Ramesh S Arunachalam
Rural Finance Practitioner
There are many key differences between traditional and micro-pension products, which have significant implications for distribution of micro-pensions, operational strategies used to deliver them and associated costs. Several aspects deserve mention here:
First is the aspect of the proximity of pension fund (manager) to customers, which is closer in case of traditional pension products (TPPs) than micro-pension (MP) products, whose clients tend to be far removed and less accessible.
Second, is the issue of awareness of the customers and their preparedness to fulfill their (contractual) obligations (in terms of prompt payments of their contributions etc), again higher in case of TPP customers and lower for BoP clients.
Third is the issue of total value and unit transaction value, both of which are higher for traditional as opposed to micro-pension products.
Fourth, is the aspect of number of transactions, which is inordinately high for BoP clients as opposed to TPP customers. This can really have an impact on processing costs and time
Fifth, is the aspect of higher transactions cost, arising out of the above, again much lower in case of traditional as opposed to micro-pension products.
The key differences are summarized in Table 1 below.
Thus, micro-pension products have special characteristics, which makes distribution naturally difficult.
Specifically, a high level of post sales service is required year after year, which means higher costs of servicing clients. Therefore fee (or commission) structures should afford sufficient incentives to absorb the inordinately high costs (because of remoteness and lack of easy access to customers).
That said, a key question that remains is how to enable various stakeholders to address this and enhance distribution effectiveness, while at the same time being efficient…from a cost and client stand point…
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