International Pension Models and Lessons for India

India's move from a defined benefit civil service pension to a funded, defined contribution NPS followed a global trend, and the design of the NPS drew on experience abroad. Comparing pension systems in other countries helps explain the choices made in the PFRDA Act, the problems the NPS faces, and the reforms that may follow.

1. The Multi-pillar Framework

The World Bank, in Averting the Old Age Crisis (1994), proposed a three-pillar system, later expanded (2005) into five pillars:

• Pillar 0: a non-contributory social pension to relieve poverty in old age;
• Pillar 1: a mandatory, publicly managed scheme, often pay-as-you-go and defined benefit;
• Pillar 2: mandatory, funded individual or occupational accounts, often defined contribution;
• Pillar 3: voluntary savings for retirement;
• Pillar 4: informal support, such as family and access to health care and housing.

India's system maps onto this framework: social pensions (pillar 0), EPS and Government pensions (pillar 1), EPF and the Government NPS (pillar 2), and the voluntary NPS, APY and private products (pillar 3).

2. Chile: Individual Accounts

• 1981 reform: Chile replaced its pay-as-you-go system with mandatory individual accounts managed by private pension fund administrators (AFPs), funded by employee contributions.
• Influence: the model was widely copied in Latin America and Eastern Europe, and influenced thinking behind the NPS.
• Problems: low pensions for many retirees, high fees, and gaps in coverage for informal and women workers led to protests and early withdrawals of savings.
• 2025 reform: Law 21.735, published in March 2025, adds a new employer contribution rising to 8.5 per cent of wages by the early 2030s, split between individual accounts and a social insurance fund, and increases the universal guaranteed pension.
• Lesson: pure individual accounts need a strong solidarity element and low costs to deliver adequate pensions.

3. The United States: Social Security and 401(k)

• Social Security: a pay-as-you-go, defined benefit public pension funded by payroll tax.
• Employer plans: 401(k) and similar defined contribution plans, regulated for fiduciary standards under ERISA (1974), with tax advantages and often automatic enrolment.
• Lesson: strong fiduciary duties and disclosure for those managing retirement money, an approach reflected in PFRDA's rules on pension funds.

4. The United Kingdom: Automatic Enrolment

• State Pension: a flat-rate public pension.
• Automatic enrolment: under the Pensions Act 2008, rolled out from 2012, employers must automatically enrol eligible workers in a workplace pension, with minimum employer and employee contributions; workers may opt out.
• Pension freedoms (2015): removed the effective requirement to buy an annuity at retirement.
• NEST: a low-cost, Government-established scheme to ensure every employer has a suitable option.
• Lesson: inertia works for saving when enrolment is the default; the UK experience with annuity freedoms parallels India's 2025 reduction of compulsory annuitisation.

5. Australia: Compulsory Superannuation

• Superannuation Guarantee: employers must contribute a percentage of wages to workers' superannuation funds, rising to 12 per cent from 1 July 2025.
• Age pension: a means-tested public pension complements it.
• Lesson: a mandatory employer contribution with broad coverage builds large retirement savings and deep capital markets.

6. Singapore, the Netherlands and Sweden

• Singapore: the Central Provident Fund is a mandatory savings system covering retirement, housing and health, with CPF LIFE providing lifelong annuity income.
• Netherlands: collective, funded occupational pensions with very high coverage, moving to a new collective defined contribution design under the Future of Pensions Act; ranked first in the Mercer CFA Institute Global Pension Index 2025.
• Sweden: notional defined contribution accounts (from the late 1990s), with an automatic balancing mechanism, plus a funded premium pension with wide fund choice and a low-cost default.

7. India in Comparison

• Global ranking: in the Mercer CFA Institute Global Pension Index 2025, India ranked 52nd of 52 systems, with a score of 43.8 and grade D, scoring lowest on adequacy.
• Weaknesses identified: low coverage of the workforce, low replacement rates, fragmentation and fiscal pressures.
• Strengths: the NPS's low costs, portability, unbundled architecture and default life cycle fund are consistent with international good practice.

8. Lessons for India

• Coverage: automatic enrolment and employer contributions, as in the UK and Australia, could extend the NPS beyond Government employees.
• Adequacy: a basic social pension floor and solidarity elements, as Chile has added, protect those with small accounts.
• Decumulation: sound payout products, such as CPF LIFE, are as important as accumulation; India's work on assured payouts addresses this.
• Costs and defaults: keep charges low and defaults sensible, as Sweden and NEST show.
• Governance: clear separation of regulator, trustee and fund manager, which supports proposals to separate the NPS Trust.

9. Related Topics and Provisions

• Pension reform in India: the road to the PFRDA Act
• Pension coverage in India
• Old Pension Scheme and NPS: the debate
• Evaluation of the Act and the way forward