applied some design thinking to the so-called irrational investors’ issues and came up with holistic solutions.

Here is my problem statement – I believe we don’t save for our retirements because our basic needs are not taken care of. We carry too much risk ourselves. If we were able to pool some of these risks with the rest of society, we could be freer to invest for the long-term without worrying about how to pay for the medical bill, home EMI or college tuition. This is precisely the role of insurance. On the other hand, investments should be for longer term goals. Pension funds should provide a product overlay combining insurance and investments, and then managing the drawdown phase. These three players have distinct roles and strengths.

My suggestions for solutions – why can’t we make health insurance available at affordable rates through group policies within the National Pension System, thereby drawing all workers to look at the NPS? We could also ask insurance companies to offer capital guaranteed products through NPS tier 2, or separately, which would give them a point of differentiation from the market-linked look-through mutual funds. And we should definitely ask the insurance companies to develop annuities as a product segment before making them mandatory in the NPS tier 1. These measures would allow insurance companies, mutual funds and pension funds to focus on their respective roles, while still providing a holistic solution to the investor.

This solution may sound simplistic, but will hopefully spur the industry to start thinking more holistically. Build a foundation before adding pillars and a roof.