The last three decades in India have seen steady improvements in life expectancy—a 2019 WEF report suggests that average life expectancy increased by 11 years since 1990; however, averages do not reflect reality. Socio-economic factors have a significant impact on these numbers with life expectancy in the top 20 percent households in India increasing by two–three years compared with the bottom quartile.
The highlight of this data is that most white-collar employees in India live for at least 15–17 years after retirement, meaning that retired individuals will have to plan for a time span equalling 40 percent of their earning career, without a steady income stream. Multiple studies have shown that the post retirement earning potential for employees remains abysmally low—a 2019 Standard Chartered Wealth Expectancy Report showed that for white collar employees, the ability to retain their lifestyle will run out in six–nine years (based on different sub groups) going by their approximate pre-retirement earning and desired lifestyles.
This entire challenge is accentuated with increased health concerns emerging from the current pandemic that brought to light sensitive health needs of the aged and varying insurance coverage levels to manage those. To add to the complexity, bank interest rates have witnessed sharp drops, where three-year FD rates now range from 3% to 5.5%, which, at the turn of the century used to be around 11 percent. This is particularly relevant when for a large section of retirees in India, interest from fixed deposits forms a significant portion of their income. This income has dwindled, both, as an absolute number and also with inflation levels (where FD returns are at or below inflation rates).
While the government has simplified the tax structure on retirement incomes (taking up the taxability threshold on retirement vehicles to ₹7.5 lakh), companies have struggled to define effective retirement vehicles because of long-term provisions and the costs they incur. Most Indian companies look at the high pension cost burden of their US/European counterparts and shudder. As an example, the Centre for Retirement Research in the U.S. projects that the current pension costs (20 percent of payroll costs) will go up to almost 30 percent in the next five years. This kind of pension burden would take away the cost competitiveness for many industries, as they have in the West!
One alternative to address this challenge could be for Indian companies to consider equity-linked programs to provide retirement incomes for employees. The current approach towards equity awards is based on the norm that employees need to exercise their vested awards at or immediately after retirement. This is premised on the belief that these awards are meant to drive and reward performance and so, once an employee leaves the organisation, there is no performance to be expected. We believe organisations would generate significantly higher loyalty and retentiveness within their employees if they structure awards in the last couple of years of an employee’s work-life that run well past retirement. For instance, a grant made just before retirement that vests over the next five years. Another alternative could be creating a “Share Match” programme, where an employee is encouraged to allocate a portion of his/her salary to buy shares of the company and the company makes a matching contribution. For example, if an employee buys 10 shares of the company, the company awards five shares to the employee free of cost. This company award segment can be ratcheted up as the employee approaches retirement. In the same example, for a 45-year-old employee, the company contribution could be 1 free share for every two shares that the employee buys, but for a 55-year-old employee it could be a 1:1 match.
Such equity awards have a couple of other intrinsic advantages; first, the programme cost is locked in at the point of the award, and therefore there is no inflation over time and actuarial elements such as increased life span do not have any implications on the costs of the programme. Secondly, the programme creates a significant and potentially unlimited upside potential for the employee. All of these are over and above the strong positive welfare and governance messaging—employees at senior management levels will have a part of their post retirement wealth tied to the continued performance of the business they led or served.
Such a programme should award equity based on a combination of performance and tenure to a select group of retirees. Focussing primarily on top or senior management roles or rewarding based on pre-retirement pay levels (like gratuity) may not be the most relevant approach towards structuring this as it would lead to higher costs and provide larger rewards to individuals who may have already built a larger wealth pool.
Naturally, there will be challenges—any equity grant made to a retiring employee takes away the potential of providing higher equity awards to existing employees, who in theory, have a larger role to play in the company’s performance. Also, from an employee’s perspective, it increases the equity risk in the retirement portfolio.
Employers expect loyalty and a sense of esprit-de-corps—a sense of emotion linked to their jobs. However, all forms of rewards are structured in such a way that employees can generate quantifiable value. Some traditional Indian companies that provide post-retirement packages offer health or housing-related benefits. While this probably may not create the most exciting pay structure for a younger demographic, they do create strong loyalty for older employees. As the country ages, today’s young stars will start maturing, chances are, companies that provide long term value will earn greater respect and loyalty.
Views are personal. Ghose is Partner, Deloitte India, and Nandi is Manager, Deloitte India.