India is one of the youngest nations today, but it’s ageing fast. In just a few decades, we may have more senior citizens than the entire US population. India has a window to prepare, and the recent industry focus on post-retirement income marks a welcome shift from accumulation-centric thinking to a more outcome-oriented approach centred on income security.
A consultation paper released by the Pension Fund Regulatory and Development Authority (PFRDA) on 30 September outlines three concepts for post-retirement decumulation mechanisms. This might sound technical, but the underlying message is simple — focus on retirement income, not just account balances. It’s an approach rooted in outcomes rather than investments. For most individuals, that’s the difference between financial comfort and uncertainty in their later years.
NPS subscribers commonly highlight key issues with the value and security of their old-age income under the current system — namely, low annuity yields, lack of inflation protection, and market-condition risks at the time of retirement, to name a few.
The concepts in the paper aim to address many of these concerns. They draw on sound pension design theory and real-world examples from other countries.
From saving goals to income goals
The first concept focuses on a “desired pension” with associated indicative contributions. While it doesn’t guarantee the pension amount, it helps align the accumulation phase with income outcomes — say, a ₹30,000 monthly pension — and then works backward to determine how much an individual needs to contribute to reach that goal.
However, subscribers must not risk misinterpretation. “Desired” is not “guaranteed.” The scheme features an automatic increase in income over 10 years at a pre-set yield level, followed by a mandatory annuity purchase at age 70. The step-up income helps counter inflation in the initial years, but people should be prepared for a flat income from the annuity post age 70.
Further evolution might be needed to ensure inflation protection into older ages. Financial advice and periodic reviews must be built into the system so that individuals can adjust contributions as they track their progress and stay on course. Flexibility in contribution rates should be an integral feature, not an afterthought.
The second concept introduces a clearer inflation-linked income element, underpinned by a fixed pension layer. This scheme guarantees a fixed “target pension” over a defined period, adjusted annually for inflation using the Consumer Price Index for Industrial Workers (CPI-IW). It’s a retiree’s dream.
The UK’s Pension Decumulation Pathways framework offers retirees similar structured options to split funds between systematic withdrawals and level lifetime income. In the PFRDA concept, the corpus split appears to be done behind the scenes through investment management, and if that’s the case, it could create a more complex liability for providers. It shifts inflation, investment, and longevity risks to Pension Fund Managers (PFMs). For subscribers, that likely means higher contributions.
Once again, the distinction between “target” and “guaranteed” requires careful communication so subscribers understand exactly what they’re due to receive.
The third idea, a goal-based pension credits approach, offers a different kind of simplicity. It allows savers to buy pension income “credits,” each representing a specific future income (for example, ₹100 per month for 20 years). It’s similar to Brazil’s RendA+ system, which has proven highly popular there. The key difference is that in Brazil, the central bank issued these retirement bonds. The concept outlined in the PFRDA paper envisions PFMs pricing these credits based on the assets they plan to hold to meet the pension credit income guarantee.
This concept helps people view their pensions not as complex investments but as building blocks of guaranteed future income. For it to succeed in India, however, the system must remain transparent and easily accessible. Complexity or inconsistent pricing between providers could undermine public confidence. It’s definitely a concept to watch.
Final thoughts
PFRDA’s proposals are bold, timely, and necessary. They reflect a growing recognition that retirement security isn’t just about saving—it’s about converting savings into sustainable, predictable income. The PFRDA’s decumulation blueprint deserves public attention and informed debate. India has a rare opportunity to leapfrog older models and build a next-generation system that blends security with choice.
For most Indians, retirement planning begins late and ends too soon. By focusing on income outcomes and inflation protection, these proposals move us closer to a future where retirement can mean security, not uncertainty.
In my view, this isn’t just a policy paper for experts — it’s a signal for every working Indian to rethink how they plan for the years ahead. Because retirement isn’t about how much you’ve saved; it’s about how long that money can sustain you — comfortably, and with dignity.
Kulin Patel, CEO, partner and actuary at K. A. Pandit Consultants & Actuaries, India.
