Pension scheme to offer 8.6% assured return option

The government has secured the support of BJP on the bill to reform the pension sector by agreeing to the main opposition's demand that the scheme offer a minimum assured return and foreign investment be capped at 26%.

The new pension scheme (NPS) will offer an option for an assured return of 8.6% for investments in government bonds, while subscribers willing to take a higher degree of risk can look at other choices, where their contributions are invested in a mix of private and government placements.

An understanding over the Pension Fund Regulatory and Development Authority (PFRDA) Bill was arrived at a meeting on Monday between finance minister Pranab Mukherjee and BJP leaders L K Advani, Arun Jaitley, Sushma Swaraj and Yashwant Sinha in Parliament. However, no consensus was possible with regard to the Companies Bill.

This is the second occasion on which the government and BJP have cooperated on the PFRDA Bill that seeks to give statutory cover to the NPS in force since 2003. The bill was introduced in Parliament in the face of Left resistance with BJP's backing and now its prospects of passage seem bright and it may be moved on Wednesday.

The terms of the deal are on the lines of the recommendations of the parliamentary finance standing committee that did not agree with the Centre's proposal that foreign investment in pension funds be raised to 49%, and also called for an assured rate of return, arguing that senior citizens should be given security on their investment.

The panel was also critical about the mediocre performance of the fund so far and the relatively low number of subscribers. While the government looked uncertain about the bill last week, Mukherjee's renewed bid for an agreement has borne fruit. BJP also seems prepared to be more accommodative towards Mukherjee, who the party feels is not needlessly combative towards the opposition.

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Passage of the pension bill will be an important gain for the government after the reverses it has suffered over reform initiatives like FDI in multi-brand retail apart from the finance standing committee turning down proposed changes in the banking laws that would have given private investors voting rights equal to their investment.

On the Companies Bill, UPA conceded BJP's demand for allowing Limited Liability Partnership that would enable a group comprising only professionals from a category like chartered accountants or company secretaries to form their own company.

But the government has proposed so many changes to the bill - already scrutinized by a House panel - that it is now looking very different.

Pension plan: Now, a person can draw annuities at 55 years of age

The insurance regulator plans to lay a floor of 55 years of age for a person to draw annuities from pension plans as it moves to reduce risks for insurance companies and revive a pension market that's ignored by private insurers. However, the move may throw a spanner in the works of those planning early retirement.

The plan, which is still in the discussion stage, is also partly aimed at encouraging private insurers to share the burden of the state-owned Life Insurance Corp, which now bears the burden of the entire annuity risk, said two people familiar with the discussions.

"Fixing the age of annuity will solve the problem of longevity risk,'' said an official at Irda who did not want to be identified. "We are finding out how regulators in other countries manage the pension risk." Pension policies that promise to pay a fixed annual sum to a policyholder till death are seen as risky with rising life expectancy on higher incomes and better healthcare facilities.

Reducing Risk

If an insurer sells a pension policy to a 22-year old with annuity starting at the age of 40, the risk is seen higher if the person ends up living till 80 as the insurer will be paying for 40 years. If the minimum age is fixed at 55, the payments are for just 25 years.

"The risk is more at the younger age," said G N Agarwal, Chief Actuary at Future Generali Life Insurance. Many insurance companies, to market policies easier, had peddled pension policies with annuity payments as early as 35 years which is considered the beginning of the best earning period of individuals. But these companies bear only the lumpsum payment at the end of policy, and the remaining risk of annual payments is borne by LIC, for historical reasons since it has the capabilities.

But the regulator now wants to change that so that one company does not bear the risk and the remaining do not sell policies indiscriminately. "The idea behind fixing the age is that it should not be made to look like a short-term product," said S B Mathur, Secretary General, and Life Insurance Council. "It will increase persistency and bring down the risk in the industry.'' The regulator has been taking steps, including mandating at least a 4.5% annual return on pension policies. But that has backfired with private insurers just dumping the product itself.

Pension products were almost a fifth of the total insurance policies sold in the country till fiscal March 2011. But that has plunged to just 2% of the total in the first half of this fiscal, data from industry representative’s show.

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The regulator circulated a draft norm for insurance companies on pension products. As per the draft norms, policyholders had to take a compulsory annuity of two-thirds of the corpus at the time of the beginning of annuity payments and the remaining one third could be withdrawn after the lock-in period ends.

This plan if implemented will also bring the pension market almost on par with the New Pension Scheme backed by the government and regulated by the PFRDA. Under NPS, the retirement age is fixed at 60 years. Also, one can withdraw 40% at exit and use the remaining for buying annuity. "Most of our annuity plans are sold to group. We encounter early annuity in case of dependents. Restricting an age could take away choice from the customer. The regulator should look at fixing only the minimum age," said Sanjiv Pujari Appointed Actuary SBI Life Insurance.

IRDA, pension regulator to lock horns

Two years after tensions rose between the pension and insurance regulator over commissions, a fresh round of friction between the two is in the offing.

The latest cause for friction is Pension Fund Regulatory and Development Authority's move to list life insurers to provide annuities to subscribers of the National Pension System (NPS). The NPS, which is administered and regulated by PFRDA, accumulates savings for a regular monthly annuity payment after retirement for government employees and those in the unorganized sector . However, the conversion of the accumulated savings into a monthly income stream can only be done by a life insurance company as per law.

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PFRDA has invited expressions of interest (EoI) from life companies. In its invitation for EoI, it has said that annuities will be bought directly by the annuitants from the list of Annuity Service Providers (ASPs) approved by PFRDA from among the schemes accepted by PFRDA. PFRDA has also outlined seven options which life insurers can provide. According to a senior official from the life industry, if PFRDA is going to allow only select companies to provide annuities, pricing might be an issue for selection. However , insurers can quote a price for an annuity plan only after their product is approved by the regulator.

Recently, the Insurance Regulatory and Development Authority (IRDA) had expressed reservations over a proposal to allow agents of life insurance companies to distribute pension products. IRDA chairman J Harinarayan, at a recent insurance summit, had said that life insurance companies were not mandated to act as intermediaries for third-parties.

In 2009, a committee headed by former pension regulator D Swarup had proposed that commission for insurance agents be scrapped completely and all agents should be converted into independent financial advisers who would be regulated by a Financial Well-Being Board of India (FINWEB).

The planners were expected to advice on all products, including those administered by PFRDA. The proposals were, however, never implemented by the government.

Earlier too there was an issue of who would regulate pension plans after the formation of PFRDA. Although the PFRDA's mandate was to manage pension plans in the government and unorganized sector, the insurance regulator made it clear that any pension plan floated by an insurance company would be its sole jurisdiction.

Collision course

The NPS-regulated by PFRDA-accumulates savings for a regular monthly annuity payment after retirement But the conversion of the accumulated savings into a monthly income stream can only be done by insurers as per law PFRDA has invited expressions of interest from life companies and has also outlined seven options which life insurers can provide

LIC to give 6% annual return on Pension Plus

Life Insurance Corporation of India is set to offer up to six per cent annual return on Pension Plus, its unit-linked pension product.

This comes at a time when the insurance regulator has been forced to withdraw the controversial 4.5 per cent guaranteed return clause on unit-linked pension plans following opposition from private life insurers, who argued such returns were not viable.

Pension Plus is thus the only regular premium unit-linked pension scheme based on guidelines mandating a minimum guaranteed return of 4.5 per cent.

“We are going to declare the annual return for the financial year 2010-11, and it should be up to 6 per cent depending on the age and tenure of the policies,” says a senior LIC official, on condition of anonymity.

Moreover, buoyed by the good response for the product, the largest life insurer in the country is likely to continue with the existing scheme, even if the pension guidelines are revised in the coming months.

“Given that it is the only product of its kind available in the market right now, sales have picked up. If the new regulation permits, we would like to continue with this minimum guarantee as it will provide another option to policyholders,” says the official.

Pension Plus was launched in September last year and collected a premium of nearly Rs 400 crore.

The Insurance Regulatory and Development Authority (Irda) has now offered to drop the guaranteed return clause in pension product norms, as private life insurers have refused to launch any products. The revised draft guidelines on pension plans, issued by the regulator last month, talked about a “non-zero” or capital guarantee instead of a fixed guarantee. An Irda official says the success of LIC proves the product is “workable” and “saleable”, unlike what's perceived by private life insurers.

Private insurance companies say a six per cent return is good, considering the guaranteed clause, which inherently restricts investment freedom. Another says traditional pension plans are offering seven-nine per cent return, so a six per cent return may seem to be a bit low. But, it is justified due to the guaranteed clause.

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In September 2010, Irda introduced pension product guidelines that mandated returns on such products to be linked to the reverse repo rate, and insurers were asked to offer an additional 50 basis points over the same. The minimum guaranteed return was fixed at 4.5 per cent last year, based on the reverse repo rate. Reverse repo is the rate at which banks park their excess funds with the Reserve Bank of India.

India may allow foreign investment in pension funds

India may allow foreign investment of up to 26 per cent in the pension sector, giving global players access to a roughly $2 billion pool of assets that is expected to grow quickly as more people join the organised workforce.

The recommendation by a parliamentary panel on a pending pension bill is the latest fillip to economic reforms that have stalled as the government was paralysed by a spate of scandals.

New Delhi has been taking steps of late to make the country more investment friendly, backing in principle foreign direct investment in multi-brand retail, a reform that has been delayed for years.

Some of the reform measures, including a proposal to lift the cap on foreign holdings in insurance companies to 49 per cent from 26 per cent, require parliamentary approval.

Now, pension funds of over a million employees in India are managed by IDFC , State Bank of India , ICICI Prudential Life Insurance, Kotak Mahindra Bank, Reliance Capital and Life Insurance Corp of India.

Foreign firms have been lobbying for liberalising access to the pension and insurance sectors in a fast-growing country where most of the 1.2 billion populations lack such investments.

Most of the 23 life insurance players in India, nearly all of which have a foreign partner holding a 26 per cent stake, are eager to enter the pension fund market, analysts said.

Global players holding stakes in Indian operators include Aviva, AIG and AXA.

The pension and the insurance bills are currently being examined by a parliamentary panel, headed by Yashwant Sinha, former finance minister and a leader of the main opposition Bharatiya Janata Party.

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The panel has also recommended that the returns from a new government pension scheme -- subscribed by employees of the federal and state governments -- should fetch a minimum return at par with the state-run social security fund, the Employee Provident Fund (EPF).

The EPF, covered by separate law, manages more than $50 billion worth of assets for around 40 million employees and paid a 9.5 per cent return in the fiscal year that ended in March 2011.

Returns on pension plans will now be market determined

If you are planning to buy a pension plan, you need to exercise more caution. The expected returns from unit-linked insurance plans (ULIPs) will now be subjected to market conditions. They could be go higher than 15 per cent or even drop to 1-2 per cent, thanks to new norms on pension plans mooted by the Insurance Regulatory and Development Authority (IRDA).

The existing minimum guaranteed annual rate of return at 4.5 per cent is proposed to be removed by the regulator with some kind of assured benefit on the premiums paid, which can be decided by an insurer.

This would call for a wise and informed decision from a policyholder to decide what kind of retirement protection he prefers.

“If one is averse to risk, one should go for traditional pension plan products. Otherwise, unit-linked pension plans can now give significant upsides of revenue depending on the markets conditions,” Mr Andrew Cartwrigth, Chief Actuary, Kotak Mahindra Old Mutual Life Insurance, told Business Line

As per the new norms, the returns could be anywhere between 3 and 15 per cent, he hinted. This is possible because the investment options for insurers would now expand, according to Mr V. Srinivasan, Chief Financial Officer, Bharti AXA Life Insurance.

At present, the companies which offer unit-linked pension plans prefer to invest only in government securities because of the minimum guaranteed return norm of 4.5 per cent.

“But now, we can consider other investment options which can bring in higher yields,” he said.

“The idea to liberalise guarantees in pension plans is positive development for all stakeholders,” he added.

The proposed norms are seen largely as “industry-friendly”. Before the introduction of 4.5 per cent minimum guarantee norm in September 2010, the pension plans accounted for 20-30 per cent of the new business premium in the life insurance segment.

A stimulus for growth

“But now, if these proposed norms are introduced on a fast-track, the unit-linked pension plans will come up to rescue of the life insurance industry which needs a stimulus for growth,” a senior official of IndiaFirst Life Insurance said.

“More pension plans are likely to be launched. We, at Bharti AXA Life, are also working on filling the existing product void in the market,” Mr Srinivasan said.

Pension products set to turn aggressive

The Insurance and Regulatory and Development Authority (IRDA) on Monday issued a draft on pension products exposure for insurance firms.

The regulator will look at revising or scrapping the guaranteed return in its final guidelines.

“Because of the uncertainty over investment returns, that requirement did not find wide acceptance in the market. We have since reviewed the position and propose to expand the option of pension products,” IRDA said.

IRDA has asked for comments from insurers before it comes out with final guidelines on pension plan products, which is expected in a month.

“Since the percentage of guaranteed returns will drop at different levels for different companies, the amount at maturity will differ from every insurer to insurer. This will be specified at the time of sale of product depending on the interest rate scenario, equity growth and other macro economic conditions,” says GN Agarwal, actuary, Future Generali India.

The revised guideline may offer full capital protection and that will be the minimum requirement for insurers.

Anything above the capital amount would be decided by insurance firms seeing the economic factors and market needs.

This will make the pension products competitive in the market.

P Nandagopal, MD and CEO, India First Life Insurance, said since insurers will drop guaranteed returns at different levels, “we can now structure products with various options. This will help the pension market pick its pace.”

Pension products transfer longevity risk from the individual policyholder to an insurance firm.

So the insurance company has to value and manage this risk which often only becomes evident after a long period of time.

“If they scrap this entire guaranteed return phenomenon, it will help the insurance industry a lot in terms of promoting these products as well as improving the market for pension products,” says Kamalji Sahay, MD and CEO at Star Union Dai- ichi Life Insurance.

“Annuitisation on surrender is compulsory and theopen market option does not exist as per the exposure draft. Pension providers have to take longevity risk on annuities,” said Anisha Motwani, director and chief marketing officer at Max New York Life Insurance.