An Investigation on Factors Determining Investments in Retirement Products

    Srividya V ,Shripria V ,Thilagam V ,Nandhini K

    Abstract

    India is one of the most populated countries in the world with more than 133 crore population of which about 30% is above 40 years of age (Sundaramurthy, Raviprakash, Devarla, & Rathis, 2020).  Majority of this population is not covered by a formal pension scheme which is the safe and secured income for most of the senior citizens after their retirement. Before 2004, the Defined Benefit Pension Plan was followed in India which is an employer-sponsored plan in which the employer administers the portfolio and risk of the plan. The payment includes a Single-life annuity which ensures a fixed amount as monthly pension until death. It also includes a Qualified Joint and Survivor Annuity which enables the spouse/ the life-partner to receive pension to survive until death. The transition from the DB (Defined Benefit) Plan to the DC (Defined Contribution) Plan was made by the government in the year 2004.  This transition in the retirement saving system has shifted the burden from the employer to the employee and made them more responsible to save for their retirement and face more financial market risks. As per DC plans, the employees are no longer eligible for a guaranteed pension and have to depend on the vagaries of the stock market. Though it was made mandatory for all government servants to contribute 10% of their salary towards pension savings it was not the same case for private sector employees.  The employed salaried class are the only ones that benefit from company owned pension funds. All other forms of employed people and the self-employed have to rely on the market related retirement products for funding their retirement life after they quit working. A survey on the formal and informal employment scenario in India by CPHS (Consumer Pyramids Household Survey) that included self-employment found the overall employment rate to be constant in India since 2016. However a decline in the below 30 years (25.6% in 2016 to 20.8% in 2019) age and increase in the above 40 years age group (49% in 2016 to 56% in 2019) was observed, this shows that the profile of India’s workforce is ageing.  The aging profile may  probably have lesser capacity to face the challenging work environment limiting reemployment making retirement planning all the more important. It has been observed that investments in market related retirement products were not favoured to a greater extent (Ranta, Aarikka-Stenroos, Ritala, & Mäkinen, 2018)) due to many reasons such as the risk associated with it, cost and benefits in it, etc. (Kumar & Murty, 2014). (Rhee & Boivie, 2015) found that perceived risk influences the choice of investment in retirement products. Perceived risk according to this study stems from not having the exact information and understanding of the product. Investment decisions in retirement planning are influenced by factors other than Perceived risk such as Influence of others (Peers, Family and Friends, Time left for retirement) and liquidity of the retirement products. Some of the previous research have confirmed the influence of friends, family members and colleagues in individual’s investment decisions (Al-Tamimi, 2006; Brown & Laschever, 2012). The future time perspective also affects the investment decisions (Jacobs-Lawson & Hershey, 2005). Behavioral reasons that does not form part of the rationality framework also prevents savings for retirement ,these termed as behavioral anomalies that have been found to influence retirement planning and investments are  mental accounting (Thaler, 1990), self-control problems (Rhee & Boivie, 2015), status-quo bias(Laibson, 1997). (Colin & Orla, 2003) found a significant proportion of employees to automatically joining their company owned pension schemes without a careful assessment of the costs and benefits of such plans or comparing to other market related plans. This brings an interesting dimension about awareness and financial knowledge to decision making. Investors (Employees’) knowledge about the benefits associated with various retirement investment schemes available plays an important role in retirement planning.   Low level of awareness and lack of knowledge about financial matters added to complicated financial products, may influence the choice of investments in retirement products.  In this paper we study factors such as financial literacy, influence of others and perceived risk on investment in retirement products. In the following section a brief review of related studies is presented, followed by analysis and discussions of the results.

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