Embedded value: How pension funds offer long-term solution for elderly

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Published: January 23, 2018 4:07:31 AM

Life insurers can provide cash-flow through annuities for old-age financial requirements. For that, the government should issue very long-term bonds for pension funds to invest

Embedded value, pension funds, Britons, Role of insurers, Long-term bonds, long-term investments, sovereign bonds, mediclaim policyThe role of insurance needs to change substantially in order to take care of the drastically changing needs of the society.

A few days ago the prime minister of the UK announced the appointment of minister for loneliness in her cabinet, citing a major crisis engulfing the British society. She said that more than nine million Britons had already walked into a life stage where they had none to talk to and none to take care of their daily needs.

Increase in longevity

This scenario is the fallout of advancement in medical science which has led to dramatic increase in longevity. India may soon have 90 million senior citizens who will need an effective answer from society for solving their problem of loneliness. A country which is still struggling with the problems of human resource development may very soon find itself confronting a huge population on the other end of the spectrum demanding yet another kind of care and protection by way of social and financial support. India is not yet ready for addressing such an imminent problem which has the potential to derail financial planning for the development of the country and for providing job opportunities to a vast population.

Role of insurers

The role of insurance needs to change substantially in order to take care of the drastically changing needs of the society.Gone are the days when an endowment policy or a limited term mediclaim policy used to serve the policyholders as a security tool. Different milestones in one’s lifetime were matched with requirement of funds and policies were sold accordingly. Till recently, the heads of families considered education of children or their marriage as their major responsibility and they saved during their entire career for such occasions. They always felt that their family will take care of them and they need not bother for life beyond 60. Our government will never be in a position to support senior citizens as the required resources will be very difficult to mobilise.

The insurance industry has to upgrade its products and step into the role of providing long term resources to senior citizens. Life insurers are most suited to provide financial support through annuities and also to provide cash flow in the golden years for long term care. The market today needs a paradigm shift in regard to product design and product distribution. Saving for dependent children can be substantially supplemented by saving for one’s spouse and also for one’s own financial security. With changing needs, fixed term products may become redundant and in future we may see emergence of products with whole life benefits,delivered to a policyholder with regular frequency, or some such benefits which cannot be usurped by any other stakeholder as long as the policyholder survives, even if he or she is in the most debilitating condition.

Long-term bonds

Regular cash flow for such a long tenure is the function of market scenario in respect of returns and availability of long-term fixed return instruments. Insurers cannot take long-term risk unless they have sovereign bonds for long to very long-term investments. The government should issue and allocate such bonds to pension funds only. This will enable self-financing of old-age requirements and at the same time provide to the exchequer long-term fund for infrastructure development. I think the Budget exercise by the government should not overlook the need to adopt focussed approach to support senior citizens when they need to be treated with dignity. Concessions in tax slabs or in rail fare are mere cosmetic helpHealth insurance protection through insurance cover purchased in old age generally serve as a psychological protection only as when the need arises, the fineprint make the cover grossly insufficient. The insurers must devise products which can be financed during healthy phase of life but must substantially protect the policyholders in their old age without unfair conditions. Currently, more than two-third of health insurance policyholders are people belonging to the working class and the cover lapses post-retirement. Housewives remain the most ignored segment. One cannot overlook the real issue and everyone must find solutions for themselves and for the generations destined to face hard times in the silver years of their life.

The writer is former MD & CEO, SUD Life, an Indo-Japanese JV

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