Module 18. Pension Sector
1. Evolution of Pension Reforms in India
Pension reforms in India reflect a long journey from traditional defined-benefit schemes to a more sustainable, inclusive, and market-oriented pension architecture. Over time, these changes have aimed to address demographic shifts, rising life expectancy, fiscal pressures on government finances, and lack of old-age income security for large portions of the population.
Early Pension Framework: Old Pension Scheme (OPS)
Historically, formal pension coverage in India was limited to a narrow segment of workers. The Old Pension Scheme (OPS) — introduced in the early decades after independence — provided a defined-benefit pension for government employees. Under OPS, a retiree received a guaranteed pension equal to about 50% of the last drawn salary along with dearness relief twice a year. The state funded the payouts on a pay-as-you-go basis from current revenues, rather than accumulating a fund in advance. This meant the government bore a heavy and open-ended liability for pension obligations.
OPS was considered secure for pensioners but became unsustainable as government liabilities ballooned with expanding workforce and increasing life expectancy. Moreover, most workers in the private and informal sectors — forming a vast majority of India’s workforce — lacked any formal pension coverage beyond small provident fund accumulations.
Step Toward Reform: OASIS and EPS
By the 1990s, economic reforms had exposed systemic weaknesses in India’s social security frameworks. In 1995 , the Employees’ Pension Scheme (EPS-95) was introduced as a contributory, defined-benefit plan under the Employees’ Provident Fund Organisation (EPFO) for organized sector workers. However, EPS was limited in scope and did not cover millions in the unorganized sector.
Recognising this gap, the Government of India set up the Old Age Social and Income Security (OASIS) project in 1998 to recommend a comprehensive pension reform strategy. It advocated moving away from unfunded pension liabilities toward a contributory and fiscally sustainable system.
Major Breakthrough: National Pension System (NPS)
A breakthrough came in 2003–2004 with the formation of the Pension Fund Regulatory and Development Authority (PFRDA) on an interim basis and the launch of the New Pension System (NPS) on 1 January 2004 for new Central government recruits (excluding armed forces). The NPS replaced the OPS for these employees and introduced a defined-contribution model in place of guaranteed defined benefits.
Under the NPS:
- Employees contribute a fixed percentage of their salary (often ~10%) to their pension account, matched by employer contributions.
- Funds are invested in market-linked instruments managed by professional pension fund managers.
- At retirement, up to 60% of the accumulated corpus could be withdrawn as a lump sum, while the remaining 40% must be used to purchase an annuity that provides a monthly pension.
The switch to a contributory pension aimed to reduce open-ended budget liabilities and encourage disciplined saving for retirement.
Expansion to All Citizens
Initially limited to government employees, the NPS was expanded in 2009 to all Indian citizens — including private sector workers and those in the informal sector — on a voluntary basis. This significantly widened potential pension coverage.
The PFRDA Act, 2013 (notified in 2014) gave statutory status to the regulator, strengthening the institutional framework governing pension funds, product standards, and subscriber protection.
Focus on the Informal Sector: Atal Pension Yojana (APY)
Despite NPS expansion, uptake among low-income and informal workers remained modest due to income uncertainty and market-linked returns. To address this, the government launched the Atal Pension Yojana (APY) in 2015 . APY provides a guaranteed minimum monthly pension (e.g., ₹1,000–₹5,000) to contributors upon reaching 60, based on contribution levels and entry age. It targets workers with irregular incomes and promotes contributory pensions across the informal economy.
Multi-Tiered Pension Architecture
Today, India’s pension system consists of three broad pillars:
- Social Assistance Pillar: Non-contributory support programmes such as the Indira Gandhi National Old Age Pension Scheme (IGNOAPS) provide minimal monthly allowances to elderly persons below the poverty line.
- Mandatory Provident Fund and Pension Pillar: EPFO’s EPF/EPS ensures organized workers have retirement savings and defined-benefit pensions.
- Contributory National Pension Pillar: NPS and APY enable long-term retirement accumulation via personal contributions and market investment.
This architecture aims to balance fiscal sustainability, inclusivity, and adequacy of old-age income security.
Recent Developments and Reforms
In recent years, the pension landscape has continued to ...
