A recent study by United Nations Population Division highlighted that World’s life expectancy is expected to reach 75 years by 2050 from present level of 65 years. The improved health and sanitation conditions across the world have ensued better life span, thereby adding to the number of post-retirement years. Thus, rising cost of living, inflation and life expectancy make retirement planning essential part of today’s life. The traditional and best approach to achieving retirement security consists of a pension, which helps to maintain a middle-class standard of living, and retirement savings provides important supplemental income for unforeseen expenses.

The money you save in a pension builds up into a pot which provides a secure means of monthly income to older people, especially the underprivileged and the weak. The amount, though small, proves useful as it means less dependence on the family and greater dignity and confidence. It relieves them of the worries of daily existence in old age and the need to work to provide for daily food and necessities.

Pension, a fixed sum to be paid regularly to a person, typically is a form of retirement plan that provides monthly income to employees of companies or governments that offer such plans. Two primary types of pension plans include defined-benefit plans and defined-contribution plans. With defined-benefit plans, the employer guarantees that the employee will receive a definite benefit amount upon retirement, regardless of how well the underlying investment pool performs. With defined-contribution plans, the employer makes predefined contributions for the employee, but the final amount of benefit that the employee receives depends on the investments’ performance.

The amount that an individual’s pension provides is typically based on the number of years the employee has worked for the company or government offering the plan, the employee’s age at retirement, and the employee’s compensation, either at retirement or over some other period determined by the plan.

Worldwide, the quality of pension systems available to workers varies greatly. While pension reforms in most countries initially are driven by the budgetary difficulties of supporting costly public pension systems, the longer term problems of ageing of the population and social change, including breakdown of traditional family support for old age income security, are equally important factors. Worldwide, pension systems are under more pressure than ever before because of rising life expectancies, increased government debt, uncertain economic conditions, inflation risk, and a shift towards defined contribution plans.

India has a large number of young people, but as the population grows, it is expected to add a substantial number of elderly people. By 2050, those 60-79 will make up 21 per cent of the population and those over 80 an additional 15 per cent. Also, the absence of a country-wide social security system (formal pension coverage being about 12% of the working population), while the ageing and social change are important considerations for introducing pension reform in the unorganised sector, fiscal stress of the defined benefit pension system was the major factor driving pension reforms for employees in the organised public sector (Government employees).

Almost 400 million people (more than 85% of the working population in India) work in the unorganized sector. Of these, at least 120 million are women and the majority had no access to any formal old age income security scheme. Tenuous labour market attachment, intermittent incomes, poor access to social security renders the unorganized workers highly vulnerable to economic shocks during their working lives.

Today, major retirement schemes in India include provident fund, gratuity and pension schemes. The first two schemes provide lump sum retirement benefit while the last one makes payment in the form of monthly annuity. These schemes are characterized by the following common features i.e. they are mandatory, occupation based, earnings related, and have embedded insurance cover against disability and death. There are three major components to the Indian pension system: civil servants pension, the mandatory pension programs run by the Employees’ Provident Fund Organisation of India and the unorganised sector pension.

India, like most other developing countries, does not have a universal social security system to protect the elderly against economic deprivation. Perhaps, persistently high rates of poverty and unemployment act as a deterrent to institute a pay-roll tax financed state pension arrangement for each and every citizen attaining old age. Instead, India has adopted a pension policy that largely hinges on financing through employer and employee participation. This has however restricted the coverage to the organized sector workers only.

Private sector workers are less fortunate and until recently had access only to a provident fund system and pension plans offered by the Life Insurance Corporation of India for their old age income security. The provident fund system, consisting of the Employees’ Provident Fund (EPF) and a number of smaller provident funds is the largest benefit program operating in India.

Thus, to provide social security to more citizens the Government of India established Pension Fund Regulatory and Development Authority (PFRDA) in 2003 to develop and regulate pension sector in the country. The National Pension System (NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPS aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens.

Additionally, to encourage people from the unorganised sector to voluntarily save for their retirement the Central Government launched a co-contributory pension scheme, ‘Swavalamban’ Scheme in the Union Budget of 2010-11. It will be applicable to all citizens in the unorganized sector who join the National Pension System (NPS).

This Article is taken from Disha’s The Knowledge Book.

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