How Does The Indian Pension System Measure Up In Global Markets?

If you are a salaried employee, at some point, you have thought about your life after retirement. Chances are, especially if you’re an overworked millennial, you’ve got big plans to travel the world, relax and enjoy.

Your savings will partly help you realise this dream. Another big component that plays into your life after retirement is the pension system in the country. Let’s see how India’s pension system fares against other countries.

What is India’s Rank in the Global Pension Index?

If you look at the numbers, they are bleak. Out of the 44 countries included in the survey, India came in at number 41. Iceland topped the survey, followed closely by Netherlands and Denmark. That is abysmal, to say the least.

“The financial fragility of individuals has been exposed due to reasons such as the pandemic, global conflicts and volatile interest rates. The lack of a social system to support citizens has only accentuated the impact,” said Preeti Chandrashekhar, India Business Leader at Mercer, Health and Wealth to Live Mint.

The main problem that India faces is the fact that the majority of our workforce is still in the unorganised sector. They don’t have proper employment contracts which enable them to receive benefits and pension plans. And because financial awareness is so low, a lot of people are not even aware of the requirements of these things.

There is a structural issue here, and only government interventions can solve this roadblock. What is needed is reforms and initiatives that can enforce some minimum benefits with employment contracts.

The government has announced a host of reforms that will be implemented over this financial year. “The new labour reforms are expected to usher in a framework to facilitate increased participation in private pensions, thereby encouraging higher levels of private savings,” said Chandrashekhar.

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How Does the Pension System Work in India?

Countries like Iceland and the Netherlands have full-fledged social security systems. They have insurance and pension and a whole horde of other benefits that are freely provided by the government.

India does not have social security. Given our population of 1.4 billion people, our government funds would run dry in days if we tried having social security.

Instead, India has the National Pension System. It’s a voluntary contribution system, like an investment scheme where you earn fixed returns. The scheme was founded in 2009, and since then, it has given an average yearly return of 8 to 10%.

That’s quite good if you consider the fact that Fixed Deposits (FDs) provide about 6.5% at the most. Plus, anything you contribute to the NPS becomes completely tax-free up to Rs 1.5 lakhs per year.

To make it easier for employees, most of the time, NPS is woven into the Employee Provident Fund (EPF) scheme. A part of the contribution to EPF is routed to the NPS scheme.

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The Road Ahead

With systemic change, it always takes a while before we can see any real change. The reforms, the laws, they’re all trying to lay a framework but only time will tell if it works.

“India is ageing and ageing very fast. That’s why talking about pension has become absolutely necessary at this stage,” said Supratim Bandyopadhyay, Chairperson of India's Pension Fund Regulatory and Development Authority.

There is a need to spread awareness. The earlier you start your NPS contributions, the better it is. These systems have been designed to be integrated into your life very organically. It’s almost like a mutual fund systematic investment plan (SIP). It keeps accumulating over time and can generate consistent returns for you.

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