India’s pension system shows improvement in adequacy: Mercer CFA Institute Global Pension Index  

• Index compares 44 retirement income systems with respect to adequacy, sustainability and integrity.
• The index gives 40% weighting to adequacy, 35% to sustainability and 25% to integrity

Mumbai, October 18, 2022: India’s retirement system has improved marginally from 2021, revealed the 2022 Mercer CFA Institute Global Pension Index survey (MCGPI) released today. Globally, Iceland was top, followed by the Netherlands, while Thailand ranked last. This year’s MCGPI also features Portugal as a new addition.

According to the survey, India had an overall index value of 44.4, up from 43.3 in 2021 ranking 41 out of the 44 retirement income systems analysed. The improvement was primarily due to an increase in its net replacement rates¹.

The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65 percent of the world’s population. It benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would help provide more adequate and sustainable retirement benefits.

The index highlights key strengths of retirement pension systems in three sub-indexes — adequacy, sustainability and integrity — where India scored 37.6, 40.7 and 60.4 respectively. In particular, India’s adequacy score, which measures 37.6, improved from 33.5 in 2021.  This is primarily due to an increase in the net replacement rates and the revised scoring methodology to calculate minimum pension

In the absence of social security coverage in the country, the adequacy and sustainability sub-indices can be improved significantly by boosting coverage under private pension arrangements. Regulations in India can also be strengthened to provide a greater level of security for private pension plans, which would enhance the system's integrity.

The penetration of private pension plans is low in India and with over 95% of the total workforce being in the unorganised sector, there is a need for strong facilitation so that these workers are not left out of the pension system. There is hope that new labour codes, when implemented, would give access to such coverage and drive the necessary improvement in the adequacy and sustainability sub-indices.

With the increase in life expectancy, facilitating and encouraging savings for retirement becomes even more important. Benefit plans that discourage leakage — that is, use of funds before retirement — would also go a long way to increase adequacy.

According to Preeti Chandrashekhar, India Business Leader at Mercer – Health and Wealth,

“The financial fragility of individuals has been exposed due to reasons such as the pandemic, global conflicts and volatile interest rates. The lack of a social system to support citizens has only accentuated the impact. Since the past decade or so, 2001-02, the government has adopted a number of measures aimed at pension reforms for both Central Government and for the unorganised sector. Subscribers under the National Pension System are also increasing. However, with traditional employer-employee relationships getting blurred, we need programmes that are inclusive of all Indian workers including those in the gig economy.  The new labour reforms are expected to usher in a framework to facilitate increased participation in private pensions, thereby encouraging higher levels of private savings. Given the demographic diversity and the large percentage of the workforce in the unorganised sector, reforms in the pension system take time to manifest themselves. The results from this year’s Mercer CFA Institute Global Pension Index show that India’s pension system is getting stronger, but also highlight how much work still needs to be done.”

Sivananth Ramachandran, Director, Capital Markets Policy, India, CFA Institute, said, “India, like its peers in the region, faces short-term macroeconomic risks from higher prices, rising interest rates, and widening current account deficits, but, with its strong economy, is better positioned to weather them. However, even as these short-term issues focus policy-makers’ attention, they should continue to focus on the long-term issues in our pension system, such as improving the adequacy of pension benefits for the poorest segment of the population, and widening the coverage of pension arrangements for the unorganised working class. Also, the problem of individuals bearing the risks of managing their retirement corpus, due to the shift from defined benefits to defined contributions, is not unique to India, and the report lays out the issues and the approaches that might help solve the conundrum.”

Global Results

Globally, Iceland had the highest overall index value (84.7), closely followed by the Netherlands (84.6) and Denmark (82.0). Thailand had the lowest index value (41.7). For each sub-index, the systems with the highest values were Iceland for adequacy (85.8) and sustainability (83.8), and Finland for integrity (93.3). The systems with the lowest values across the sub-indices were India for adequacy (37.6), Austria for sustainability (22.7), and the Philippines for integrity (30.0).

In comparison to 2021, Mexico showed the most improvement as a result of pension reform, which improved outcomes for individuals and enhanced pension regulation.

About the Mercer CFA Institute Global Pension Index (MCGPI)

The MCGPI benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits.

This year, the Global Pension Index compares 44 retirement income systems across the globe and covers 65 percent of the world’s population. The 2022 Global Pension index includes one new retirement income system – Portugal.

The Global Pension Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity to measure each retirement system against more than 50 indicators.

The Global Pension Index is a collaborative research project sponsored by CFA Institute, the global association of investment professionals, in collaboration with the Monash Centre for Financial Studies (MCFS), part of Monash Business School at Monash University, and Mercer, a global leader in redefining the world of work and reshaping retirement and investment outcomes.

For more information about the Mercer CFA Institute Global Pension Index, click here.

1 OCED: The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking into account personal income taxes and social security contributions paid by workers and pensioners.

About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s approximately 25,000 employees are based in 43 countries and the firm operates in 130 countries. Mercer is a business of Marsh McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 83,000 colleagues and annual revenue of over $20 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit mercer.com. Follow Mercer on LinkedIn and Twitter.

About CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion of ethical behavior in investment markets and a respected source of knowledge in the global financial community. Our aim is to create an environment where investors’ interests come first, markets function at their best, and economies grow. There are more than 190,000 CFA® charterholders worldwide in more than 160 markets. CFA Institute has nine offices worldwide, and there are 160 local societies. For more information, visit www.cfainstitute.org or follow us on LinkedIn and Twitter at @CFAInstitute.

About the Monash Centre for Financial Studies (MCFS)

A research centre based within Monash University's Monash Business School, Australia, the MCFS aims to bring academic rigour into researching issues of practical relevance to the financial industry. Additionally, through its engagement programs, it facilitates two-way exchange of knowledge between academics and practitioners. The Centre’s developing research agenda is broad but has a current concentration on issues relevant to the asset management industry, including retirement savings, sustainable finance and technological disruption.

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