Insurance, pensions and provident funds help secure futures at the individual level and finance infrastructure growth at the national level. To make these products more attractive, India must change its investment regime
The sale of financial products, particularly those that involve long-duration contracts like insurance and pension schemes, continues to be ‘push business’ in India. A salesperson has to knock on the customer’s door more than once to convince him of the desirability of buying such products. With growing longevity, disintegrating extended family systems and increased cost of living, the need for insurance and pension products has become profound. However, the macho assumes that the hazards of dying ‘too soon’ or living ‘too long’ will not afflict him, and defers the decision to de-risk (an invisible risk) — until, of course, a persuasive intermediary is able to change his mind.
Such a transactional exercise sometimes turns out to be ‘misselling’. The salesperson, who has been belabouring to close a deal, having now captured the mind space, is tempted to promote his own interest, at times undermining the interests of the customer. The solution lies in spreading and deepening financial literacy, which has received at best a lip service, and enforcing discipline on distributors.
However, a substantive hurdle in selling long-term financial products is the lack of a pull factor or the absence of a real rate of returns. In emerging economies, the propensity for inflationary tendencies is inherent. Periodically, India comes under the grip of rising prices, and monetary and fiscal authorities end up fire-fighting. Knee-jerk reactions and/or academic approaches sometimes derail the growth trajectory. Currently, a barter is being navigated between growth and inflation, albeit vicariously. While the monetary authority holds on to its position, growth potentials are restrained.
The directed investment regime, propounded by the regulators of insurance, pensions and provident funds, seeks to lay down the limits of investment in various classes of assets, like Government securities, corporate bonds and equities, and over-burden the investment portfolio with high percentage of fixed income securities. This delivers a negative real rate return. The disheartening sentiment propels savers to pursue alternative asset classes, like real estate and gold.
Gullible investors often land up in the lap of thugs, masquerading with cheat sheets of returns — a la chit funds. The system keeps fighting the menace, as is happening now, instead of solving the problem at its roots.
Every country, in particular that with a developing economy, needs substantial investments in infrastructure. Investments in infrastructure have a long gestation period. Insurance, pension and provident fund providers are the only institutions that mop up savings for long durations, ranging up to 30 years. Hence, a globally significant part of the infrastructure financing need is met by these sectors. Unfortunately, in India, the insurance and pensions sectors have not grown at the desired pace. The focus on the pension sector has been non-existent. Consequently, these sectors have not delivered on the national priorities.
Matured economies have moved from directed regimes to prudent investor regimes. In the new dispensation, investment managers are expected to optimise returns within the risk appetite of the subscribers. The flexibility of diversifying the investment portfolio, into various asset classes and instruments in the new regime, enables investment managers to look at all possible instruments of investment, and optimise the returns, within the given level of risks, security and liquidity. This regime helps deliver significant rate of real return, which can transform long term financial instruments into pull products.
India’s continued reliance on directed investment regimes, under the pretext of security of subscriber money, has given inadequate service to both individuals and the country. It is time that the regulators assess if their duty of developing the market and providing service to customers is being fulfilled adequately.
This writer is not even obliquely suggesting that prudence be blown up at the altar of returns, nor is he recommending investment norms that are bereft of safeguards. He is merely suggesting a gradual move to a prudent investor regime. The transition has to be well orchestrated. The market must be prepared to handle the empowerment.
It should be a three-stage process: First, freedom to invest in broader range of asset classes and instruments; second, institutional capacity building, inclusive of governance structure and processes, risk management and skills sets in investment managers and trustees; and third, strengthening of regulatory oversight capabilities. However, in the interregnum, while the market prepares to profit from the new regime, investment limits in various asset classes and instruments should be gradually relaxed.
The state has its limitations in funding infrastructure and needs substantial support of the financial markets to build the economy. The insurance and pension sectors must step in to fill up the space. Further, the ticking time bomb of a fast-aging large Indian population, which has poor reception for pension products, can become an unaffordable burden on state revenues.
The remedy lies in individual effort to ensure economic security, when the hat is on the peg. The Union Government has seized this issue in the current Budget, which has a pronounced focus on promoting individual efforts to weaving an umbrella of economic security through state-sponsored schemes, and incentives.
However, those efforts will be frustrated if insurance and pension products do not become pull products. This can be facilitated with change in investment regime.
(The writer is a former Chairman of lIC and Sebi)