Interview with Jos van Ophem, Project Manager for the P&D Network

9-Mar-2010    P&D Network member Jos van Ophem shares insights on how to develop and implement a micro pension product, as he tells about his work as Project Manager for the DHAN Foundation in India.

What is your task within the P&D Network?

I support the DHAN Foundation with the development of a micro pension pilot-project in India. By focusing on insurance-technical aspects, I develop questions that are related to the set-up of the pension scheme. Each question refers to a specific aspect of the pension scheme. By answering all these questions, the DHAN Foundation can give the input that is needed to devise a pension-system that is perfectly adapted to the circumstances of its area of operation and the wishes of its (future) clients.

What is your contribution to the micro pension product of the DHAN foundation?

The main part of my contribution lies with product development. Specifically, my financial knowledge regarding pension and actuarial issues. 

What is the current status of the DHAN micro pension pilot-project? 

Setting-up a micro pension scheme is complicated, and the lay-out of the actual pension product for a large part depends on the characteristics of the target audience. Any pilot-project should start out by mapping the characteristics of the target audience. Therefore, the DHAN Foundation executed a baseline study, which is aimed at mapping the characteristics of the target audience: their income, the situation they live in, the characteristics of the people, their wealth, etc. On the basis of these characteristics the second phase of the research was set up: the feasibility study. This study consists of more specific questions, designed at answering in which way, according to the wishes and characteristics of the target audience, the pension-product should be ‘furnished’, and what clients in which areas (rural, tribal, urban) will participate. 

The results of the feasibility study are expected to come in by the start of April. When these come in, we can move forward with the design of the (pilot) pension product for the 10 selected federations. This product needs to be both simple and sustainable and valid for the coming 20 years at the least. When doing this, we have to stay focused on the basic premises that came out of our research: the pension product should be affordable for our target audience. 

Does the current status of the pilot-project bring an end to your work for the P&D Network and the DHAN Foundation?

No, not at all. The launch of the pilot-project concerns a micro pension scheme, which will be executed in 10 federations. Preparations within these federations are almost complete. After April 2010, when the pilot pension-scheme is running, the different experiences from each federation can be analyzed and used to further perfect the pension scheme and adjust it for a complete launch. Since a pension-scheme is a long-term product, it is certainly possible that I will stay involved the coming years.

What problems are you confronted with designing a micro-pension scheme?

The core problem we face is illustrated by the following question: to what extent do we offer transition-measures? A pension product is a long-term product, and participants who have started paying their premiums at a late age cannot be giving full pension compensation by the time they reach retirement age. 

So do you put money in transition-measures, out of (intergenerational) solidarity? Does the federation you cooperate with (in this case the DHAN Foundation) possess sufficient funds for such measures? Transition-measures can be partly funded by pension premiums, but how to approach these matters is still a question.

Together with DHAN, we set-out these questions within the federations, and we specify the pension product according to their answers. If there is no capital to fund transition-measures then people who have not saved for their pension will not receive compensation. 

In the Netherlands, the solution to this problem lies in legislation. When old-age employees retire they receive pension benefits for which they (technically) have not paid. Their pension benefits are paid for by the current younger generations. But when the current younger generations grow old, the changed demographics of the population of the Netherlands will prevent them from having the same benefits as the current old-age employees. 

What kind of problems do you face working in India?

The main problem I come across in my work in India is the lack of accurate mortality tables. In order to determine the ‘price’ of a pension-scheme, accurate mortality tables are indispensible (but this is also very much determined by the type[1] of pension system one wishes to develop). Although we do have access to Indian mortality tables, we have no insight in the level of accuracy of these tables. Also, we do know that wealthy people live longer than poor people, but we are not yet sure how this correlation will develop in the future, or how to implement the conception of this correlation in the design of a pension scheme.

When one wishes to implement a DB system, accurate mortality tables will be a fundamental demand for the insurer (the executing organization) setting up the pension scheme, for in the DB system the insurer bears the risk. In the case of India, one could think of implementing a DC system instead of a DB system. In a DC system the risk lies with the participants of the pension-scheme, not the executing organization. However, this is also the main problem of a DC system; poor people who trust the organisation and the product will run all the risks. When participants reach retirement age the question is how their savings (pension) will be paid out: via annuity or lump sum[2]. If the savings of a DC type pension system are paid out via lump sum, then there is no need for mortality tables, for this kind of set-up has not much to do with insuring the risks of ageing.
Accurate mortality tables are needed when you wish to incorporate the risk of injury or death of a client during the build-up phase of the pension system, and possibly compensate the widow(er): then you offer an insurance-based product. In the case of setting up a DC type pension system that pays out on basis of annuity, you also need accurate mortality tables in order to calculate the corresponding risks.

What kind of solution do you think you can find for this problem?

When you implement a DC type pension system, it will take some time before enough savings have been built up. In principle it is possible during this phase to decide which method is used for paying out, lump sum or annuity. When the choice for life-long annuity is made, it is of great importance to have accurate mortality tables. But there is also time to gather accurate mortality tables and data on life expectancy. Pension schemes are long-term products, and there is time to adept them to changing circumstances.

Do you face any cultural problems? Are there big differences in procedure?

In my work I do not really face cultural problems. There are differences in approach, but I wouldn’t classify them as problems. The biggest difference between both countries is that the surroundings are more unstable with regard to inflation, although inflation related risks have gone down. But the threat of inflation is larger in India.

Regarding the difference in procedure of setting up a pension scheme; in the Netherlands, the first thing you do when setting up a pension scheme is market research: what is needed, and what can I sell? In India it’s basically the same. There’s just as much knowledge regarding financial systems as there is in the Netherlands. Regarding pension systems, the situation in India can be described as the situation that the Netherlands were in 60 to 70 years ago. At that time we did not have any pension provisions, which led to extensive market research on the needs of people.

The only cultural difference I come across regarding pension schemes is the way in which pay-outs of pension savings are handled. In the Netherlands, pay-outs are accommodated on annuity basis, whilst in India they are used to accommodate pay-outs on a lump sum basis. I see this as an illustration of the main cultural difference between the Netherlands and India: the Netherlands are more insurance-focused and base their pension pay-outs on annuities, which are based on mortality tables. A lot of research is done to gather as accurate data as possible. Whilst in India pay-outs are lump sum basis, and accurate mortality tables are absent.

Do family ties play a large role in the matter of pensions?

In the Netherlands, we are very much aimed at pension provisions for the surviving relative, retiring before your official pension age (´pre-pension´) and other specific pension products. The demand for these products is less in India, but this could also be affected that all extra insurance aspects you offer make a product more expensive. These aspects can also be implemented at a later stage. This is what makes a pension product so flexible; you start with the basic product and any extra arrangements can be set up in a later stadium.

Do solidarity and social control within the federation-communities play a role with the set-up of a pension system?

Generally speaking, the social control within the selected federations is large. The development of the pension product is followed in detail, and there is a high certainty that pension provisions will be paid for. People get together to discuss the pension product, which ensures a high amount of involvement and keeps the will to contribute to the pension scheme high as well. But it’s not only social control that plays a role herein; the mutual solidarity is very high as well.

What knowledge is missing in order to set up the micro pension product?

Actuarial knowledge. I don’t have the illusions that I bring expertise to India that cannot be found anywhere else in this vast country, I believe there are plenty of good actuaries in India, but it seems hard to find ways to access to these people. They possess the technical expertise, but from a P&D Network perspective we bring along the specific financial experience. We have encountered a lot of financial risks and hazards, even recently with the credit crises and the financial recession that it brought along, and we can warn them of the troubles that we have encountered.

Is it possible, combining the Dutch financial expertise with the knowledge of recent economic developments, to develop a more advanced pension product in India?

The Netherlands have a DB pension system, which is becoming very expensive. In order to maintain our current and future pension system, we have to move towards a DC pension system in the Netherlands. If it was up to me, I would introduce a DB system in India, but this is very difficult. In the end there’s no choice: in order to set up a sustainable pension system, you have to move into the direction of a DC pension system.

I don’t think we will devise a better pension system or product in India: we move in the same direction but with a different approach.

What is the biggest difference between your work for Syntrus Achmea and your work for the DHAN foundation?

In the Netherlands my work focuses mainly on how the present DB pension system can be preserved and maintained. What is the optimal investment strategy? Is the pension fund indexed? Which security does my pension fund have? Are we up to date with the latest regulation demands form the Netherlands Central Bank?

The above questions are not important for my work in India. My work focuses on setting up a completely new pension system, so I am far more busy with development.


The different types of pension systems are:
Defined Benefit (DB): the pension benefit is guaranteed based on the final or average salary of the worker.
Defined Contribution (DC): the pension contribution (made by employer and/or employee) is fixed, but the benefit depends on investment returns.
Hybrid Solutions:   
-a pension system which is DB up to a basic level and DC on top of that basic level.
-collective DC; participants share risks and returns collectively.
Annuity: a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient's life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment.
Lump Sum: a single sum of money that serves as complete payment.
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India: Development of Humane Action (DHAN) Foundation

Together with the P&D Network and HelpAge India, the DHAN Foundation is setting up a micro pension pilot project.

Add your opinion

Buitengewoon interessant.
Ik ben benieuwd naar de oplossing voor oudere, startende deelnemers, die nauwelijks meer kunnen sparen. Hiervoor zou je een omslagstelsel wensen, maar dat past natuurlijk niet in de gekozen DC-structuur. En om nu het fonds niet open te stellen voor mensen boven een bepaalde leeftijd, klinkt ook niet wervend.
Ik ben benieuwd of de deelnemers volgens een dwingende structuur moeten inleggen, of dat daar ruimte is om een tijdje niet in te leggen als het economisch tegen zit.
Ik wens de projecten heel veel succes!

m vr groet
Coby Diergaarde
Posted on Wednesday 3 August 2011
Posted on Tuesday 22 March 2011
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