It is worth highlighting that India has more than 2,000 fintech startups, and they had collectively pocketed more than 2.1 billion USD in 2020 during an unprecedented slowdown amid the pandemic.
Plus, there is no denying that the requirement for such initiatives is already here. According to available data, a young demographic in its late 20s in 2019, senior citizens would comprise at least 20% of the Indian population by 2050.
Moreover, with the lack of proper financial literacy and not-so-inclusive annuity market, the reality looks quite austere.
Leading us to one major question, what has kept Indian startups from exploring the micro-pension space?
Social Security for Senior Citizens in India
We characterize old age as a loss of productive capacity, leading to less or no ways to generate income. Worldwide, communities have had a traditional and informal mechanism to manage the risks. Social stigma, unequal employment opportunities, and unfavorable property laws pose more concerns for older women, especially for widows in India (2).
Such informal mechanisms that tackle elderly income security can lose their effectiveness with the surge in urbanization and families’ atomization.
Therefore, it won’t surprise if governments start transitioning to more formal mechanisms for senior citizen income security as part of their social security frameworks.
It is a subject of immediate concern for policymakers in India because of multiple factors such as increasing longevity, decreasing fertility rates, and a large amount of workforce outside the purview of social security nets.
According to a CRISIL report (3), every fifth Indian would be a sexagenarian in 2050 compared to one in twelve now. In the upcoming future, India would progress towards a higher old-age dependency ratio.
Moreover, as India’s productive capacity would decrease, its consumption need would remain the same or even increase.
The state of senior citizen income security poses a severe threat to the long-term economic growth of India. Still, the Indian pension systems lag behind the globe significantly.
According to the World Economic Forum, only about 7.4% of the Indian labor force participates in any contributory pension scheme. India’s public spending on social security for retired individuals is less than 0.2%, much lesser than developed economies.
India needs a well-functioning system to ensure that the poor can access basic sustenance levels in their old age and long-term savings to build an inflation-protected asset that offers adequate retired life annuities.
Social Pensions in India
Even though more than 48 million people are eligible for social pension in India, only one-third of them (roughly) are receiving it. Indicating that the number of intended beneficiaries excluded could even be higher.
An IGNOAPS, Indira Gandhi National Old Age Pension Scheme, evaluation points out that the use of BPL and poverty lists to target and find beneficiaries has led to huge exclusion and inclusion errors (4). And even though the Ministry of Rural Development and Centre for Budget and Governance Accountability has access to fairly recent data, they are still employing the 2001 census and 2004-05 poverty rations to target beneficiaries in their current methodologies.
Similarly, a fixed criterion for retirement age could be disadvantageous for society’s vulnerable sections whose life expectancy at birth. Morbidity is higher among people living in slums and employed in the informal economy. Those employed in strenuous occupations are forced out of the market because of the drop in physical capacity.
Hence, India needs to rationalize the age for getting pensions. Even with better policies, men usually receive more benefits than women, leading to distortions in the intra-household distribution of resources and exclusions.
MPCE and Low Pension
For most Indian states, pensions don’t even cover half of the MPCE, Monthly Per Capita Consumption Expenditure according to their respective poverty rates, let alone the mediocre household consumption expenditure.
According to the available data (5), the average pension is 16% less than the poverty line MPCE at the India level and covers only about 45% of the average MPCE.
According to the Australian Center for Financial Studies and Mercer’s Index (6), if India needs to meet its poverty alleviation goal, it needs to offer at least 30% of average incomes as a minimum pension. Notably, the pension amounts in India are not even 10% of the elderly’s average earnings.
Last-mile Delivery of Social Pensions
According to a recent NSAP, National Social Assistance Program report, delivery channels employed for disbursing social pension differ across states. Even though bank transfer is the primary delivery channel, more than 78% of all pensioners are still using cash, money orders, and post offices.
There has been a shift towards using DBT, Direct Benefit Transfer in recent years with the JAM, Jan Dhan Aadhaar Mobile to identify beneficiaries better and arrest leakages.
However, it has also given us some unintended consequences. Studies in Jharkhand have highlighted challenges in accessing pensions in JAM’s infancy because of friction in linking Aadhaar cards and bank accounts.
There are also other challenges, such as banking channel exclusion, which has not been addressed adequately.
We all know that banks have refused to market the regulator mandated basic accounts targeted towards underprivileged households. Also, banks turn away customers who negotiate for cheaper alternatives, harass people with the demand of excessive identity documents, withhold vital information about a product, and impose high incident costs on the customer concerning effort and time.
As the Indian government aims to bring most, if not all, all schemes under the DBT framework through JAM, it is vital to understand whether these schemes efficiently reduce household vulnerability.
According to IFMR Finance Foundation indicated in a report that the present targeting and delivery model has nodal agencies hosting intermittent enrolment camps and sparsely distributed bank branches, acting as a barrier for long-term relationship development between the beneficiary and the distributor.
The usage of non-bank financial intermediaries like micro-ATMs, payment banks, and white label BCs would effectively help increase accessible touchpoints.
It is vital to evaluate whether the current intervention machinery is powerful enough to offer universal social security. There are also arguments that tax-financed pensions aimed for redistribution should reflect a real inflation-indexed monthly pension that can at least afford households’ minimum consumption expenditure in each state. It must also ensure acceptable living standards for every household.
Micro-pensions in India
A pension system’s second function is to enable individuals to redistribute resources across time via voluntary and contributory pension schemes, especially micro-pensions (7).
According to a detailed analysis that looked at the coverage of major pension schemes in India (8), the pension coverage gap translates to 91%.
Since 1952, salaried individuals have had options for retirement planning. Social pensions come once people have already come into poverty and past their working years.
However, the first pre-eminent products catered exclusively to working-age informal workers’ retirement requirements were government produced and incepted only in the 2000s.
It is also worth highlighting that most private pensions are not suitable for low-income households for several reasons, such as the lack of required identity and employment documents.
There are times when there is no grace period or an option to surrender the policy. Moreover, most pensions have exit loads; charges for leaving the scheme ranges from 1% to 5% compared to countries such as Turkey, Chile, or Spain, where exit load either doesn’t exist or is less than 1% (9).
The only pan-India private micro-pension scheme we have come across is the UTI-RBP Unit Trust of India Retirement Benefit Plan.
There are proposals that the product design should offer a combination of lump sum and annuity upon superannuation considering the present state of micro-pensions in the country. It would assure the flexibility to withdraw and a guaranteed income stream life long.
It is worth highlighting that India only has about one APY service provider for 8500people. According to APY predecessor analysis, considering revenue and incentive structure, the product can be commercially viable if only distributors leverage existing client networks and infrastructure.
Hence, distribution points need to engage with grassroots organizations such as farmers’ clubs, unions, and other such associations via aggregators to ensure last-mile delivery at an effective cost (10).
Private Players Offers A Way Forward
As we have already discussed, a senior citizen is of eminent concern for India. Even though they are significant, the present social pensions are not adequate in terms of coverage or amount.
Micro-pensions are also inadequate in India because both and history has excluded the unorganized sector from it. Even today, there are not enough products for them.
Instead of engaging in product design, states should focus on protecting the pensioners’ interests as the most critical role as only states have the power to enforce inter-generation contracts (11).
The Indian government should complete missing markers, help bridge information asymmetries, and incentivize private players. Moreover, public statistical agencies should offer reliable life tables with forecasts to aid suitable product designs (12).
Even though the complete privatization of pension plans in Eastern Europe and Latin America post-1900 had adverse effects such as gender inequality, high administrative costs, and low coverage, public pensions are not deprived of sustainability issues.
Engaging private players in suitable roles would also improve welfare and lessen the pension coverage gap in India. There are still studies needed to explore the extent and role of private players in the pension market while implementing regulatory structures to protect unenlightened customers.
WhatsApp’s Micro-pension Plans
In India, EPFO, Employees Provident Fund Organization, and SPFO, Seamen’s Provident Fund Organization, primarily lead organized pension plans. Here, a portion of people’s salary is structurally invested for post-retirement purposes.
On the other hand, micro-pension schemes are individual plans focused on the informal sector or low-income workers and enable voluntary savings for accumulation over a long period. It could also be a hybrid product, a cross between savings schemes and pension but doesn’t have plan sponsors.
Even though workers in informal sectors don’t formally retire, such as their counterparts in the organized sector, there is a requirement to prepare for income reduction as they age and their health declines, which often impacts their earning capacity.
At the end of 2020, Whatsapp had announced an initiative to collaborate with HDFC Pension to take the National Pension Scheme, formerly known as New Pension Scheme, the product on its platform. PinBox, a Singapore-based startup (13), would also be a part of the project.
Overall, WhatsApp would be the go-to-market solution for the project, PinBox would manage the user interference, and HDFC would design the financial product.
There are expectations that the initiative would reach 400 million self-employed individuals in the country. However, we don’t yet know further details and the roll-out plan.
It is also worth highlighting that Whatsapp features WhatsApp Business for small businesses and WhatsApp Pay for UPI transactions.
Challenges in Current Market
Presently, top tech firms in India such as Paytm, PhonePe, Gpay, and Amazon Pay offer solutions across payments, investment, and lending. However, they are completely silent when it comes to micro-pension.
Paytm offers an NPS product (14), marketed as a wealth-building tool but not as micro-pension if we give specific attention.
As we previously discussed, pension penetration in India is quite low compared to other countries in Asia like China, Japan, and South Korea.
A primary reason for it is that the bulk of India’s Indian population is engaged in the unorganized sector that doesn’t have the money to ensure a decent vesting corpus.
There are also government initiatives such as PM-SYM, Pradhan Mantri Shram Yogi Maan-Dhan, and Atal Pension Yojana. Even though they mainly focus on the unorganized sector, their reach is limited.
According to a fintech leader and partner at PwC, Vivek Belgavi (15), the need for a solution has always been there, and now, with gig workers becoming a part of the larger global policy, the opportunities would expand.
He added that digital payments have laid down the foundation in the fintech sector, where investments are made, user engagement has been created, and transaction data has been generated. And as these businesses would add more layers to monetize their offerings, we would soon see them diversifying in the micro-pension area.
Since private participation in this area is not very high, we still need more innovation on the product-market fit even though the need is known.
Nevertheless, we believe that a pension solution would work best if embedded as a financial tool with low distribution cost. One can achieve it via using an existing distribution channel across commerce or fintech solutions. And, the other pension funds supporting micro-pension products require APIs and technology adoption to modernize offerings.
Considering the present scenario, Whatsapp can operate as a distribution channel with multiple providers and traditional insurance firms. Even telecom firms are now offering small insurance products with prepaid recharges that one can utilize for pension purposes (16).
However, the essential part is to get end-users to save their money. It doesn’t matter which platform is offering micro-pension products. The most important part is to reach the right audience, which depends on balancing an intuitive UI, user interface with a compelling argument to make savings.
Offerings of Micro-pension
WhatsApp is trying to establish a robust fintech presence in India for quite some time, and its new offerings are critical for the Facebook-owned company.
After over two years of regulatory struggles, NPCI, the National Payments Corporation of India, finally gave a green flag to WhatsApp to launch its UPI payments on the platform.
However, the messaging platform is still not allowed to go to its full potential since initially; it can only get up to 20 million users on board. Considering its massive 400 million user base in India, it is only a fraction.
Moreover, India has also imposed a 30% transaction volume cap to protect the UPI ecosystem from a possible monopoly (17). Meaning, fintech companies are now compelled to look at a wide range of product offerings to grow their presence, including WhatsApp.
Even though WhatsApp’s user base is largest globally in India, it is constantly struggling with policy matters, further complicating Facebook’s scandalous user data misuse record (18).
It leads us to believe that even Indian startups are staying out of the pension product space since it needs institutional and governmental backing. Since pension penetration is so low in India, even the organized sector employees are not fully covered.
The scene is quite a brim for India, and individual startups can’t handle it alone. Moreover, even though India is observing a sharp growth across financial services, financial awareness is still very low.
Even designing a product for the low-income segment is not easy since they have huge capital requirements and no organized lender is ready to lend to them. It also leads us to the most critical part of designing algorithms that would allow these people to plan their withdrawals without affecting their future requirements.
We still have high hopes since the growing digital awareness in the post-COVID world can play a huge role for fintech solution providers.
So far, Indian startups have catered to the young digitally active demographic. And considering the young population of the country, there will be scope to offer them pension-based products. However, the opportunity still could be lying a few decades ahead. But it is gradually opening up.
In the previous decade, the Indian government offered a slew of multidimensional schemes to accelerate financial inclusion. It includes initiatives such as PMJDY, Pradhan Mantri Jan-Dhan Yojana, PMJJBY, PMSBY, Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, APY, Atal Pension Yojana, PM-KMY, Pradhan Mantri Kisan Maandhan Yojana, PM-SYM, Pradhan Mantri Shram Yogi Manndhan Yojana, and PMMY, Pradhan Mantri Mudra Yojana.
Since these schemes have almost achieved financial inclusion, it is now the right time to consider wealth inclusion.
The next step for India in its financial life cycle is to think about investments. There is an opportunity in the country to facilitate small and incremental savings into low-risk investments.
Players can offer small investment avenues using AI and ML models to help millions of people get onboard to an investment discipline.
However, it would all depend on how and when these micro-pension products would start rolling out.