India tops South Asia in pension coverage

India stands top among South Asian countries in pension coverage to its older people, according to a joint report by the World Bank and the Organisation for Economic Cooperation and Development (OECD).

"Only in India are social pensions significant, with around 10 per cent to 15 per cent of older people being covered," the report said.

However, according to the report, India needs to reform its pension system to deliver sustainable and adequate retirement income for today's workers.

The "Pensions at a Glance: Asia/Pacific" report notes that a quickly ageing population, overly generous pension schemes and early retirement age are putting pressure on pension systems. The report covers the retirement income systems of 18 countries in the region, including India, Australia, China, Indonesia, Pakistan, the Philippines and Vietnam.

It says that while systems vary from country to country, the current systems are unlikely to provide security to retirees because early withdrawals are common and coverage of formal pensions systems is relatively low. The report also noted that pension savings are also usually taken in a lump sum, rather than in the form of an annuity, and pensions in payment are not adjusted for changes in cost of living.

In OECD countries, an average of 70 per cent of the working-age population is eligible for a pension. Whereas, in South Asia, just 7.5 per cent of the working-age population is eligible and in East Asia, only 18 per cent. In addition, "few Asia-Pacific countries have social pensions to provide safety-net retirement income for people who are not members of formal schemes," the report said.

The report recommended that Asian countries with defined-benefit schemes based on workers' final salaries should shift to calculating pension entitlements using lifetime average earnings; allowing people to take their pension through regular payments, instead of in a lump sum to reduce the risk of savings running out in retirement; and linking pension payments to reflect changes in the cost of living.

It said that reform is needed because: coverage of formal pension systems is relatively low; withdrawal of savings before retirement is very common; pension savings are often taken as lump sums and often do not provide adequate income over a person's lifetime; pensions payments are not automatically adjusted to reflect changes in the cost of living.

Few Asia-Pacific countries have social pensions to provide safety-net retirement incomes for people who are not members of formal schemes.

The next most common kind of scheme is again publicly managed but benefits depend on the amount contributed and the investment returns earned and these are known as defined-contribution schemes. India, China, Indonesia, Malaysia, Singapore and Sri Lanka make use of those schemes.

To improve Asia's pension systems, the report made three key recommendations.

First, Asian countries with defined-benefit schemes based on workers' final salaries should shift to calculating pension entitlements using lifetime average earnings, as most OECD countries do. This will make them more financially sustainable and fairer: final salary plans tend to favour the higher paid whose earnings tend to rise more rapidly with age compared to lower paid manual workers.

Second, many countries allow people to withdraw their pension benefits before retirement or pay lump-sum benefits, rather than a regular retirement income. Allowing people to take out their savings only on retirement via regular payments, known as annuities, would reduce the risk of people's savings running out in retirement.

Third, countries should link pension payments to reflect changes in the cost of living. Of the countries covered in the report, only China and the Philippines currently do so.