How AI and digitalisation can make pension schemes more accessible and efficient

India’s population today has surpassed 1.4 billion (World Bank, 2023). While a significant portion of the population remains young, with those aged 15-29 comprising around 27% (UNFPA, 2023), the number of senior citizens has also surged to more than 10% of the population, or roughly 140 million people (Ministry of Statistics, 2023).

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Current demographic trends, such as the shift from joint to nuclear families, emphasise the need for a robust pension system as projections suggest 20.8% of the population will be over 60 by 2050 (UN World Population Prospects, 2022). Digitalisation and artificial intelligence (AI) will play a pivotal role in transforming this system to improve accessibility and sustainability.

Digitalisation: A catalyst for expanding pension coverage

The advent of digitalisation has revolutionised the accessibility and administration of pension schemes in India. Digital platforms such as eNPS and the unified portal have simplified pension management, reducing the administrative burden and increasing transparency. The Pension Fund Regulatory and Development Authority (PFRDA) reported more than five crore National Pension System (NPS) subscribers by March 2023 because of such advancements.

Additionally, automation in back-end processes, like fund reconciliation and benefit disbursement, minimises human error and expedites procedures. However, with the growing gig economy and labour mobility, pension policies must adapt to support workers in flexible employment structures and the informal sector.

The transformative power of AI in pension management

While digitalisation has paved the way for greater access and efficiency, the use of AI is transforming how pensions are managed in India. AI’s ability to analyse large datasets and provide predictive insights makes it a powerful tool to improve decision-making in pension fund management.

One of the key areas where AI can have a significant impact is in predictive analytics. Pension funds are responsible for ensuring that the contributions they manage are sufficient to meet future obligations, which requires accurate predictions of future liabilities. 

AI-driven predictive models allow pension fund managers to make more informed decisions about investment strategies, risk management, and asset allocation. As of March 2023, PFRDA managed nearly ₹9 trillion in pension assets and has been harnessing AI to optimise its investment portfolio, enhancing long-term sustainability and delivering improved returns for subscribers.

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AI tools like machine learning can analyse how individuals interact with pension systems, helping develop targeted, personalised pension schemes and delivery mechanisms. This personalisation allows pension systems to better meet the needs of different demographic groups, including the elderly and women, addressing gender gaps and promoting gender parity in pension coverage.

Fraudulent activities, such as identity theft and false claims, have long plagued pension schemes, particularly in systems with large numbers of beneficiaries. By analysing patterns in pension transactions and beneficiary data, AI algorithms can detect anomalies that may indicate fraud.

This proactive approach to fraud detection will help prevent financial losses and ensure that pension payouts reach the intended recipients. The EPFO has already begun using AI-based systems to verify the authenticity of pensioners’ Aadhaar-linked accounts, significantly reducing the likelihood of identity duplication or fraudulent claims.

In addition to improving the efficiency and security of pension systems, fraud detection and risk management, AI has the potential to offer personalised retirement solutions. Traditional pension schemes often offer standardised plans that may not align with the specific financial goals or needs of individual subscribers. AI can analyse an individual’s income, spending patterns, lifestyle, and long-term financial goals to recommend customised pension plans. 

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Such personalisation improves financial inclusion by catering to the needs of different income groups, including low-income earners who are often excluded from formal pension systems. Robo-advisors, or AI-powered financial advisory platforms, are gaining traction in India. They offer personalised pension planning advice, helping individuals choose the best pension products and strategies.

AI-powered chatbots have also emerged as a critical tool in enhancing customer service for pension subscribers. These chatbots provide real-time responses to common queries, such as checking contribution status, explaining withdrawal procedures, or providing account updates quickly, freeing up human agents to handle more complex cases.

Expanding coverage and ensuring security

Although schemes such as the Atal Pension Yojana (APY) have been launched to target informal workers, there is still a large gap in pension coverage. Digitalisation and AI also have immense potential to transform the pension sector by expanding coverage, particularly in the informal sector. Over 90% of India’s workforce is in the informal sector, where access to pension schemes is limited (ILO Report, 2022). Digital platforms and AI tools can help bridge this gap by simplifying the registration process, offering low-cost pension products, and reducing administrative costs. Moreover, through gamification, proper financial knowledge and skills, more young people can be attracted to this sector.

Digital marketing can also play a crucial role in increasing financial literacy and educating the public about pension options, driving engagement with non-traditional audiences. By leveraging digital channels, pension providers can better reach underserved communities, promoting participation among lower-income groups and rural populations.

Challenges

Pension funds handle sensitive financial data, and any breach of this data could have serious repercussions for subscribers. It is essential that pension providers invest in robust cybersecurity frameworks and comply with regulations such as India’s Digital Personal Data Protection (DPDP) Act to protect user information. Ensuring the security of digital pension platforms is critical to maintaining trust in these systems and encouraging more people to use them.

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Secondly, there is the need to improve both financial and digital literacy, particularly among senior citizens and the rural population. Although smartphone penetration in India has increased significantly, many pensioners still face difficulties accessing digital services. Government initiatives such as Digital India aim to promote digital literacy and encourage the use of digital financial services.

Thirdly, the young people need to be brought into the pension system early in their careers to ensure they have a secure future. Continued efforts are needed to ensure that everyone, regardless of age or location, can benefit from the digitalisation of pension services.

Way forward

Digitalisation and AI are revolutionizing the pension sector in India by improving accessibility, efficiency, and security. As the country grapples with a growing elderly population and an expanding informal workforce, these technologies will play a crucial role in ensuring that pensions are accessible, efficient, and sustainable for all citizens. 

While there are challenges related to coverage, expansion, cybersecurity, and digital literacy, the ongoing adoption of digital tools and AI in the pension sector promises to create a more inclusive and future-ready system, making the youth of this country understand that pension is not something only meant for senior citizens to think. The benefits of investing in this sector are equally important. By leveraging these technologies effectively, India can ensure a more secure retirement for millions of its citizens.

Dr CS Mohapatra is the chair professor – IEPF, and Depannita Ghosh a research analyst – IEPF, at the National Council of Applied Economic Research.