Designing Dignity: CEO of PinBox on What it Takes to Build Pension Systems That Work for All | The CXO Conversations

Guest:

• Parul Seth Khanna, Co-founder & Director, PinBox Solutions

Host: 

• Matto Rizzi, Investor, Author, Co-founder, FTS Group

Full Transcript

[00:00:00] Matteo Rizzi: Hey guys. Welcome back to Breaking Banks Europe, hosting The CXO conversation at the Singapore FinTech Festival. I'm here with my friend, Parul Khanna, director and Co-founder of pinBox Solutions. Parul, welcome to Breaking Banks Europe.

[00:00:19] Parul Seth Khanna: Thank you so much for having me, Matteo. Always a pleasure.

[00:00:22] Matteo Rizzi: You are a master in the topic about tourism. One, because, we worked a lot in Africa. Even if you are based here [Singapore] , but your remit is absolutely global and we work together in emerging markets, with a topic that is very unpopular, which is pension. I would like you to start with the traditional two minutes of introduction. I know it's going to be complicated and then let's dive into it. As I said, I don't think we talk enough about this topic.

[00:00:53] Parul Seth Khanna: The problem is a very here and now problem, right? I think old age poverty among future elderlies is a much larger problem than the poverty than the elderly faced today. I've said this several times and at the cost of repeating myself.

Honestly, Matteo. If I just give you some perspective, and probably the listeners as well, there are 1.6 billion people above the age of 65. By 2050 to 2055, there will be over 2.2 million people above the age of 65. 8 out of 10 of elderlies are going to live in Asia, Africa, and Latin America. Because all the young countries will start. Africa probably a little later. But Asia and Latin America certainly have started aging.

Each of these countries, if you just slice and dice them out, have less than 10% of taxpayers. 80% of the population in any of these continents in the developing emerging markets are in informal sectors, that means they're self-employed. Again, out of these 80%, 20 to 25% of those are going to be de-savers.

That means they will never be able to accumulate enough money because their income cycle right now doesn't permit them to save enough. So the reason, I make this bifurcation is because when we think of low income individuals who are self-employed. We are thinking of the ultra poor. How is he going to save? He's thinking only about today, right?

But we keep forgetting that there is this middle emerging market which is growing very fast. They are gig workers. They are farmers. They are seamstresses. There are self-help groups. There's so many of these who earn anywhere between $400 to $500 minimum a month, and they are the ones who are self-employed and don't see the horizon of what they're going to look like in 20 to 40 years time.

If I change my occupation to a domestic helper and I change your occupation to a taxi driver, then you and I will keep working till the time that we can't. We don't have a retirement age in mind. And the reason is because the ecosystem doesn't exist. The perspective doesn't exist. Financial literacy doesn't exist.

Concepts of compounding and inflation don't exist. And we have internal needs that we want to take care of, which is child's marriage, housing, so on and so forth. And if there's anything left. We'll say, we'll save for old age. But the intention is there. They understand that they will have this problem because god, faith and children are not exactly very strong retirement portfolios.

[00:03:26] Matteo Rizzi: Absolutely.

[00:03:26] Parul Seth Khanna: And with ever increasing dependency that our children are going to take care of each other and they're going to take care of us, is becoming a little lackluster. It's going to be difficult. Everybody in Asia, Africa and Latin America all take care of our elderly.

We don't traditionally or culturally send our parents away. We keep them at home. We want to take care of them but that is at the cost of something else. It is very important that the youth and the women start saving today. Because by 2055, it is too late. You've already aged and there will be people who will be old and destitute.

The World Bank report says that by 2050, the biggest reason contributing to poverty will be old age poverty.

[00:04:13] Matteo Rizzi: Interesting.

[00:04:13] Parul Seth Khanna: It's a silver tsunami.

[00:04:14] Matteo Rizzi: Absolutely. While you were talking, I said, okay. I'll take a bet right now. I'm going to ask a question that no one have asked. This is not your first interviews, right?

If you take the perspective of the institutions or the government. Is it easier to fix something broken? At the pension level or to build something from scratch.

[00:04:39] Parul Seth Khanna: I'll break your question down even further. I'll first answer the first part. Is it okay to build something broken? They will never get to start from scratch because you're already building something that is broken. Something that doesn't exist, it's already broken. You will already have, say in India there are...

[00:04:55] Matteo Rizzi: Sorry. I was trying to compare Western economies with emerging markets. Most of the Western economy's pension schemes are broken. Italy is a very good example. Every couple of years, they increase the pensionable age for 2 years. It is now 67.

Of course we are living longer but people are still as dumb, talking about my fellow Italian colleagues, in planning their pensions. We are trying to fix something that is, at the moment, inherently broken.

Africa, for example, takes a completely opposite approach. There is barely any pension scheme unless pinBox has worked with that country, right? I don't know many players that took this challenge. I was trying to compare the two (models).

[00:05:44] Parul Seth Khanna: For this, I'll have to explain pensions a little deeper to make people understand and give perspective on how it works.

[00:05:50] Matteo Rizzi: And that's the objective!

[00:05:51] Parul Seth Khanna: So pension works in two ways. There is either a defined contribution pension or it's a defined benefits pension. Most of the developed world have taken a defined benefits pension, which means it'll be decided today that at age 60, what pension will I get? Which is the case in Italy. And this is the case in Chile, and this is the case in a lot of the markets.

So what happens when it's a government sponsored scheme, the government is giving a commitment today, that I will give you $5,000, just a certain number out of my head, at age 60. Now that $5,000, two things happen. If there are a hundred thousand people in Italy who are going to get $5,000 at age 60. The government has to ensure, or the sponsor of this scheme has to ensure whoever it is, that a hundred thousand people get that $5,000.

The other way the pension works is that there is a defined contribution. Countries like India adopt, countries like Bangladesh, countries like Rwanda have, which is when you say that your pension will be defined on how much contribution you make towards your pension account. In that case, it is up to the individual how much money they put into the pension.

Now this can be in a employer - employee relationship or somebody who's formerly employed, or it could be a farmer who earns twice a year because of his crop cycle and he has the ability to put it twice. In this case, the markets and the return decides how much pension you get. Now in both cases they become very different and the country start pushing the age back in defined benefit.

It is because they want people to work longer and they may not have the funds due to other factors such as the fact that they have used up the money, like France. You keep pushing the age back. Hence you don't have a pool of money.

But when it is the money that they've put in. Then, it is how much money you get back and it is decided on the amount that you take. So this is one big difference in pensions.

The second part, to answer your question on broken or not? It depends on the nature of it. Secondly, countries like India, Rwanda and Kenya, want to include as many people to join pension schemes. And the reason is that the opportunity is much bigger than the cost of not doing it at all or losing out the cost of not doing it.

Even if 25% of the informal sector workers of each country starts saving a dollar a day. You will accumulate over 10 to 15 trillion of new assets that the governments can then consume for infrastructure for whatever else that they want.

So the opportunity is much bigger. That is why countries are now saying, especially the emerging markets. Why don't I incentivise that individual for a limited period of time, say one to three to five years. So that they get into a savings habit and are able to put away, and I become their employer substitute. The way I give affluent tax benefits to put money into pensions.

All countries give tax benefits when you voluntarily contribute. So they're saying, because there is no employer in this case, and they're not tax based either. So why don't I give the informal sector, self-employed people, some incentive for three to five years in the hopes that they start getting onto pensions.

[00:09:21] Matteo Rizzi: Per you mentioned something quote unquote, "We give them incentives too." Right? Which implies to educate the population that have the worry to put food on the table because even with $300 to $500 a month, they are still not swimming in cash, right? Especially if they have kids that go to school. Most of the time they barely make ends meet at the end of the month.

How do you foster this literacy that allows them to change their mindset? Because, very often, if you're talking about a dollar a month or a day, of course if you make $2 a day, you won't be able to do this. But if you're talking about $300 to $500 which is 5 to 10% of their salary, which seems reasonable, and maybe in that case is buying a couple of shoes less.

How do you you push this culture?

[00:10:14] Parul Seth Khanna: There is no simple answer to this.

[00:10:16] Matteo Rizzi: Of course.

I have to be very honest here but there are several attempts that are made and more can be made. Maybe share a couple of stories in countries that you have worked. That might be a good way of doing it.

[00:10:27] Parul Seth Khanna: India had has given a lot of focus on financial literacy and they're creating an ecosystem or have already created in terms of digital id, banking, payment systems, and so on and so forth. India is is not a representative sample currently of the rest of the emerging markets of the developing countries, as you may call it. But however, they were there 20 years ago where a lot of countries are now.

So in India's case, they have taken on educating people as a public good. Private players do not have to spend money on creating awareness around why you need bank accounts. You have the best cricketers in the world, and India cricket is religion. So they have top class cricketers coming and saying that maybe you should invest in mutual funds. It's the right thing to do and hence this whole buzz around that.

I don't want to miss out on this opportunity. Even the the food delivery guy is sitting on his smartphone scrolling all day long and he has MS Dohni (Former Indian Cricketer) and Sachin Tendulkar (Former Indian Cricketer) telling him, "Mutual funds are here." Which is saying that mutual funds is the right place to save or that saving does not mean putting money in a cupboard, you should actually invest your money.

The difference between investments and savings is targeted financial literacy for women through the self-help group structure down to the villages, up to cities. So these kind of public good help for (industry) players like myself when they come in and approach the self-help group women, the truck drivers or the domestic help, because they seem to be aware about it.

However the other challenge lies around the friction that you have when accounts need to be open. So financial literacy assume that they have understood what it is, but sometimes a product design can be so complicated that even you and I sometimes find it difficult to understand the product.

That is the other simplicity that needs to be thought through.

How is it that you can go through trusted organisation whom these people and individuals understand? And not some complicated names that you and I are used to. I'm not gonna take any names here. In India, State Bank of India or LIC or something that's similar.

I'll give you an example of other countries as well. When you go with a product like that, there is instant trust and say, "Okay, fine. This is something that will work." The simplicity of the technology at the front end needs to happen. In developing countries, not everything is totally digital, even in India, given that we have all these digital touch points.

Yet there will be people in low income areas who want a receipt. They don't trust an SMS. They don't have smartphones. Those are what we call 'phygital.' - Physical and digital, we call it  phygital. The most important thing that is another friction area or a trust issue, is the services that they get.

When you and I want to interact with our financial product. We have the app. We have the helpline. We are on top of the question we want to ask. Sometimes, the helpline individual may not have the answer.

[00:13:37] Matteo Rizzi: Actually, the least interaction is the best.

[00:13:39] Parul Seth Khanna: Yes.

[00:13:39] Matteo Rizzi: In this side of the world.

[00:13:41] Parul Seth Khanna: But in this side of the world, they're intimidated already to go and call someone that I don't know what to ask. And they're simple questions. What is the value of my money? How much money have I put in? What will happen if I pass away? They're only interested in that. And the most basic question that we always get on the helpline. Anywhere that we run is, 'Will I at least get the money I have invested?'

So these are very simple things and with Rwanda, a different world from India, yet they have the digital infrastructure in place. They have national IDs, they have payments, they have so on and so forth. The government took it upon themselves to run this scheme and they incentivize them on three fronts.

All of Rwanda is broken up into five different income categories. One being the least, five being the most. Ubudehe categories is what they call them. So the government said that whoever is in one and two, we will match your co-contribution. If you save an X amount, we will match it. Whoever is in three and four, we'll give you 50% of what you save in a year. And to category five, no co contributions for you. We'll give you tax incentives.

Everybody in the pipeline from the time that they started to the next five years, gets a life insurance, gets a funeral insurance, which they call the last insurance. So, culturally it works. That has created the uptake to about 3 to 4 million. So the coverage grew from 5% to 50%.

[00:15:04] Matteo Rizzi: Amazing. The scale of this.

[00:15:07] Parul Seth Khanna: And there is small country, right? So in terms of population, I will only work in terms of percent. But if you look at India. The scheme that the government came up with is a fantastic scheme, collateral pension and there are 12 million people who are in the scheme today, but that's still tip of the iceberg.

[00:15:21] Matteo Rizzi: This conversation lacks time. I know that we should spend way more time to do this, but I'm going to invite you again on breaking banks. I'm making a promise here to our listeners.

When I was working for my friend at Omidyar Network when it was still called this way. We invested in MicroNsure that had this very smart idea. I wanna talk about convenience and user interface. What they did is that they interface with the telco operator that was selling Microinsurance products and the users were allowed to pay them with a fraction of the airtime, which I thought back then it was one of the brightest idea I've ever seen. And also, you were talking about convenience and affordability, but actually how easy is it to have a third party that is already used every day. So the customer journey. Isn't that a super important part of this?

[00:16:19] Parul Seth Khanna: If Parul also goes and stands in front of people and say, I think you should do this. They're like, who are you? So they, it has to be in the interface that these people have every day.

It cannot be someone new, and it has to be as easy as putting money into their mobile phone. It has to be as easy as buying a vegetable or making a contribution. There's one more thing in all of this that I just want to touch upon. Pensions alone cannot work. And one of the reasons why people are not able to save into their pension accounts is because even Queen Maxima said, that it has to be financial health, which is that I have to have short term, I have to harm long term, and I need insurances. Because remember, Matteo, unlike you and I, they are meeting their risks with current income or with credit.

If a cow dies, they take out money from under their pillow and they still don't have enough money. They'll go to a local neighbor who will charge them 50% interest or more. Then, they will match their money and they will go and buy the cow. What it does is not only have they consumed their current savings, but they've also mortgaged their future income.

[00:17:29] Matteo Rizzi: Yeah.

[00:17:29] Parul Seth Khanna: And then they get into that cycle of always paying this guy and paying that guy. If they had a fraction of a group insurance where the premium amount is much less, then they will suddenly have all that money to then put into the child's education, marriage, house, and then actually realistically putting money away for the long term.

Women are even more particularly vulnerable to this. Women outlive men. They don't get the same kind of income in comparable jobs. They're in and out of workforce due to childbirth and family responsibilities, and yet globally and everywhere in reports. Everyone knows that women are better savers and they're 50% of the workforce that lives in this world. They're 50% of the workforce who lives in this world. They're 50% of the reproductive population. They're 50% of everything that we do. And yet the society has put in some norms around what is a productive activity and what is not, leaving them even more vulnerable to old age.

Some focus needs to be brought about in herself. She's the one who's going to teach her children way more and secure the future. As they say, you want your village to progress, teach the woman what to do. She not only do it to her house, she take the village to another level.

[00:18:44] Matteo Rizzi: The reason why I wanted you to come and and have this conversation at the show is because this topic is something that, unless you are in the middle of a silver economy, you don't think about it. And and I do want to start with the listeners that is clearly far from having this kind of worries to open their eyes.

Maybe there is some lights bulbs in my brain that needs to be lightened up.

Thank you a lot for having shared these insights with us.

[00:19:20] Parul Seth Khanna: Thank you so much. Thank you. Can I just add one thing, Matteo.

[00:19:24] Matteo Rizzi: By all means,

[00:19:24] Parul Seth Khanna: I think for the listeners. I think there are two-pronged approach that could be thought of.

One is, what is it that I can do as an individual? And if there are businesses, what is it that they can do to collaborate to make this happen? It is also for the stakeholders in the community to think. If businesses do not find this opportunity to be lucrative or sustainable, they don't join this business.

It is something that doesn't give you instant gratification. Even on a business level, it comes after maybe five to six years, there's no progress in one or two years. There is a case where it has to be a public - private partnerships. They have to have local stakeholders, payment providers, telcos, all of them to come together to make this happen.

Otherwise, it's not going to happen. It'll just again, be talk.

[00:20:13] Matteo Rizzi: Parul, thank you very much for being with us. Thank you so much. Thank you for having me.

[00:20:17] Parul Seth Khanna: That is Breaking Banks Europe at The CXO conversation, live from Singapore FinTech Festival and it's a wrap.