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A dignified retirement for the 50-plus
Gautam Bhardwaj
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February 28, 2008

PFRDA, India's new pension regulator, has recently appointed UTI, LIC [Get Quote] and SBI [Get Quote] as pension fund managers and NSDL as the record keeper for the New Pension System (NPS). Within a few weeks, the nearly one million new employees of the central and state governments already covered by the NPS will begin to benefit from the most important new pension reform in the world.

However, due to the government's inertia on the PFRDA Bill, this pension reform is likely to bypass the 284 million working age Indians in the informal sector, who will simply continue to be excluded from formal pension provisions.

Less than 5 per cent of this population is consciously saving for their old age and unless they get access to the NPS, a majority will fall below poverty as soon as they stop working. But since most of India is still young, they can perhaps afford to wait for the next parliament session or even the next general elections to see decisive government action on bridging India's pension coverage gap.

For those workers already nearing retirement however, India's pension reform is already too late. Even if the NPS were mobilised tomorrow, the 53 million informal sector workers already over the age of 50 will not have enough time to build up adequate retirement savings. Nearly 90 per cent of these workers earn less then Rs 100,000 per year. Forty per cent of them are farmers, a third are own account workers or wage labourers and 14 per cent are small retailers.

In a country with next to no government assistance available for the elderly, this presents a glum future indeed for many of these workers. This group has worked most of their lives in India's pre-economic miracle phase and, as a result of which, many do not have enough savings behind them for a comfortable and secure retirement.

New data on home ownership suggests, however, that all may not be lost for a significant population within this group and they may yet be able to afford a dignified retirement. The owner-occupied housing of nearly 36 million of these non-government, over-50 workers is valued conservatively at Rs 1,700,000 crore. What's more, 98 per cent of this housing is totally unencumbered with the owners having achieved that most elusive of goals - a 100 per cent equity in their homes.

It seems that these home owners have achieved this happy state for the same reason their personal savings are low - which is that housing was acquired in most cases in earlier times when property prices, like earnings, were at minuscule levels compared to today's values.

This situation presents an unprecedented opportunity for the government, the PFRDA and the NHB to work together for a worthy public policy outcome and for the banking sector to score a major profit coup, as 35 million over-50s are sitting on a fast appreciating asset - their family homes.

Instead of tentative first steps and intent announcements, banks should actively step forward and offer reverse mortgage products that have been popular in developed property markets for many years.

The process for reverse mortgages is already well established. Banks offer reverse mortgages to older persons who own their homes and need to supplement their incomes but are unable to borrow money through a normal loan because they do not have the cash to make loan repayments.

Here, the normal mortgage conditions are reversed with the bank making the mortgage payments for a person in exchange for acquiring an equity share in the property. In the mean time, the persons continue to live in their home and their life is otherwise undisturbed, except that they have a regular monthly income to lead a dignified retirement.

The reason this is a particularly attractive option in India's case is that population growth and rising incomes will place upward pressure on land and housing prices, especially in larger urban centres. Downside risks for owners, therefore, would be low as property prices are likely to appreciate at a healthy pace, which would slow the rate of attrition on owners' equity in the properties.

Going by prevailing property prices, achieving a monthly reverse mortgage income of, say, Rs 3,000 a month for up to twenty years should be possible for most urban home owners, and perhaps half that for rural residents nearing retirement. If property prices appreciate faster than an average 7 per cent per annum, that outcome should also be possible with property owners still retaining a healthy residual equity in the property after twenty years.

From the perspective of banks, this would be a good business move as loans would be secured and disbursement of the loan values would be gradual over the period of the reverse mortgage. Importantly, promoting this product should also not be difficult as nearly half of the over-50s homeowners in question are already bank customers.

For banks contemplating this possibility, there are some states that appear to be better prospects in terms of potential demand than others. Andhra Pradesh, Bihar, Karnataka and Punjab head this list, as in these four states, home ownership rates among the over-50s are very high at over 70 per cent. Uttar Pradesh, West Bengal and the northern hilly states are not far behind with ownership rates exceeding 60 per cent in all cases.

From a fiscal perspective as well, this is a much more attractive option than attempting delivery of Rs 17,000 crore (Rs 170 billion) per year as a tax financed old age pension to the 35 million aged. The government, along with the PFRDA and other stakeholders should, therefore, actively address any underlying tax, administrative, longevity risk and knowledge issues to design a reverse mortgage product that will actually work for India.


The author is director of Invest India Micro Pension Services. The analysis is based on the Invest India Incomes and Savings Survey 2007 produced by IIMS Dataworks. He can be reached at

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