Retirement benefits inadequate in India: Mercer

Corporate India needs to do more to help secure retirement benefits for its workforce as its inadequacy can develop into a major social problem, says a latest Mercer study.

According to a study by global HR consultancy Mercer, even the largest companies in the country, whether public or private, could do more to help secure adequate retirement benefits for their workforce.

"The fixed administrative cost incurred by a privately managed Provident Fund covering a large number of employees is significantly less than the variable fee paid to Employees' Provident Fund Organisation," Mercers Retirement and Risk consulting India Business Leader Gautam Kakar said.

For large corporations in India, the savings in management fees from private management of Provident Fund could be as high as 80 per cent, Kakar added.

In both public and private sector firms the basic salary is 28-30 per cent of the total salary.

The basic salary for top management officials in private sector hovers between 25 and 40 per cent, while for other employees it falls in the range of 25 per cent to 30 per cent.

"The mandatory retirement benefits are estimated on the basis of the basic salary. This suggests that the retirement benefits provided to the employees in general are inadequate to achieve a standard 60 per cent Income Replacement Ratio upon retirement," Kakar added.

Mercer's report titled Retirement Practices SurveyIndia is based upon contributions from 48 companies in India, with almost equal representation of public and private companies, highlighting a distinct contrast in practices of the two.                                                           

The report revealed that the retirement benefits issue may not be as immediate in India and therefore, may not have received the policy attention, that it is given in Japan, China, Korea, Europe and the United States.

The demographic composition of the workforce in India is younger than many other major global economies. Thus, for many workers, retirement seems distant, the report stated, adding an adequate awareness of the importance of retirement savings is yet to be developed in the workforce in the country.

PSUs studied by Mercer generally provide a traditional defined benefit type of pension, whereas private firms provide a defined contribution type of pension where the investment risk and longevity risk is borne by the employee.

The study also showed that a vast majority of the companies analysed, both in the public and the private sector, provide Provident Fund, gratuity and leave encashment benefits to their employees.

Among the 48 companies studied, the prevalence of supplementary superannuation schemes in the public sector is 68 per cent, whereas it is 77 per cent in the private sector.

Besides, leave encashment, one of the most popular voluntary retirement schemes, is mostly unfunded. Some 95 per cent of public sector companies and 80 per cent of private sector companies make an accounting provision for leave encashment liability, the study found.

Meanwhile, Post Retirement Medical Benefit schemes are less popular, with only 59 per cent of public sector companies and 31 per cent of private sector companies studied offering this benefit.

In the case of the public sector, PRMB is mostly a pay-as-you-go scheme, while in the private sector 50 per cent of the PRMB schemes are insured.