The hallmark of an efficient financial system should be the choice it offers to the ultimate consumer. The availability of choice for the consumer necessarily implies that the market place is vibrant and throbbing with competition - with new products to suit different requirements - for the mobilization of consumer savings. Looked at from that perspective, the New Pension System (NPS), launched in May 2009, holds the potential to add to the level and efficacy of competition in the Indian financial market place. It indeed could heighten the competition in one particular segment of the market for financial savings - that of saving for retirement.

So, will Indian insurance companies and other financial intermediaries who have been attempting to build an organized market for retirement savings welcome this development?

Actually, more than intensifying the level of competition, the NPS appears to hold the potential for doing something even more basic. It could increase awareness levels in the general population about the importance of saving for retirement and about the different ways in which to build a corpus for retirement income. Looked at from this angle, Indian insurance companies need not consider competition from the NPS as unwelcome. For, the NPS could be doing, by way of publicity and increasing awareness levels, what their own promotional campaigns seek to do. The challenge, of course, is to harness the (possible) increased awareness levels to increase their own market shares as the overall market pie expands.

The potential market for retirement savings

The scope for doing that - increasing market share - though appears to be immense in the Indian scenario. Just consider these numbers. The potential market for retirement savings - those in the working age group of 20 - 59 years is as much as 55 per cent of the overall population of around 1.2 billion as per the last census. That means around 650 million people. Even if we consider only 25 per cent of this number as the real potential - meaning the savings of those people which can actually be captured in an organized manner, that is around 150 million people in the 20 -59 age group in urban / semi-urban households in the country.

Given the established skew (inequality) in the distribution of overall incomes in the Indian population (the latest National Family survey shows that in urban India, 75 per cent of the population falls in the top two income / wealth quintiles), the income generation / savings potential of this segment of the population is considerable. To this segment should be added the retirement income needs of those in the 60 plus age group - this segment is currently around 8 per cent of the overall population, ie 85 million, but is slated to increase to as much as 140 million by 2020.

But, one noteworthy feature of the Indian life insurance market is the low level of pensions and annuities in the individual business segment.

IRDA statistics show that as of March 2008, for LIC, non-linked pension and annuity (NLPA) sum assured was just 3 per cent of the total sum assured under non-linked individual business of Rs.14.85 lakh crore. Half a century after nationalisation, this low level of pension / annuity sum assured of LIC is indeed a notable feature of the overall Indian market.

For the private sector too, the NLPA ratio is the same. But, having started operations only in this decade and looked at in relation to LIC’s performance over a 50 year period, the private sector does seem to have a greater focus on this segment. As of March 2008, NLPA sum assured was 3.30 per cent of total sum assured of Rs.1.40 lakh crore under non-linked individual business.

It is obvious in this backdrop that the Indian market for retirement savings is significantly large. The challenge for insurance companies is cut out. The NPS is not much diff-erent - if at all - technically from the conventional and unit-linked pension/retirement products they have been offering. The task ahead is to match the NPS in terms of returns, costs and service.