India is a young country in terms of demography, but ageing gradually. By 2050, every fifth Indian will be a sexagenarian compared with every twelfth now, putting the country in a position similar to today’s developed world in terms of the share of the elderly in population. Hence, it is important that the development of the underpenetrated pension market in India be initiated now when the situation is ripe.
This comes at a time when informal family support – Pillar IV of the five-pillar framework identified by the World Bank to benchmark pension system in a country – is reducing.
Of the remaining pillars, it is important that the government focusses on Pillar III – voluntary pension – targeting the gargantuan unorganised sector. Plans in this pillar face problem of low coverage, low contributions and persistence. To address these, the government can look at providing a) flexible payment and withdrawal options, b) monetary incentives for the lower-income strata, c) exclusive pension schemes for women, and d) improved financial literacy and intermediation.
Meanwhile, Pillar II, which targets the organised sector, needs to improve its asset allocation. The pension system under this pillar is skewed towards debt, compared with global peers, which are strongly invested in equity. The debt skew is despite the demographic advantage the country has and is expected to enjoy over a long-term. The young population has a long-term investment horizon, which calls for greater allocation to a long-term asset class such as equity for wealth creation, to meet the needs in sunset years. Additionally, there is a section of the workforce which is not covered under any form of retirement products. The government can look at auto-enrolment of people who are part of the ‘employee–employer’ set up but are not covered due to various reasons.
For the elderly below the poverty line, which gets covered under Pillar Zero, the current pension structure under IGNOAPS is sparing and varied across states. The government can thus evaluate a targeted pension scheme for the indigent poor.
In addition, the government should focus on the financial awareness of pension products in the country. Having personal finance and retirement planning a part of the formal education curriculum can aid in achieving the overall objective of financial literacy. Sufficient incentivisation of intermediaries can help in increasing penetration. Ensuring consistency across pension products in terms of accounting valuation, taxation and disclosures, etc, could also aid the growth of the industry.