Investment Risk in Indian Pension Sector and Role for Pension Guarantees

There is a considerable consensus that over the multi-decade horizons encountered in pension investment, there are enormous gains which can be obtained through portfolios of corporate bonds and equities, instead of a focus on government bonds. However, such investment strategies do impose greater uncertainty upon the worker about post-retirement consumption. Guarantees are one mechanism through which this investment risk can be contained. In this paper, we work out the cost of certain guarantee structures in the context of a simplified model. These calculations could help assist better decision-making about the role for guarantees in the Indian pension system. We also discuss some policy issues in pensions and in finance, which are related to the problem of guarantees.