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.