The survey reveals that India’s overall index value increased from 44.5 in 2022 to 45.9 in 2023, placing it 45th out of 47 analysed retirement income systems. This improvement is primarily attributed to enhancements in the adequacy and sustainability sub-indices.
India’s retirement income system consists of an earnings-related employee pension scheme, a defined contribution (DC) employee provident fund (EPFO), and predominantly DC-based supplementary employer-managed pension schemes. Government initiatives have been introduced as part of a universal social security program aimed at benefiting the unorganized sector.
Preeti Chandrashekhar, India Business Leader, Mercer – Health and Wealth, stated “Changes in workforce dynamics, employment, and family patterns have brought formal sources of retirement to the forefront. While there is improvement in the net pension replacement rate and participation in private pension plans, which is reflected in the value of Adequacy and Sustainability sub-indices, the coverage of the Indian workforce under private pension plans is still very low (6%). Given that India does not have a mandated public pension plan with contributions linked to earnings that aim at replacing some pre-retirement income, a Social Security System that increases coverage of the unorganised workforce, as well as the self-employed, would further improve the efficacy of the system.”
Chandrashekhar added, “There is a growing focus on making India a full pensionable society and the government has undertaken several measures towards this. Facilitating further participation in private pensions would encourage higher levels of private savings. Focus on funding of gratuity plans, and improved communication in terms of disseminating information to the members would go a long way in improving the governance and overall index value. The results from this year’s Mercer CFA Institute Global Pension Index show that India’s pension system is slowly but firmly getting stronger, with more opportunity for improvements.”
“The rapid development of AI technology presents meaningful opportunities for pension reforms to move forward. For example, AI can enable more dynamic financial decisions by more engaged participants, thereby increasing retirement financial security. It can also empower plan fiduciaries to deliver better retirement outcomes. In India, the elderly population is predicted to double to one-fifth of the total by 2050. Given our demographic trends, and the fact that most of the population lacks formal social security, using AI for data analysis, scenario planning, and communication to manage the retirement transition effectively, represents an opportunity for policymakers,” said Arati Porwal, Country Head-India, CFA Institute.
Increasing influence of AI and its advantages for stakeholders
Apart from ranking the world’s leading pension systems, the report explores the potential of artificial intelligence (AI) to enhance pension and social security systems, ultimately enhancing the quality of life for retirees.
Senior Partner at Mercer and lead author of the study, David Knox added, “The ongoing expansion of AI within the operations and decisions of investment managers could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members. The AI also has the potential to improve member engagement and help individuals make long-term decisions about their financial decisions. Both advances should improve retirement outcomes.”
“AI by itself is not the complete answer. There will always be a need for human oversight. Despite these risks, AI has the opportunity to deliver a higher standard of living in retirement — a worthwhile objective for all pension systems,” added Knox.
Nonetheless, the report underscores that AI carries inherent risks, such as modelling complexities and ethical considerations, along with the necessity for robust data privacy and cybersecurity. When constructing these systems, it is crucial to establish sound governance and unequivocal accountability for AI models to mitigate biases and unwarranted actions. Implementing safeguards is of paramount importance for pension plans to maintain the enduring trust of their members.
Explaining in numbers
The Netherlands secured the highest overall index value at 85.0, closely trailed by Iceland at 83.5 and Denmark at 81.3. Argentina recorded the lowest index value, standing at 42.3. Even as the Netherlands undergoes substantial pension reform, the system remains well-positioned to deliver exceptional benefits as it shifts from a collective benefit structure to a more individually defined contribution approach.
The index is derived from the weighted averages of the sub-indices of adequacy, sustainability, and integrity. Leading in each sub-index were Portugal for adequacy at 86.7, Iceland for sustainability at 83.8, and Finland for integrity at 90.9. Conversely, the sub-indices revealed the lowest scores, with South Korea at 39.0 for adequacy, Austria at 22.6 for sustainability, and the Philippines at 25.7 for integrity.
Declining birth rates have imposed long-term pressures on various economies and pension systems, adversely affecting sustainability scores in countries such as Italy and Spain. However, several Asian systems, including mainland China, Korea, Singapore, and Japan, have undergone reforms aimed at enhancing their scores over the last five years.
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Updated: 18 Oct 2023, 04:45 PM IST