The Insurance Regulatory & Development Authority (Irda) is planning to introduce two additional options on pension products, as the existing one has attracted few investors. Under the current option, policyholders get a minimum 4.5 per cent return a year, which will be subsequently linked to the Reserve Bank of Indiaâs reverse repo rate.
The first option would offer pension products with a capital guarantee and a minimum 5 per cent return on the accumulated sum of the policyholder at maturity. In addition, the holder will get a large portion of the actuarial surplus.
For example, if a person invests Rs10,000 a year for 10 years, he will get Rs1.5 lakh at the end of the term. That includes Rs50,000 â the return on the accumulated fund. If this Rs1 lakh grows to Rs2 lakh in 10 years because of better fund performance, the insurer will have to share Rs90,000 of the actuarial surplus with the policyholder. The actuarial surplus is the amount by which the value of a company's pension fund exceeds the amount it must pay out in benefits.
The second option would be similar to the New Pension Scheme (NPS) floated by the Pension Fund Regulatory Development Authority, where as much as 60 per cent could go into equity and the remaining into fixed-income instruments rated at least AA.
In the last two to three years of the term, the entire fund would be moved to debt. However, this option may not be as attractive, as the fund management charges would be comparatively higher than the 0.009 per cent levied by the six NPS managers at present.
The move by Irda follows a decline in new plan offerings by insurers under rules introduced from September 1. At present, insurers have to ensure a 4.5 per cent return a year, in addition to capital guarantee. This prompts them to play safe and invest mainly in debt. Under the first option, insurers will have the flexibility to invest half their funds in equities, which typically provide a higher return than government securities.
"We are likely to offer more choice by introducing capital guarantee and an NPS-like scheme. We want to assure investors that capital is protected on the whole," said a senior Irda official.
In the new regime, most insurance companies have confined themselves to filing single-premium pension products. Under these, a policyholder pays a premium only once, at the time of buying the plan. However, single-premium pension products not only fail to offer long-term protection, as the corpus is limited to the initial payment, but also limit the returns, the official added.
If a person invests Rs 10,000 every year for 10 years
|Return at maturity|
of 4.5% per annum *
|Nil||1 lakh||Depends on avg reverse
repo rate+50 basis points
with 5% guarantee
on overall term
|50k||50k||Around '1.5 lakh
+ 90% of acturial surplus
|NPS-type scheme||60k||40k||Depends on fund
|* will change with reverse repo rate|
"Capital guarantee is still better, as one can invest at least 50-60 per cent in equity,ââ said Andrew Cartwright, appointed actuary for Kotak Life Insurance.
Executives from insurance companies say there are no long-term instruments in India that may offer attractive returns. Actuaries argue that it would be difficult to match the assets and liabilities in a long-term guarantee plan.
Moreover, the return on an existing pension plan will vary every year depending on the reverse repo rate. Given the recent hike in the reverse repo rate, the return on a unit-linked pension plan is likely to be 5-5.5 per cent for 2010-11.
In addition, the return will be 50 basis points above the reverse repo rate effective next fiscal. This adds to the woes of life insurance companies, which are unhappy offering any guarantee on a pension product.
Life insurance companies are launching pension plans with a single premium to ensure the stipulated return on these products. ICICI Prudential launched a pension plan with a one-premium paying term. Other insurers like HDFC Life and Kotak Life are working on the same structure. Life Insurance Corporation of India (LIC) is the only insurance company to have launched a regular unit-linked pension product.
Last year, pension products constituted 20-25 per cent of the total premium collected by the industry. For the last financial year, insurers collected around Rs 65,000 crore by selling pension products.
"The numbers, however, have fallen sharply in the last two months. LIC has not seen a good response to its Pension Plus plan,ââ said D K Mehrotra, managing director, LIC. "The minimum guarantee has defeated the purpose of the pension plan.ââ