By Aparajita Singh, Dvara Research
Income security for the elderly is of immediate concern in India due to increasing old-age dependency and nuclearisation of families as discussed in our first post as part of our pensions blog series. Moreover, a vast portion of the population is employed in the unorganised sector, who barely have access to any form of social protection. They are particularly vulnerable to a decrease in work productivity and health risks that accompany old-age. Out of the many retirement options, one solution that focuses on explicitly mitigating longevity risk, the risk of outliving your assets, are pensions.
A pension is a financial product that allows one to contribute during working years into a fund that will pay out instalments, or an annuity, for the remaining portion of life when one is unable to work due to old-age. A well-functioning pensions system should ensure two outcomes:
- redistribution to ensure that the economically poor have access to a basic level of sustenance in their old age; as discussed in our second post on social pensions
- long-term savings to build inflation-protected corpora that offer adequate annuities in post-retirement life;
In this third and final post, we discuss the latter. We look at voluntary and contributory pension schemes, especially micro-pensions, which are pensions exclusively designed for low-income households considering their highly seasonal and irregular income.
Pension Coverage in India
As of 2019, 10% of the total population is above the age of 60, which is considered the standard retirement age in India. As discussed in our second post, this age criterion may be too high for vulnerable communities and those involved in arduous labour whose retirement age and longevity are lesser than average. About 58% of the population is of working-age (18-60 years) and needs to invest in pension products to ensure income-security in their non-earning years.
A quick look at the coverage of major pension schemes in the country sheds light on the extent of exclusion.
The Employee Provident Fund Organisation (EPFO) and National Pension System (NPS) together cover close to 47% and 8% of the total organised sector respectively. On the unorganised front, there is the Atal Pension Yojana (APY) and NPS. While APY has 1.7 crore subscribers, less than half of them have contributed in the past 24 months. Together, APY and NPS cover 3% of the population employed in the unorganised sector.
It is important to note that while someone who’s enrolled with the EPFO cannot avail APY; they can avail NPS. Additionally, an individual can have one account in NPS and another with APY. Hence, the number of unique persons covered by at least one pension scheme maybe even lesser. Even if we assume that each policy is associated with a unique individual, the pension coverage gap translates to 91%.
Further, based on our previous analysis, we know that NPS-Swavalamban (NPS-S), APY, and Pradhan Mantri Shram Yogi Maan- Dhan Yojana (PM-SYM) all under-protect in terms of the pension amount offered.
Advent of micro-pensions
Though the salaried have had options for retirement planning since 1952, we note that the unorganised sector has remained invisible for a long time. While social pensions for the elderly poor which kick in once people have already fallen into poverty and past their working years have existed since 1957; the first preeminent products that catered exclusively to the retirement needs of the unorganised sector started in the 2000s. These were the West Bengal provident fund for unorganised workers and Rajasthan’s Vishwakarma micro-pension scheme. In addition to the pan-India micro-pension schemes like NPS-S, APY and PM-SYM noted above, micro-pensions schemes are also offered by microfinance institutions, Unions, Self Help Groups (SHGs), Cooperatives, Societies and Trusts.
Most private pension schemes are unsuitable for low-income households due to several reasons. People are excluded due to lack of identification and employment documents. In some cases, there is neither a grace period nor an option to surrender the policy. Most pension schemes have an exit load (charges for leaving the scheme) ranging from 1%-5% as compared to countries like Spain, Turkey, Mexico, or Chile where exit loads either don’t exist or are less than 1%. The only pan-India private micro-pension scheme we have come across is the Unit Trust of India-Retirement Benefit Plan (UTI-RBP),.
The way forward
In lieu of the current state of micro-pensions in India, we propose the following:
- The product design should provide a combination of lump sum and annuity upon superannuation. This assures the flexibility to withdraw accordingly and simultaneously, a guaranteed income stream for life. Since annuities may not keep up with inflation, investment in local physical assets are a good way to hedge inflation risk. Mortality-linked securities such as longevity-indexed bonds would serve as a prospective capital markets solution for longevity risk management.
- On the delivery and enrollment front, there is approximately 1 APY service provider per 8500 people. An analysis of APY’s predecessor, NPS-Lite, reveals that given the revenue and incentive structure, the product can only be commercially viable “if distributors leverage existing client networks and infrastructure”. Hence, to ensure last-mile delivery at an effective cost, distribution points can engage grassroot organisations like farmers clubs, unions and other such associations through aggregators.
- Instead of engaging in product design, the role of the government should be geared towards activities like filling the gaps in missing markets and helping bridge information asymmetries. For example, public statistical agencies need to provide reliable life tables with forecasts, especially for the unorganised sector, to aid suitable product designs. The most critical role of the state is in protecting the interests of the pensioners, as only the state has the power to enforce inter-generational contracts. For example, the complete privatisation of pension plans post-1990 in Eastern Europe and Latin America had several unwanted effects, including low coverage, high administrative costs, increasing gender inequity, and lower benefits. From 2008, most countries have been reversing these reforms and going back to public pension schemes which aren’t bereft of sustainability issues themselves. Hence, one of the most significant areas of exploration is to motivate higher private sector participation in the pensions system while implementing a regulatory structure to protect uninformed consumers.
Given that by 2050 every fifth Indian will be a sexagenarian compared with one in twelve now, universal coverage of pensions and longevity risk protection is the need of the hour to adequately provide for future consumption. To plug the existing protection gap, engaging private players in suitable roles would improve social welfare.
 A micro-pension scheme is a voluntary, defined contribution, individual account plan for the informal sector (or low-income earners). It has no plan sponsor and allows for the accumulation of voluntary savings over a long period. Micro-pension schemes are usually long term savings products or hybrids between pension schemes and savings products. Iwelume, M. and Olanipekun, T. (2017). Micro- Pension: The New Frontier. Advisory Outlook, PwC.
 Population Estimates and Projections, World Bank Group.
 Calculations for the organised and unorganised sector is done assuming that the entire working-age population is employed, the unorganised sector consists of 88% of the total workforce, and organised sector consists of 12% of the workforce.
 EPFO consists of 3 schemes – namely the Employee Provident Fund (EPF), Employee Pension Scheme (EPS), and Employee Deposit Linked Insurance (EDLI).
 The NPS consists of NPS for the government sector, all India citizen model, corporate model, NPS-S, and NPS for NRIs. NPS-S and all India citizen model can be availed by the unorganised sector. NPS-S was replaced with APY in 2015 and stopped enrolling new members.
 Author’s calculations.
 Agarwal, H., Banerjee, S., and Sarkar, R. (2019). Case study of actuaries and social security Atal Pension Yojana. Proceedings from Seminar on Current Issues in Retirement Benefits organised by the Institute of Actuaries of India.
 Author’s calculations.
 Question 6, Frequently Asked Questions about NPS, NSDL website.
 The Employee Provident Fund was started in 1952.
 The first state old-age social pension started in 1957 in Uttar Pradesh. Kulkarni, S., Raju, S., and Bammidi, S. (2012). Thematic Paper 1 Building Knowledge Base on Ageing in India: Increased Awareness, Access and Quality of Elderly Services. Social Security for the Elderly in India.
 Cai, F., Giles, J., O’Keefe, P., and Wang, D. (2012). The Elderly and Old Age Support in Rural China: Challenges and Prospects. Directions in Development; human development. Washington, DC: World Bank.
 Two prominent examples here would be the Abhay Hastham co-contributory scheme offered by the SHGs of Society of Eradication of Rural Poverty (SERP) in Andhra Pradesh and South Indian Fishermen Federation Society’s (SIFFS) long term savings scheme.
 Mitchell, O. and Mukherjee, A. (2016, May 8) Assessing the Demand for Micro- pensions Among India’s Poor (May 8, 2016).
 OECD (2017). Pensions at a Glance 2017: OECD and G20 Indicators, OECD Publishing, Paris. http://dx.doi.org/10.1787/pension_glance-2017-en
 Arunachalam, R. (2007). Micro-Pensions in India: Critical Issues, Challenges and Strategies for Future. Study for Cordaid, Netherlands. Uthira.D and Manohar, H. (2009). Economic implications and sustainability of micro- pensions in the era of pension reforms in India. ISSN 1450-2887 Issue 24, International Research Journal of Finance and Economics.
 A private company named Invest India Micro-Pension Services (IIMPS) partnered with various entities like SEWA, BASIX, Ujjivan microfinance etc. for more than a decade to provide micro-pensions. In October 2018 IIMPS filed for voluntary liquidation. We have not been able to track the status of these pensions after this.
 Sathe, S. (2013). Longevity Risk. In B. Ananth & A. Shah (Eds.), Financial engineering for low-income households (pp 124-135). New Delhi: SAGE India.
 Longevity bonds or survivor bonds are a category of derivatives which are linked to the mortality of the stated population group. The bond pays coupons that reduce over time in line with the actual mortality experience of a particular age group in the population. If population survivorship is higher at each age than was expected, the bond pays out higher coupons.
 Blommestein, H. et al. (2009), “Evaluating the Design of Private Pension Plans: Costs and Benefits of Risk-Sharing”, OECD Working Papers on Insurance and Private Pensions, No. 34, OECD publishing, © OECD. doi:10.1787/225162646207. Please note that there have been no examples of longevity bonds till now
 Author’s calculations using Point of Presence- Service Provider (POP-SP) list as made available on the NSDL website on September 23, 2019.
 Arunachalam, R. (2007). Micro-Pensions in India: Critical Issues, Challenges and Strategies for Future. Study for Cordaid, Netherlands.
 The OECD roadmap for the good design of defined contribution pension plans (This roadmap was approved and endorsed by the OECD Working Party on Private Pensions in June 2012).
 Arunachalam, R. (2007). Micro-Pensions in India: Critical Issues, Challenges and Strategies for Future. Study for Cordaid, Netherlands. Blommestein, H. et al. (2009), “Evaluating the Design of Private Pension Plans: Costs and Benefits of Risk-Sharing”, OECD Working Papers on Insurance and Private Pensions, No. 34, OECD publishing, © OECD. doi:10.1787/225162646207.
 Antolín, P. and F. Stewart (2009), “Private Pensions and Policy Responses to the Financial and Economic Crisis”, OECD Working Papers on Insurance and Private Pensions, No. 36, OECD publishing, © OECD. doi:10.1787/224386871887.