According to Census figures, the proportion of older people in the population in India was 5.3 per cent in 1961, and is expected to reach 9.9 per cent in 2021. As the Indian population ages and the traditional joint family system gradually falls apart, the living standards of India’s elderly are bound to worsen. In the absence of adequate pension provisions for poor people, alternatives mechanisms must be developed to provide income security in old age.
Pensions in India
Depending on the estimates, retirement benefits in India are available to only 11% to 13% of the workforce. Moreover, the covered individuals are among the highest-income earners in India.
The National Old Age Pension Scheme (NOAPS) is a non-contributory, means-tested social assistance program targeting the destitute persons over 65 years old. The monthly pension amount is a modest Rs. 200 per beneficiary. In addition, some States add a contribution from their own resources. The program covers only a small fraction of the elderly.
Government employees and workers in the organized sector are covered by mandatory schemes. Government employees participate in both a contributory Defined Contribution pension plan - the General Provident Fund Scheme (GPF) and a noncontributory, pay-as-you-go, Defined Benefit pension plan - the Civil Services Pension Scheme. Civil servants also obtain a lump sum gratuity upon retirement.
The schemes designed for workers of the organized sector - a DC system called the Employees Provident Fund (EPF) and a DB plan called the Employees Pension Scheme (EPS) - are managed by the Employees’ Provident Fund Organization (EPFO). The Public Provident Fund (PPF) is meant to provide the unorganized sector with an instrument for long-term savings. However, employees contributing to one of the mandatory schemes can also join the PPF. The PPF is an individual account system that operates through designated nationalized banks or post offices.
In recent years, insurance firms and mutual funds have entered the Indian pension market.They aim at providing pension to investors after they attain 58 years, in the form of periodical cash flows.
Micro pension schemes
The most well-known micro pension scheme for the unorganized sector in Inda is the UTI micro pensions scheme, which has forged parnerships with SEWA (Self Employed Women’s Association), Mann Deshi Bank (Mann Deshi Mahila Sahakari Bank Ltd.), and SHEPHERD (Self-Help Promotion for Health and Rural Development). The micropension is a voluntary, funded, defined contribution scheme based on individual accounts. At maturity the accumulated balances can be withdrawn in a lump sum, a periodical income or a combination of the two.
As MFIs move towards individual lending, they should have systems suited to this. It is preferable that MFIs play a administrative role and leave management of contributions to a professional fund manager, who can invest and manage the funds prudently in line with the extant regulations. This partner-agent model is described in the document of Sybille Gianadda.
DHAN Foundation and Shepherd
The Pension & development Network supports two organizations in India in developing or upscaling a micro pension product. Click here for more information.