India's pension system as per Global Pension Index

The Indian pension system was recently ranked 41st out of 44 countries in the Global Pension Index.

About the Global Pension Index:

A ranking system for pension plans around the globe is done by the Mercer CFA Institute and is known as the Global Pension Index.

What is tracked by this index?

• The index acknowledges that comparing pension systems around the world is neither simple nor straightforward.
• Population requirements, economic growth, government revenue, regulatory maturity, and the growth of the private market are all different.

Three factors are used to rank countries in the index:

• Adequacy: What benefits can retirees expect to receive in the future?
• Sustainability: Will the current systems be able to deliver despite the demographic and financial difficulties.
• Integrity: Are private pension plans governed in a way that fosters long-term public trust?

India's position:

The pension system in India is ranked 41st out of the 44 nations the 2022 edition of this index takes into account.

Low consistently:

• Although that is a low ranking, it is also crucial to remember that India has consistently performed poorly on this index, even in 2011, when only 16 countries were examined.

Ongoing Debate Between OPS and NPS in India:

The Old Pension Scheme (OPS):

• The pension for federal and state government employees was set at 50% of the last drawn basic pay.
• The only people who can receive a pension after retiring are those who work for the government.
• The old pension plan's income is not subject to tax.
• Issues: The main issue was that the pension liability was still unfunded, meaning that there was no corpus created specifically for pensions that would grow over time and could be used to make payments.
• The OPS was also unsustainable because, like existing employees' salaries, pensioners benefited from indexation, or what is known as "dearness relief," which would cause pension liabilities to continue to rise.
• Improved medical facilities would prolong life expectancy, which would result in longer payouts.

NPS: The National Pension Scheme

• NPS is a portable, cost-effective, flexible, and easily accessible retirement savings account.
• Contributions: Under the NPS, a person can contribute to both his retirement account and his social security/welfare benefits with the help of his employer.
• NPS is set up on a defined contribution basis, meaning that the subscriber makes contributions to his account and does not have any defined benefits available when the system is terminated.
• The amount of wealth that has been accumulated depends on the contributions made and the income from investments made with that wealth.
• Beneficiaries: Both resident and non-resident Indians between the ages of 18 and 60 (as of the date on which the NPS application was submitted) are eligible to invest.
• Performance: The NPS has grown its subscriber base over the past eight years and increased the amount of assets it manages.
• PFRDA is in charge of regulating NPS.
• The Government of India established the Pension Fund Regulatory and Development Authority (PFRDA) through the PFRDA Act 2013
• PFRDA was established to protect the interests of subscribers to pension fund schemes by creating, regulating, and growing pension funds with the goal of promoting old age income security.

NPS's importance compared to OPS

• Concerns about the old pension framework's coverage, sustainability, and scalability led to the decision to switch to NPS.
• According to research done in the early 2000s, India was facing unmanageable and unsustainable levels of implicit pension debt due to central (civil) employees, state government employees, and the funding gap of the employee pension scheme.
• Furthermore, only a small portion of the entire labour force benefited from this framework.

Information about the pension:

• When a person is no longer employed, a pension provides them with a monthly income.

Need for the Pension:

• In comparison to youth, one's productivity declines with age.
• Old age security due to the growth of the nuclear family
• Migration of younger members of the family
• Increase in living expenses
• Lengthened lifespan
• A guaranteed monthly income guarantees an honourable retirement.

Global Data recommends:

• For the first time in human history, adults 65 and older outnumber children under the age of five, according to the World Economic Forum.
• There is a risk associated with longevity, even though it might be lower in a nation with a relatively younger population profile like India.
• The concept of longevity risk refers to the possibility that as life expectancies rise, insurance and pension funds may require more funding because people are living longer than expected.

Highlights of the inadequacy of India's pension system:

• Currently employed individuals make up at least 85% of the workforce, and these individuals are likely to remain uninsured or receive only social security benefits as they age.
• 57% of elderly people receive no income assistance from public funds, and 26% receive social pensions as a means of reducing poverty.
• As government ex-workers (or their survivors), 11.4% of the elderly receive defined benefits, accounting for 62% of system costs.

Way Forward

• The Indian pension system desperately needs reform, and switching back and forth between OPS and NPS is not reform.
• Reform must address the futuristic need of India’s rising old-age population in the coming years.