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.

Click to apply Best Pension Plan

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.

IDBI Federal Retiresurance pension ULIP target unclear

IDBI Federal Retiresurance Milestone Pension Plan is a single-premium pension ULIP. Only Life Insurance Corporation of India has come out with a regular premium pension ULIP after the 1 September 2010, ULIP changes by Insurance Regulatory and Development Authority (IRDA). All other pension ULIP products offered today are single-premium which helps insurers to be on the safer side for guaranteeing 3% to 6% returns per annum. If this product had been launched last year, it may have got some response. In the current high interest rate scenario, it is unlikely to evoke interest. The minimum premium is a hefty Rs1 lakh. The premium allocation charges (0.50%pa) and policy administration charges (0.1% p.m. for five years and Rs60 p.m. thereafter) are on the lower side. These charges are zero for premium of Rs25 lakh and above. There will be fund management charge of 1.25%pa and investment guarantee charge of 0.25%pa.

One of the investment options of the product is 0%-10% exposure to equities and equity-linked instruments, but it also means that the company will take a conservative approach to be able to offer guaranteed returns. IDBI Federal recently launched a traditional pension plan called Retiresurance Guaranteed Pension Plan which may give better returns than the pension ULIP. If a customer chooses a 25-year term, the current rate for 25-year government securities (8.6%) will be guaranteed for the company’s traditional pension plan. IRDA will come up with changes to pension ULIP regulations soon. This is because pension ULIPs are not selling. The customer will be better off waiting for the future regulatory changes.

Insurance authority will carry on regulating pension schemes

The Insurance Regulatory and Development Authority (IRDA) will continue to regulate pension schemes offered by insurance companies, said IRDA Chairman J. Harinarayan.

The statement assumes significance in the wake of reports that the Pension Fund Regulatory and Development Authority (PFRDA) have been making efforts to bring pension schemes of insurance companies under its fold.

A revised PFRDA bill was tabled in Parliament during the last budget session, according to which it will regulate pension products under the new pension scheme.

Mr. Harinarayan said pension schemes handled by insurance companies had dipped from 25 per cent to about 17-18 per cent.

Currently, Rs.36,000 crore worth of pensions were being handled by the companies, Mr. Harinarayan told presspersons on the sidelines of a three-day summit on ‘Transforming Healthcare with IT 2011', here.

Insurers wait for norms on pension products

Life insurers are waiting for revised guidelines from the Insurance Regulatory and Development Authority (Irda) before they can come out with regular unit-linked (Ulip) pension products.

Sales of pension products, which have been growth drivers for life insurers and were among highest selling products, have fallen in the absence of products on shelf for sale. Only LIC has regular Ulip pension product. Private insurance companies are selling traditional pension products, which are non-transparent and often have high charges.

Few private players such as HDFC Life, ICICI Prudential Life have launched single premium Ulip pension plan.

Since September 1, 2010, new guidelines from Irda came into effect, which mandated all Ulip pension products to offer a minimum guarantee of 4.5(%) per cent.

Despite these guidelines being in place for over 10 months, no private life insurance company has launched a product. Insurers say that they have not been able to calculate a profitable formula to design such a product.

“Offering guarantee on regular Ulip pension has create asset-liability mismatch. No one can guarantee minimum return of 4.5(%) per cent. What if the interest rate is low in debt products or equity is not giving good return. We are waiting for Irda to make changes in the guidelines,” said Sunil Sharma, head- actuary, ICICI Prudential Life Insurance.

“We are waiting for new guidelines on pension plans. It is an important product category. Irda has also understood that none of private players have come out with a product due to though guidelines. Changes are expected soon,” said a senior official of a private insurance company.

Irda is working on new guidelines and expected to come out with final version within a month.

As per the latest data, individual new business premium collected by life insurers stood at Rs 69297 crore during April-February compared with Rs 62914 crore a year ago.

Irda to carry new pension norms in April

After unit-linked pension products disappeared from the market following an imposition of guaranteed returns of 4.5(%) per cent, the Insurance Regulatory and Development Authority (Irda) has decided to revise the pension norms in April.

“Since companies are busy this season, we have decided to come out with new guidelines in the next financial year. We will issue the draft guidelines in April,” said a senior Irda official. In the new guidelines too, the regulator will ensure the capital of policyholders was protected.

He said the existing guidelines were not liberal and the revised ones would give some flexibility to the insurers. It would look at protecting premium along with adding some returns.

“Guarantee at this level is unachievable and is the main reason for drop in sales,” the official added.

New product offerings have declined following the introduction of new rules in September. While only the Life Insurance Corporation (LIC) of India launched a regular unit-linked pension product, others like ICICI Prudential Life Insurance launched unit-linked pension plans on a single-premium stage.

Most insurers say offering 4.5 (%) per cent on one-time premiums is possible compared to long term. Also, a single-premium pension product does not provide long-term protection.

Returns on pension products have been linked to the reverse repo rate and insurers have to offer an additional 50 basis points over the same.

Given the recent rise in reverse repo rate, the returns on unit-linked pension plan are likely to be 5.5-6(%) per cent for 2010-11.

“We have not launched any pension product as we do not believe in offering a guarantee of 4.5(%) per cent. Capital guarantee would be a welcome option and would give us some flexibility,” said a senior executive of a life insurance company.

Last year, pension products constituted 20-25(%) per cent of the total premium collected by the industry. Around Rs 65,000 crore came from the sale of pension products. Total premium rose 18(%) per cent to Rs 2, 61,025 crore.

With only a few players selling the product, it has fallen appreciably.