Rene Schaaf, senior vice president and chief operating officer, Principal International, is responsible for global business development, strategy and operations of the company in Latin America and Asia. She met Mint during a recent visit to India and discussed global trends in the pension industry. She also elaborated how India is in a unique position when it comes to the retirement market, thanks to the relatively younger population. Schaaf stresses the importance of defined contribution plans for sustainable evolution of the pension industry. Edited excerpts:

Many countries have adopted the defined benefit format for pension contributions; however, this hasn’t worked well for government finances. How do you see the situation progressing?

When we think about pension systems, there are two critical elements. First, what is the replacement rate it provides in terms of adequacy of income? And, how sustainable is the whole system? What’s happening, not just in developed markets but globally—with any pay-as-you-go government-sponsored pension plan—is that as populations age, the ratio of people who are retired to those who are working continues to increase. This puts stress on the system, to be able to sustain it financially. Governments are realizing they have to do one of two things to sustain this: they can either increase taxes or decrease benefits or do both. For example, in the US, our public pay-as-you-go (Social Security) system reserve is inadequate for future liabilities. In order to deal with that we have already seen a reduction in future benefits and the way that’s happened is by increasing the retirement age. This is happening both in developed and emerging markets. The public pension system is under stress because of financial sustainability issues, thanks to global ageing.

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