In the recently released 2023 Mercer CFA Institute Global Pension Index survey (MCGPI), India's retirement system showcased a slight improvement compared to its 2022 standing. While the Netherlands regained the top position on the list, India's overall index value increased from 44.5 in 2022 to 45.9 in 2023. These enhancements were primarily seen in the adequacy and sustainability sub-indices.

 

India's Retirement Landscape

India's retirement income system comprises an earnings-related employee pension scheme, a defined contribution (DC) employee provident fund (EPFO), and predominantly DC-based supplementary employer-managed pension schemes. The government has introduced initiatives as part of a universal social security program to support the unorganized sector.

 

There has been progress in net pension replacement rates and participation in private pension plans, reflected in the improved adequacy and sustainability sub-indices. However, the coverage of India's workforce under private pension plans remains low at 6%. There is a requirement for social security system that expands coverage to the unorganized workforce and the self-employed, further enhancing the system's effectiveness.

 

India's focus on becoming a pensionable society, with the government implementing measures in that direction. Encouraging higher levels of private savings through participation in private pensions and improving gratuity plans' funding and communication to members could enhance governance and the overall index value.

 

The Role of AI in Pension Reforms

The study explored the role of artificial intelligence (AI) in pension and social security systems, emphasizing AI's potential to enhance retirement financial security. India's growing elderly population presents an opportunity for policymakers to use AI for data analysis, scenario planning, and effective retirement transition management.

 

The report stressed that AI can enhance decision-making, improve member engagement, and contribute to long-term financial decisions, ultimately leading to better retirement outcomes. However, it cautioned that AI should not replace human oversight and highlighted the importance of addressing inherent risks, including model complexities, ethical concerns, and data privacy and cybersecurity.

 

The Global Pension Index Rankings

The Netherlands secured the highest overall index value at 85.0, with Iceland and Denmark closely following at 83.5 and 81.3, respectively. Argentina recorded the lowest index value at 42.3. Notably, the Netherlands maintained its strong position, despite undergoing substantial pension reform.

 

The index is derived from the sub-indices of adequacy, sustainability, and integrity, with Portugal leading in adequacy, Iceland in sustainability, and Finland in integrity. On the other hand, countries like South Korea, Austria, and the Philippines scored lowest in these sub-indices.

 

Challenges and Reforms in Pension Systems

Declining birth rates have posed long-term challenges to economies and pension systems, affecting sustainability scores in countries like 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.

 

While India's retirement system shows promise, addressing coverage gaps, enhancing pension plans, and utilizing AI for better retirement outcomes are key considerations on the path to further improvements.