PENSIONS IN INDIA: CHALLENGES AND REFORMS

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Picture Courtesy: Times of India

Context:

PFRDA has announced that it plans to establish a dedicated “fund-of-funds” under the National Pension System (NPS). This would channel selected pension assets into Alternative Investment Funds (AIFs).

 
What is Pension System?

A pension system is a retirement income arrangement where workers contribute money during their working years, and receive income after retirement.

Objective:

• To provide financial support after retirement
• To prevent old-age poverty
• To ensure long-term savings and social security

 How a pension system works?

Contribution Phase:

• Workers, employers, or the government regularly deposit money into a pension fund.
• These deposits act as systematic savings accumulated over the working years.

Investment Phase:

• The collected funds are not kept idle; they are invested in financial markets, government bonds, corporate debt, or other assets.
• This investment process allows the fund to grow through returns, ensuring savings increase in value over time.

 Withdrawal Phase

• When a person retires, the accumulated amount and contributions plus investment gains, becomes available.
• Pension benefits are provided in different ways, including:
• Monthly pension, ensuring regular income,
• Lump-sum withdrawal, offering financial flexibility, or
• A combination of both, balancing stability and choice.

 Current Status of Pension system:

• The combined pension schemes under PFRDA (National Pension System (NPS) and Atal Pension Yojana (APY)) have crossed ₹16 lakh crore in Assets Under Management (AUM). (Source: PIB)
• As of March 2025, during the fiscal year 2024-25, the AUM grew by about 23 %, reaching roughly ₹14.43 lakh crore. (Source: PIB)
• The pension architecture continues to expand beyond government employees — aiming for inclusion of gig workers, informal-sector workers, and individual citizens under NPS or APY.
• India’s retirement savings pool is relatively low, pension wealth is roughly 17% of GDP, far below the levels seen in developed countries where it often exceeds 80%.
• 85% of workers engaged in informal jobs that generate more than half of national output, most remain outside structured retirement protection.

 Challenges of India’s Pension System:

Narrow pension coverage amid a large informal workforce: Although pension assets now exceed ₹16 lakh crore under NPS and APY, coverage remains shallow. Formal pension mechanisms reach barely 12% of India’s labour force, while over 85% work in informal arrangements without systematic retirement protection. For instance, the majority of agricultural, construction and domestic workers—who together account for a large share of India’s GDP—still depend on family support or borrowings after retirement

Unequal benefit distribution across sectors: India’s pension promise has historically favoured government employees and organised-sector workers. Civil servants receive defined pensions, periodic revisions through Pay Commissions, and family pension support—benefits almost absent in private and informal sectors. Even within the corporate space, voluntary participation in NPS remains uneven.

Inadequate pension adequacy and sustainability concerns: Even where contributions exist, pension adequacy remains modest. For example, under APY the maximum guaranteed pension is ₹5,000 per month, which is insufficient against rising living costs in urban India.

Weak uptake of voluntary schemes despite rapid expansion: Pension Fund Regulatory and Development Authority (PFRDA) schemes like Atal Pension Yojana (APY) were designed to extend pensions to low-income workers. APY has crossed 6 crore subscribers, reflecting progress but also limitations: this still represents only around 5.3% of India’s population, indicating that voluntary pensions are far from mainstream.

Low financial literacy and trust deficit in retirement products: Behavioural economics insights show that Indian households prioritise gold, real estate, and informal savings over pensions. A 2023 RBI household finance survey revealed that less than 6% of families cited pensions as their primary retirement strategy.

Recent reforms:

Launch of NPS “Fund-of-Funds”: PFRDA plans to set up a dedicated fund-of-funds to invest pension money into Alternative Investment Funds (AIFs.)

Objective: boost market depth, improve long-term returns, and support private sector and infrastructure financing.

New investment choices for central government employees: The PFRDA has introduced two new Auto Choice options under the NPS/Unified Pension Scheme — Life Cycle 75–High (15E/55Y) and Life Cycle–Aggressive (35E/55Y) — to widen risk-return flexibility and enable central government employees to better align their pension investments with their retirement goals.

New Players Eyeing Pension Fund Management: Institutions like PPFAS Mutual Fund and Bank of Baroda have sought licences to manage NPS funds. It indicates rising institutional interest, potential competition, and broader choice for subscribers.

Growing Scale and Inclusion: Assets under NPS and APY have crossed ₹16 lakh crore, with over 9 crore subscribers and coverage is also expanding beyond formal employees to informal workers, gig/platform labour, and underserved groups.

 Importance of recent reforms:

• The fund-of-funds could improve long-term returns but increases exposure to alternative assets.
• New Auto Choices allow central government staff to better match pension portfolios with risk appetite.
• Entry of more fund managers may enhance competition, improve performance, and lower costs.
• Rising subscriber base and expanding coverage indicate broader retirement protection, especially for informal-sector workers.

 Other Government initiative for pension:

Atal Pension Yojana (APY): Launched in 2015, APY targets low-income and informal workers, offering guaranteed pensions ranging from ₹1,000 to ₹5,000 per month; it has over 6 crore subscribers, making it India’s largest contributory pension for unorganised labour.

National Pension System (NPS): Initially introduced for central government employees in 2004 and later opened to all citizens, NPS enables market-linked retirement savings; its subscriber base has crossed 9 crore, reflecting growing voluntary uptake.

Old Age Pension under National Social Assistance Programme (NSAP): The Indira Gandhi National Old Age Pension Scheme (IGNOAPS) provides non-contributory pensions to elderly persons below the poverty line, offering basic income security—especially for those without formal careers.

Pradhan Mantri Shram Yogi Maandhan (PM-SYM): Launched in 2019, it provides a ₹3,000/month pension for unorganised workers aged 18–40, based on contributory savings supplemented by government matching contributions.

Pradhan Mantri Kisan Maandhan Yojana (PM-KMY): A pension scheme for small and marginal farmers guaranteeing ₹3,000/month post-60, addressing agrarian old-age insecurity.

 Conclusion:

India’s pension system is gradually evolving from a narrow, state-focused arrangement to a more diversified, contributory and inclusive framework. While rising assets, expanding schemes, and digital reforms signal progress, persistent gaps in coverage, adequacy, and fiscal sustainability highlight the need for deeper reforms. Ultimately, building a secure pension ecosystem will require broader participation, stronger financial literacy, and policies that safeguard both long-term returns and social protection for a rapidly ageing population.

 Source: Times of India