Pension Market in Sri Lanka & trend World-wide Date : 10 th December, 2012 Niyati Pandit Ganesh Sudrik

Population of Sri Lanka in ,277, % of the world´s population. Population Increased by 7.9% since Average annual growth is 0.7% between Thus population is still growing but at a lesser rate.

Decreasing trend in growth rate since the Census of Decline due to difference in birth and out migration. Decreasing trend in growth rate since the Census of Decline due to difference in birth and out migration.

Population over 60 years old is expected to increase from 12.5% to 16.7% in Improvement in mortality. Life expectancy is much higher for age above 60 years as compared to other Asian countries. Increasing number of people above 80+

Source: CIA World Fact book

Year Rate Source: CIA World Fact book

In 1990 In 2010 In 2020 (Estimated) In 2050 (Estimated)

A regular income paid to a person following retirement from the service. Paid in instalments Pension systems exist to satisfy two main goals to tackle poverty in old age by providing a minimum income to smooth consumption over the life-cycle

Access to Approved Pension Plan, not more than 10% to 15% of total population There are two major challenges facing the existing pension system in Sri Lanka: coverage is low, with around 85% to 90% of older people unable to access a regular pension; and, even for those who can access a pension, many find that the actual level of the benefit they receive is well below the poverty line. If Sri Lanka is to be successful in tackling old age poverty, there needs to be a fundamental shift in pension policy.

Defined Benefit Scheme Defined Contribution Scheme Hybrid Scheme

Numerous methods are available Method can be chosen depending upon the situation Most Commonly used methods are Current Unit Method Projected Unit Credit Method Aggregate Method

Step 1 : Expected CashFlow considering all decrements Based on Accrued Benefits Step 2 : Taking PV of all future CashFlows i.e. Value of past service liability on current earnings Time Line Year 1 Year 2Year 5 Year 4 Year 3 Year 6…….

Projected Unit Credit Method Year 1 Step 1 : Escalated Expected CashFlow considering all decrements Based on Accrued Benefits Step 2 : Taking PV of all future CashFlows Value of past service liability on projected earning Escalated Year 3 Escalated Year 4 Escalated Year 5 Escalated Year 6…. Escalated Year 2 Time Line

PV of Past Service Liability PV of Future Service Liability PV Future Service Contribution Entry AgeCurrent Age NRA Net Liability = PV Past Service Liability + PV of Future Service Liability -{Accumulated Corpus + PV Future Service Contribution } Time Line Accumulation PhasePayment Phase

Pay-as-you-go Company Manage Trust Fund By In-house Management By Purchasing An Annuity from an Approved Insurance plan

Level annuities Guaranteed annuities Inflation-linked annuities Joint-life or Last-survivor annuities Life + Return of Capital annuities Investment-linked annuities

Market Globally Europe/ UK, DB plans on PAYG, tax burden increasing Minimum Funding Requirement to Fund the scheme now US 401k Plan, allows individual investment choice, Pension and medical bill to govt is around 26% of GDP Gulf Countries have DB pension plan Recently Monetary cap has been introduced India – Recent move to DC from DB, EPS 95 is Hybrid scheme with limited contribution and cap on pension

Indian Market Both DB & DC schemes are not new in India Govt., Banks, Nationalized Insurance Companies and Certain Financial Institutions also Devised Defined Benefit Pension Scheme By Diverting Employers PF Contributions..But have shifted to DC scheme with a cut-off date NPS option is made available to everyone Approved insurance plans are available Tax Advantage for contribution pension plans Benefit in Cash instead benefit in kind

Scheme funding Investment Scheme design Managing risk Corporate transactions Individual benefits

Death Rate & Birth Rate Statistics : Population Growth :