India faces a pension crisis with just 12% workforce coverage, 85% in informal jobs, and a 30% dependency ratio by 2050—urgently requiring a structured, inclusive pension system.

India’s Pension System

• Pension is a form of deferred income provided post-retirement to ensure financial security, economic stability, and social dignity.

Current Status of Pension Coverage in India

• Pension assets: 17% of GDP (vs. 80% in advanced economies).
• Only 12% of the workforce covered under formal pension schemes.
• Disproportionate coverage:
  • Public & organized private sector workers have multiple schemes.
  • The informal sector relies on the National Pension System (NPS) and Atal Pension Yojana (APY), covering only 5.3% of population (FY24).
• 85% of the informal workforce contributes to 50% of GDP but lacks pension security.
• Mercer CFA Global Pension Index 2024: India’s Performance
  • Overall Index: Declined from 45.9 (2023) to 44 (2024).
  • Sub-Indices:
    • Adequacy (40% weight): Sharp drop from 41.9 to 34.2 (due to lower net pension replacement rates).
    • Sustainability (35% weight): Improved (better long-term viability).
    • Integrity (25% weight): Improved (stronger governance/regulation).

Growth of India’s Pension Sector

• Subscriber Base:
• • Total subscribers: 78.3 crore (Sept 2024), up 16% YoY.
  • APY Dominance: 80.3% of total subscribers (62.9 crore); 52% female participation.
  • Age Shift: 45.5% subscribers aged 18–25 (vs. 29.2% in FY16).
• Pension Coverage: 5.3% of population covered under NPS/APY (up from 0.95% in FY16).
  • Assets Under Management (AuM): 4% of GDP (vs. 0.86% in FY16).
• Challenges: 93.7% APY accounts opt for ₹1,000/month pension (low-income prioritization).

Why India Needs an Inclusive and Robust Pension System?

• Economic Security in Old Age
  • Loss of Income: Post-retirement, individuals experience a sharp decline in income-generating capacity.
  • Rising Healthcare Costs: Elderly incur higher expenses due to chronic illnesses and inflation in medical services.
    • India’s out-of-pocket expenses on healthcare still hover around 50 per cent of the total health expenditure.
  • Inflation Risk: Without regular income, the elderly struggle to cope with the rising cost of living.
  • Dependency Burden: Without pensions, elderly citizens become financially dependent on families or the state.
  • As per Economic Survey, only 17% of India’s GDP is held in pension assets compared to 60–80% in OECD countries.
• Demographic Urgency
  • Ageing Population: India’s old-age dependency ratio is projected to rise from 16% (2021) to 30% by 2050.
  • Longer Life Expectancy: More people are living beyond retirement, increasing the number of years requiring financial support.
  • A larger retired population without income security increases the burden on public welfare schemes.
• Social Justice and Inclusive Growth
  • Poverty in Old Age: Lack of pensions leads to destitution among the elderly, especially among BPL and informal sector workers.
  • Gender Disparity: Women live longer but have lower lifetime earnings and savings—pensions offer a gender-equity tool.
    • The World Inequality Report 2022 states that men earn 82% of labor income in India, while women earn 18%.
  • Regional Inequality: States with better pension infrastructure show better elderly welfare indicators.
  • Article 41 of DPSP mandates the State to provide assistance in cases of old age, sickness, and unemployment.
• Informal and Gig Economy Workers at Risk: 85% of India’s workforce is in the informal sector, lacking social security.
  • Gig workers, street vendors, and daily wage earners do not have employer-sponsored retirement benefits.
  • Voluntary schemes like NPS or APY have low enrolment due to lack of awareness and affordability.
• Fiscal Stability and Long-Term Planning: Without a contributory pension culture, governments face higher welfare liabilities.
  • States reverting to the Old Pension Scheme (OPS) risk unsustainable future pension bills.
  • A tiered pension system reduces long-term fiscal stress by sharing responsibility across the state, individual, and employer.
• Catalyst for Financial Inclusion: Pension schemes encourage long-term savings habits.
  • Platforms like APY and NPS promote banking access and digital payments.
  • Pension-linked insurance and annuity markets help deepen capital markets.

Broad Classification of India’s Pension System

Important Pension Schemes in India

• National Pension System (NPS): Started in 2004 for government employees and later opened to everyone.
  • Anyone — government employees, private sector workers, or self-employed — can join.
  • One contributes money regularly, and his pension depends on how your investment grows.
  • At retirement, you can withdraw part of it and use the rest to buy a monthly pension.
• Atal Pension Yojana (APY): Launched in 2015 for workers in the informal sector (like farmers, drivers, vendors).
  • People between 18–40 years can join and get ₹1,000 to ₹5,000 per month after age 60.
  • The amount depends on how early and how much they contribute.
  • The government helps poor subscribers by also adding to the pension fund.
• Unified Pension Scheme (UPS): Applicable to employees who opt for this scheme under NPS. Operational from April 1, 2025.
  • Assured Pension
    • 50% of average basic pay drawn over the last 12 months before superannuation.
    • Minimum qualifying service: 25 years.
    • For service periods less than 25 years, pension will be proportionate (minimum 10 years of service required).
  • Assured Family Pension: 60% of the employee’s pension immediately before their demise.
  • Minimum Pension: ₹10,000/month on superannuation after a minimum of 10 years of service.
  • Inflation Indexation: All India Consumer Price Index for Industrial Workers (AICPI-IW).
• Employees’ Provident Fund (EPF) and Pension Scheme (EPS): Mandatory for workers in big private companies (with more than 20 workers).
  • Part of the salary is saved every month, and the employer also contributes.
  • The saved money earns interest and can be withdrawn at retirement.
  • EPS gives a small pension after working for at least 10 years.
• Old Pension Scheme (OPS): Gives a fixed pension to retired government employees.
  • The pension is 50% of the last salary drawn.
  • Employees do not have to contribute any money during service.
  • It has been stopped for new employees by the central government but brought back by some states.
• Indira Gandhi National Old Age Pension Scheme (IGNOAPS): For very poor people above 60 years of age.
  • They get ₹200 to ₹500 per month from the government without contributing anything.
  • It is a part of the National Social Assistance Programme (NSAP) launched in 1995.
• Pradhan Mantri Shram Yogi Maandhan (PM-SYM): Launched: 2019, by Ministry of Labour & Employment.
  • Voluntary pension scheme for unorganised workers earning up to ₹15,000/month.
  • Provides ₹3,000/month pension after age 60; workers aged 18–40 can enroll.
  • Monthly contributions (₹55–₹200) matched by the government.
  • Enrolment through Common Service Centres with Aadhaar-linked bank accounts.

New and Emerging Areas in Pension

• Gig and Platform Workers: New rules (under the Social Security Code 2020) aim to include workers like delivery agents and app-based drivers under pension schemes.
• Voluntary Pension Plans: People can save more for their retirement through schemes like NPS Tier II and LIC’s pension plans.
• Corporate NPS: Private companies can also offer NPS to their employees and get tax benefits.
• Digital Reforms: People can now join pension schemes through mobile apps, UPI payments, and Aadhaar verification.

Who Regulates Pension Schemes in India?

• PFRDA (Pension Fund Regulatory and Development Authority): Manages NPS and APY.
• EPFO (Employees’ Provident Fund Organisation): Manages EPF, EPS, and insurance schemes for private sector employees.
• State Governments: Run old-age pensions and have control over OPS for their staff.

Constitutional and Legal Foundation of India’s Pension System

• Directive Principles of State Policy (DPSP): Article 41 of the Indian Constitution says that the State should provide public assistance in cases of old age, unemployment, sickness, and disability.
• Right to Life under Article 21: The Supreme Court in Ashwani Kumar v. Union of India (2018), has expanded the meaning of Article 21 to include the right to live with dignity.
  • This includes financial security in old age.
• PFRDA Act, 2013: This law created the Pension Fund Regulatory and Development Authority (PFRDA).
  • It manages and regulates NPS and other pension-related activities.
• Code on Social Security, 2020: This new labour code includes pension provisions for gig and platform workers (e.g., app-based delivery workers, cab drivers).
  • It allows for the creation of pension schemes for unorganised sector workers, with contributions from employers, aggregators, and the government.
• Judicial Support and Landmark Cases: In D.S. Nakara v. Union of India (1982), the Supreme Court ruled that pension is a social welfare measure and a right, not a charity.

Challenges in India’s Pension System

• Low Coverage Among Informal Workers: Only about 12% of India’s workforce is covered by any formal pension scheme.
  • Informal sector workers (who make up ~85% of the workforce) are largely excluded from EPF and NPS.
  • Even APY, meant for the informal sector, covered only 5.3% of the population in FY24.
• Fragmentation of Pension Schemes: India has multiple schemes like NPS, EPS, APY, OPS, and various state-specific pensions.
  • Lack of uniformity, duplication of efforts, and confusion among beneficiaries.
• Limited Financial Literacy and Awareness: Many eligible citizens are unaware of pension options or distrust financial products.
  • Despite heavy outreach, APY enrolment remains low in many states, and only 22.9 lakh APY accounts were opened via mobile onboarding.
• Inadequate Pension Amounts: IGNOAPS offers only ₹200–₹500/month — not sufficient to meet even basic needs.
  • The Mercer Pension Index 2024 gave India a poor adequacy score — highlighting that the income provided in retirement is too low for dignity or security.
• Gender Disparity in Access and Contributions: Women, especially in rural areas, receive smaller pensions and are more financially vulnerable in old age.
  • While 44% of APY subscribers are women, their contribution amounts are significantly lower due to income disparities.
• Political and Fiscal Challenges: Some states (e.g., Rajasthan, Chhattisgarh) have reverted to OPS, which is financially unsustainable.
  • Economic Survey 2024–25 shows that India’s pension assets are just 17% of GDP, compared to 80% in OECD countries.
• Weak Integration with Gig and Platform Economy: Code on Social Security 2020 mentions pension inclusion for gig workers, but implementation is pending.
  • Workers like cab drivers, delivery partners (Swiggy, Zomato) have no pension support despite contributing to GDP.
• Sustainability Concerns: Falling birth rates and increasing longevity place pressure on the sustainability of pension systems, as fewer young people are available to support a growing number of pensioners.

Opportunities for India’s Pension Sector

• Expanding Pension Coverage in the Informal Sector: India can dramatically widen its pension base by targeting the 85% of workers in the informal sector currently outside formal pension nets.
  • Schemes like NPS and APY cover only 5.3% of the population despite informal workers generating over half of India’s GDP.
• Demographic Window Before Ageing Peaks: India has a shrinking window before its young population turns old, making early pension expansion crucial.
  • By 2050, the old-age dependency ratio is projected to reach 30%, highlighting the urgency to build a sustainable pension base now (Economic Survey 2024–25).
• Use of Digital Platforms for Pension Access
  Technology like Aadhaar, UPI, and mobile apps can simplify pension enrolment and micro-contributions, especially for rural and unbanked populations.
• Unified Pension System (UPS) for Seamless Portability: A harmonised system combining NPS, EPFO, and APY can ensure portability and better regulation. 
• Women-Centric Pension Expansion: Focused outreach to women can convert growing female financial inclusion into long-term retirement security.
• Embedding Pension Literacy in Education: Teaching pension and retirement planning early can increase long-term voluntary participation.
• Developing Private Pension and Annuity Markets: Encouraging private fund participation can reduce pressure on public pensions and improve sustainability. 
  • Countries like the Netherlands and Australia, successfully use private pension funds to support public systems.

Way Forward for India’s Pension Sector

• Integrate All Pension Schemes Under a Unified System: India should harmonise NPS, EPFO, APY, and other schemes into a single, digital, and portable pension architecture. 
  • This will ensure simplicity, reduce duplication, and improve coverage across sectors.
• Introduce a Universal Basic Pension Guarantee: A flat-rate contributory pension should be ensured for all citizens, regardless of their employment type.
  • It will provide a safety net for those not covered by formal employment.
• Implement Auto-Enrolment with Opt-Out Flexibility: Automatically enrolling workers into pension schemes can improve participation without coercion.
  • This method nudges people into saving for retirement while retaining individual choice.
• Strengthen Digital Access and Mobile-Based Enrolment: Use Aadhaar, UPI, and mobile platforms to make pension enrolment fast, paperless, and inclusive.
  • Learning from Nigeria’s investment in digital pension infrastructure, India needs to prioritize user-friendly digital enrolment platforms to increase the reach of its pension system.
• Promote Pension Literacy from an Early Age: Financial and pension awareness should be taught in schools and community programs. 
  • Early exposure builds lifelong financial planning habits.
• Design Gender-Sensitive Pension Policies: Provide flexible contributions, maternity-linked safeguards, and SHG integration to enhance women’s participation.
  • This helps bridge long-term income insecurity among female workers.
• Encourage Private Sector and Market-Based Pension Options: Boost private pension products and improve investment governance for better fund returns.
  • This will enhance long-term sustainability and reduce burden on public funds.

Conclusion

India’s pension sector must evolve to cover the 85% informal workforce and address the rising elderly population. A unified, digital, and inclusive pension system, inspired by global best practices, is essential for economic security, social justice, and fiscal stability.

DOWNLOAD PDF