India’s pension sector has witnessed significant progress, according to the 15th Annual Mercer CFA Institute Global Pension Index (MCGPI), with the country’s overall global pension index value rising from 44.5 in 2022 to 45.9 in 2023. The Economic Survey 2023-24, tabled in the Parliament on July 22, a day ahead of Union Budget 2024-25 announcements, says that India’s pension sector has expanded since the introduction of the National Pension System (NPS) and, more recently, the Atal Pension Yojana (APY).

The improvement in the pension sector has been attributed primarily to advancements in the adequacy and sustainability sub-indices, reflecting positive changes in the pension system’s ability to provide sufficient retirement income and its long-term viability.

The Indian pension system, a blend of an earnings-related employee pension scheme, is categorised as a ‘defined contribution’ (DC) in the form of Employee Provident Fund (EPF), and supplementary employer-managed pension schemes. This survey underscores the importance of formal retirement sources, as reflected in the improved net pension replacement rate and growing participation in private pension plans.

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Expansion of NPS and APY

Since the introduction of the National Pension System (NPS) and the more recent Atal Pension Yojana (APY), India’s pension sector has expanded significantly. As of March 2024, the total number of subscribers reached 735.6 lakh, marking an 18 per cent year-on-year growth from 623.6 lakh in March 2023. APY subscribers, including those under its earlier version, NPS Lite, increased from 501.2 lakh in March 2023 to 588.4 lakh in March 2024. Notably, APY subscribers now constitute around 80 per cent of the total pension subscriber base.

Gender and Age Dynamics in Pension Subscription

Data from the Pension Fund Regulatory and Development Authority (PFRDA) shows a positive shift in the gender mix of APY subscribers, with female participation rising from 37.2 per cent in FY17 to 48.5 per cent in FY23. Additionally, younger individuals (aged 18-25) are increasingly represented, their share growing from 35 per cent in FY17 to 46.7 per cent in FY23.

However, a significant portion of APY accounts, about 92 per cent, are for a pension amount of Rs 1,000 per month, with only 4.7 per cent opting for Rs 5,000. This trend is primarily attributed to the low-income target population, where immediate consumption needs often overshadow long-term savings.

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Increased Pension Coverage and Assets Under Management (AUM)

The coverage under NPS and APY as a percentage of the total population has risen from 1.2 per cent in FY17 to 5.3 per cent in FY24. Concurrently, the AUM under these schemes has grown from 1.1 per cent of GDP in FY17 to 4 per cent in FY24.

Future Outlook for India’s Pension Sector

Looking ahead, the NPS is expected to expand rapidly, particularly among corporate employees and relatively affluent households, including self-employed professionals like doctors, lawyers, and small business owners. There is also potential for NPS growth in rural areas among larger farmers and traders, given its flexible contribution requirements.

As India transitions to a high-middle-income country, the scope for pension growth is immense. The country’s demographic structure, characterised by a significant proportion of young people, supports an accumulation phase. With rising life expectancy, the necessity for a steady income stream in old age to mitigate poverty is becoming increasingly apparent.

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Financial Literacy and Inclusion

For the pension sector to fully benefit the population, financial literacy is crucial. It is essential to empower women, given their higher longevity, and young adults, particularly students, to inculcate the habit of long-term savings. Financial inclusion and empowerment are incomplete without each family member having a pension account.

The government, employers, intermediaries, and the pension regulator must work together to encourage people, especially young adults, to join pension schemes. The power of compounding ensures that even small contributions made early can result in a substantial corpus, providing a steady income in post-working life.

India’s pension sector is on a positive trajectory, but achieving comprehensive coverage and financial security for all requires sustained effort and collaboration across various sectors.