Designing Dignity: How India Can Build an Inclusive Pension Future

With the old-age dependency ratio projected to reach 30% by 2050, the country faces a pressing need to build a comprehensive and inclusive pension system.

Despite economic growth and expanding financial services, only 12% of India’s workforce is currently covered by formal pension schemes.

The rest—primarily informal and gig workers—remain outside the safety net, raising concerns about old-age poverty, economic insecurity, and social inequality.

Current Pension Landscape: Fragmented and Unequal

India’s pension ecosystem is highly fragmented, with multiple parallel schemes catering to different employment categories.

Public sector employees benefit from the Old Pension Scheme (OPS) or the Unified Pension Scheme (UPS), while private sector workers may be enrolled in the Employees’ Provident Fund (EPF) or the National Pension System (NPS).

However, for the informal sector, which constitutes over 85% of the workforce and contributes more than half of India’s GDP, the only options are voluntary schemes like the Atal Pension Yojana (APY) and NPS.

As of FY24, APY and NPS together covered just 5.3% of the total population, highlighting the limited reach of these programs.

Challenges: Scalability, Sensitisation, and Sustainability

Three major barriers hinder the expansion of pension coverage:

1. Scalability: The sheer size and diversity of India’s informal workforce make it difficult to implement a one-size-fits-all solution.
2. Sensitisation: Low levels of financial literacy and awareness about products prevent widespread adoption.
3. Sustainability: Fragmented schemes and voluntary participation models raise concerns about long-term fund viability and administrative efficiency.

Global Pension Lessons: What India Can Learn

Several countries offer models worth emulating:

• Japan operates a mandatory flat-rate contributory scheme for all residents aged 20–59, including self-employed and informal workers.
• New Zealand provides a universal flat-rate pension to all residents aged 65 and above, subject to a 10-year residency requirement.
• The UK uses an opt-out model, automatically enrolling workers into schemes to boost participation.
• Nigeria has invested in digital pension infrastructure to improve accessibility.
• Australia integrates superannuation education into school curricula to build early awareness.

Proposed Framework: A Three-Tiered Approach

Experts recommend a three-tiered pension architecture for India:

1. Tier 1: A mandatory basic pension for all citizens, ensuring minimum income security.
2. Tier 2: Occupational pensions with employer contributions and auto-enrolment.
3. Tier 3: Voluntary savings schemes, incentivized through tax benefits and market-linked returns.

This structure would balance universality, flexibility, and fiscal sustainability, while also simplifying the current maze of schemes.

Policy Recommendations: Building for the Future

To make pensions truly inclusive, India must:

• Integrate existing schemes under a unified regulatory framework.
• Enhance financial literacy through school and community-level programs.
• Leverage digital platforms like UPI for seamless contributions and disbursements.
• Ensure gender inclusion, building on the success of APY, where female participation rose from 37.9% in FY16 to 52% in FY24.
• Monitor fund adequacy, as India’s pension assets currently stand at just 17% of GDP, compared to 80% in advanced economies.

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