In May 2009, the Indian government allowed all citizens to voluntarily open National Pension System or NPS accounts to save for their retirement. Earlier, only central and state government employees were permitted into the scheme. The 2009 decision was expected to benefit people employed in the unorganised sector—who form around 90 per cent of India’s workforce but have been traditionally excluded from formal pension arrangements.
In parallel, along with the building blocks needed for comprehensive pension inclusion, India has put in place a world-class digital finance ecosystem. (moved here) This consists of a strong and sustained political commitment, a statutory pension sector regulator, a well-designed and low-cost NPS product architecture, credible and well-regulated NPS intermediaries, securities market capable of delivering high returns, near-universal banking and mobile penetration, and the India Stack infrastructure with Aadhaar for easy eKYC, and UPI for secure digital payments.
Dwindling participation
However, 13 years after NPS became accessible to regular Indians, barely 6.7 million people (or two per cent of India’s roughly 400 million informal sector workers) have opted for the NPS. By 2050, if this situation is allowed to continue, India will have nearly 300 million elderly without pension benefits—each of whom will face the grim prospect of extreme poverty for over 20 years. At that point, a tax-funded social pension of even Rs 100 a day could impose a fiscal cost of nearly Rs 11 lakh crore per year. This will inevitably divert essential public expenditure on health, education and infrastructure and lead to extended social and fiscal stress.
On the other hand, if even a quarter of the currently excluded informal workers began saving Rs 50 a day in NPS, they could generate over Rs 25 lakh crore in new long-term household savings within the next decade. This could galvanise economic growth, infrastructure and employment.
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Addressing roadblocks
This aggregate latent demand for long-term retirement savings should surely be of considerable interest to the government, as well as to pension providers and digital ecosystem stakeholders. What is then preventing the NPS from reaching low and lower-middle-income (LMI) segments? And what is preventing millions of everyday Indians from using the NPS to assure themselves a secure and dignified retirement?
To a certain extent, the first problem lies on the supply side. Although the enabling ecosystem exists, it is fragmented. And there is no easy and simple way for most people to save for their retirement. Also, pension product providers continue to depend mainly on agents and tax incentives to drive retail sales. However, sales commissions on small-ticket pensions are not attractive enough for agents. Also, most LMI segments are not taxpayers. Hence, neither strategy works at scale to bridge India’s pension coverage gap.
Several demand-side barriers and constraints further compound the problem. For example, everyday Indians with negligible experience in modern finance are forced to deal with a six-page NPS application form in English, and a complicated and cumbersome KYC process without help from agents. Ideally, anyone with a full KYC bank account linked to Aadhaar should be able to avoid new KYC and digitally activate a portable NPS account in any language within minutes. Rwanda, for example, has achieved roughly 2 million voluntary micro-pension enrolments (30 per cent of its adult population) within three years by making digital account activation easy and simple for informal workers.
Second, most NPS target segments are not insured against a range of lifecycle risks. As a result, they are forced to use a combination of past savings and credit to pay the full cost of frequent income interruptions, health shocks and other risks. Needless to say, such adverse events erode past savings, while repayment of expensive emergency loans puts a strain on future surplus income. Using savings and credit for risk management leaves no room for saving for old age or other needs. In this situation, it is desirable to layer NPS with insurance to make the overall proposition more attractive and simultaneously lower the high premium on liquidity among LMI households.
The third reason for low NPS traction is affordability. Current product rules impose a minimum contribution of Rs 500 on investors. This ticket-size crowds out most Indians who earn modest and intermittent daily incomes. It is especially difficult for daily wage earners to accumulate money to save. It is so much easier for, say, an auto-rickshaw driver or a street vendor to simply use UPI and transfer Rs 50 a day into their NPS account instead. Allowing people to save for their old age in line with their unique income flows could make saving for retirement more affordable for most Indians.
The fourth demand-side constraint is myopia. For most young people, old age is too far away and fuzzy. Also, terms like ‘retirement’ and ‘pension’ do not easily resonate with blue-collar workers like our domestic help, farmers and construction workers. There is also a fairly large—and misplaced—expectation that children make for an adequate retirement portfolio. Clearly, we need an extensive and sustained focus on retirement literacy and public awareness to dispel misplaced notions and encourage a voluntary shift to investment in retirement funds. The government needs to launch a national-level campaign on NPS and retirement savings –just like the Association of Mutual Funds in India (AMFI)’s ‘Mutual Funds Sahi Hai’ campaign, which has been endorsed by ace cricketers Sachin Tendulkar and Mahendra Singh Dhoni. It shows how even cricketers need to actively prepare for their old age, especially as they retire earlier than most.
As things stand, nearly 400 million young, economically active Indians are slowly walking towards extreme old age poverty. The glass is only half full—with a world-class pension system but a gigantic unmet demand. The government, Pension Fund Regulatory and Development Authority (PFRDA) and the NPS industry now need to urgently put their heads together and address the obvious supply and demand side barriers. Every day is precious. After all, pension exclusion is akin to climate change. It needs immediate attention. By 2050, India’s problem of old age poverty will have become way too large, too late, too expensive and entirely irreversible.
Gautam Bhardwaj and Parul Seth Khanna are co-founders of pinBox Solutions, a Singapore-based fintech enterprise committed to supporting digital micro-pension inclusion in Asia, Africa and the LAC. Views are personal.
(Edited by Zoya Bhatti)