Pension Reform Drive

According to the Economic Survey 2025-26, India's pension assets comprise only 17% of GDP—significantly below the 80% benchmark of advanced economies. With only 12% of the workforce under formal pension coverage and India's old-age dependency ratio projected to rise to 30% by 2050, the need for a comprehensive and inclusive pension framework has become urgent.

Coverage Crisis in India’s Pension Ecosystem

• Low Coverage & Inequality: Only around 12% of the Indian workforce is covered under formal pension schemes. While public and organised private sector workers have access to multiple protections, the informal sector is left to rely on voluntary schemes like the NPS and APY, which cover merely 5.3% of the population.
• Informal Sector Exclusion: Despite comprising 85% of India’s workforce and contributing over 50% of GDP, informal and gig economy workers remain excluded, posing a future financial and social security risk amid a rising old-age dependency ratio.
• Fragmentation of Pension Schemes: Multiple uncoordinated pension programs—some contributory, some aggregator-supported—have created a convoluted and inefficient system, in stark contrast to structured tiered models in countries like Japan and New Zealand.

Challenges of Sensitisation and Accessibility

• Lack of Financial Literacy: Voluntary participation is constrained by low awareness; with financial education largely missing, informal workers remain unaware of long-term retirement needs and pension products.
• Global Best Practices for Awareness: Countries like Australia have integrated superannuation awareness in school curricula, while the UK and Netherlands have implemented default enrolment and annual benefit disclosures to build trust and understanding.
• Accessibility through Digitisation: Nigeria’s digital infrastructure for pension registration stands as a model for India to emulate, ensuring easy and wide outreach even in rural and informal segments.

Ensuring Sustainability and a Tiered Reform Model

• Weak Pension Fund Adequacy: The Mercer CFA Global Pension Index 2024 assigned India a score of only 44%, with declining adequacy. Without diversification into private pension mechanisms, long-term liquidity and financial sustainability remain vulnerable.
• Tiered Framework Proposal: A unified pension system should consist of:
  • Tier 1: Mandatory flat-rate pension for all
  • Tier 2: Employer-based contributory schemes (opt-out model)
  • Tier 3: Voluntary savings supported by tax benefits and market returns
• Governance and Oversight Mechanisms: Standardised annual disclosures, robust investment norms, and centralized regulation are critical to instil public trust, ensure fund performance, and meet India’s demographic and developmental needs.

Practice Question:

Q. "India’s pension system is fragmented, underfunded, and largely exclusionary towards its informal workforce. In light of global best practices, critically evaluate the need for a tiered and inclusive pension reform framework in India. Suggest suitable institutional and policy measures to ensure scalability, sustainability, and coverage expansion."