It was just another new item in a business page and no wonder, one would have lost it amongst similar other financial news. After all each company has to declare its financial results every quarter. Revenues and Profits keep going up and down depending on business condition. So what was so special about State Bank of India’s recent Q1 financial result? Well the headlines said, Q1 net profit dives to 3200 Crore. The usual culprits were bad loans, slower growth in interest income, grim economic environment…and wait… something unusual. The rise in life expectancy of employees. What? Yes…you read it correctly. SBI provides pension to all its employees and large chunk of them are covered under defined benefit scheme where pension is linked to inflation. This scheme has since been replaced with defined contribution scheme. In normal course SBI must has calculated the pension liability based on certain life expectancy of the retiring employee. E.g. when an employee retires, the employer (in this case SBI) estimates the age till he/she will live and accordingly determines the amount and the time till which pension needs to be paid. In this case SBI estimated that the average life of their employee would be 76 years. All investments were thus made with this figure in mind. It includes the tenure of investment, the choice of asset class etc. However better standards of living and access to good healthcare has increased the average life expectancy to 81 years. That’s jump of 5 year or in percentage terms 6.5%. And remember this is just for current year. If this number increases from 81 to say E.g. 85, additional provision will have to be made in subsequent years. Net result…big hole in pension corpus of SBI. Action…provide additional amount for pension liability. (Rs 2400 Cr) What’s the message here? Most of the current workforce (In government as well as private sector) is not governed by earlier lucrative defined benefit scheme. Worse, many of them (Specially in unorganized sector) have no retirement plans at their employment at all. Self employed professional and businessmen also come under this category where they have to plan for the retirement. They in fact are at greater risk having to manage business as well personal finance. Irony however is that retirement planning is still a highly ignored aspect of financial planning. Its high time one should pose few questions to oneself. • How long will I work so that my Income will continue to keep pace with inflation and still generate sufficient surplus? • Is my living standard same as a SBI employee? Have a really considered this aspect? • Do I have access to better healthcare? • Have I started seriously thinking about the retirement planning? • Am I aware of the risk and the consequences associated with poor or no retirement planning? • Am I investing haphazardly towards retirement planning or taken professional help from a financial planner? • Do I have deep enough pockets like SBI to absorb the shocks during retirement phase? Many young investors are of the opinion that retirement is a long way to go and tend to postpone planning for it. However one must understand that longer the financial goal, easier it is to plan for it. Time is one of the most powerful tools one can have in financial planning process. The rule of compounding is incredibly powerful concept. In this age of instant news and views on financial world, it is sad that we are ignoring this most magnificent idea. ‘Start early’ is the first and foremost principle in financial planning. Remember the best time to start planning was yesterday. If you have not done that... today is the day. Think and act fast.
Posted on: Tue, 13 Aug 2013 15:15:07 +0000
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