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Has the Indian Retirement Fund Industry come of age?

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Indian Pension Industry

Facts and figures show that there are over 80 million elderly people in India and the segment is growing at a rate of 3.8% per annum, which is well high as compared to the rate at which the rest of the Indian population is growing. The rest population is growing at the rate of 1.8% per annum.

If we talk about the pension cover of the Indian population we see that only 13% of the population have a pension cover. The established Indian pension system is wherein the contribution to an Individuals pension is made by the employee and  employer. However this scheme is only seen in the organized sector, which itself is very small as compared to the unorganized sector.

Historically, there were numerous pension  schemes aiming at the voluntary participation, but unfortunately none of the schemes managed to take off well. Problems for the low participation can be attributed to:

  • Low investment returns because of the pension money invested in safe assets like G-sec
  • The investors do not get to choose their fund managers.

Going forward the problems were rectified in the National Pension Scheme or the NPS, by implementing a system which allowed the investor to choose the asset class they wanted their funds to be invested in. Despite the necessary steps NPS had a slow start.

Problems faced by the Indian Pension System

Some of the key problems identified as the reasons for the pension sector are as under:

  1. Poor and under developed distribution network to reach the investors.
  2. Poor Financial Literacy of people.
  3. Improper and Inadequate efforts being made to sell the pension schemes to people.
  4. Changing psychology of people which resulted in increased investment for the short term than long term.

Steps to enhance the Indian Pension System

In order to correct the problems faced by the sector, proper steps need to be taken which will enhance the growth of the sector and would attract investment. Some of the steps which can be incorporated are:

  1. Indian Postal System has a huge network including the rural India. Use of the network for distribution purpose will help reach greater target audience.
  2. Financial Literacy drives needs to be executed on a large scale mainly in rural areas of the country.
  3. Proper marketing of scheme is required which should only be done post proper market segmentation and positioning of the scheme.
  4. Use of LIC, NGOs, etc. for the marketing and distribution of pension products.

Read more about Life Insurance Industry in India.

Steps to attract the Indian Younger Generation

Some of the alternatives which can be seen while the implementation and designing of the products are as under:

  1. Possibility of active fund management as alternative which could be given to the investors and they could be charged higher. This method will surely help in attracting the younger population who are keen on managing their portfolio themselves. Read more about Asset Management Companies in India.
  2. The  life  expectancy  of  people  is  rising  in  India  and thus a rise in expected cost for healthcare is also seen. This aspect should be taken into consideration while designing the social security system.

The Pension system plays a major role by adding liquidity to the capital markets and thus helps in economic growth of  the nation.

Analysis of  the Demographic Profile

  1. The  proportion  of  the  elderly (above 60 years of age) in the total population is expected to increase to 13% (350  million) by 2025.
  2. India is also witnessing longer life expectancy which is expected to increase in coming years from the current level at 60 years.
  3. 85% of India’s population is working in the unorganized sector (agriculture to small scale industries)
  4. The  literacy rate is substantially low in the rural areas and unless the problem is addressed the issue of financial planning cannot be conveyed to the rural illiterate population. Thus there is a need of sound planning for improving education system.
  5. Only 4 to 5% of the  aged live alone
  6. Less  than 1% are  inmates  of  old-age homes
  7. About 30 to 31% of  the  aged  males in the rural and urban areas are fully dependent on others
  8. About 71 and 76% of females in rural and urban areas respectively are dependent on others.

Types of Pension Schemes

1.Social Assistance Schemes for the poor

The scheme provide  assistance  to the  life  time  poor and are targeted at the destitute and poor. These schemes are usually underfunded and are poorly targeted. At present majority of the workers in the unorganized sector are protected only through the efforts of welfare bodies or the NGOs.

2.Occupational Pension  Schemes

These scheme is referred as employer sponsored scheme that is not statutory but provides additional post–retirement  income to employees on a regular basis. These schemes are governed under the Income Tax Act by the IT Dept and the liabilities are met by setting up Trust Funds, either self managed or managed by LIC. The scheme only covers the organized sector workers.

3.Voluntary Pension Schemes

These schemes comprise of Post Office Savings Bank Schemes, Public Provident Fund (PPF), individual and group annuities of life insurance companies.

Recommendation for the Indian Pension Industry

Opportunity of cross selling pensions through the Indian life insurance sector as one potentially effective sales platform should be considered. Also market segmentation should be done in order to identify the target segments and marketing strategies should be designed accordingly.


Thus to conclude we can say that the objectives of ability to consume and poverty alleviation are important parameters. Providing a safe vehicle for long  term  savings will help in the improvement of pension system which in turn will positively affect the lives  of  millions  of  Indian  citizens in years to come. A well designed pension system will help in channelizing the funds from savers to the private sector firms which help in promoting economic growth. Also the system will increase the flow of funds into the government securities market.


Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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