The new Insurance and Regulatory Development Authority’s (Irda) regulations on pension plans have kept the need of the guarantee intact, but aim at encouraging insurance companies to launch more unit-linked pension plans (ULPPs).
While the guarantee remains, the insurance regulator has done away with a fixed number that is to be guaranteed. The guidelines address the reluctance of insurance companies that have been refusing to offer regular-premium ULPPs since last year when the regulator asked them to provide a minimum guaranteed rate of return of 4.5% per annum. Subsequently, Irda pegged this number to the reverse repo rate fixed by the Reserve Bank of India (RBI). Reverse repo rate is the rate at which RBI borrows from the banks.
In the process, the regulator has also taken into its fold the entire range of pension plans offered by life insurance companies and has tried to make them more transparent as far as the benefits are concerned. Let’s find out whether transparency would also mean better returns for you.
Illustration by Jayachandran/Mint.
What is guaranteed now?
According to the new guidelines, an insurer will need to offer either a minimum return, which is non-zero and positive, on all the premiums paid or an absolute amount on maturity. Says Kshitij Jain, managing director and CEO, ING Vysya Life Insurance Co. Ltd: “The new guidelines ensure that the capital or premiums of the policyholder is guaranteed. Over and above that, the insurer can offer a minimum return with a potential upside or an absolute or maximum amount payable which could be equal to all the premiums paid or more with no potential upside.”
This, the insurers say, could lead to the onset of capital-guaranteed products. Says Puneet Nanda, executive director, ICICI Prudential Life Insurance Co. Ltd: “The guidelines have ensured that at least the capital of the customer is protected, basically translating into capital guaranteed products.”
However, the insurance component is optional. So if the insurer wants, it can offer you an in-built protection cover or offer an insurance cover as a rider. While calculating the assured benefit, the premiums that you pay for the rider will not be taken into account.
What about equity exposure?
Owing to the guarantee, the insurers may still find it difficult to offer ULPPs with high equity exposure. Says Andrew Cartwright, chief actuary, Kotak Life Insurance Co. Ltd: “A high exposure to equity may not be possible because the insurer needs to offer a guarantee. But the exposure to equities would depend upon the extent of guarantee. So an insurer offering a minimum guarantee of, say, 1% will be able to offer a higher equity exposure than an insurer offering a minimum guarantee of say 3%.” In other words, the higher the guarantee, the lower would be the equity exposure.
But what could make matters worse in terms of equity exposure is guarantees on death and surrender benefits throughout the term of the policy, which the new guidelines suggest. According to the circular: “All pension products shall have explicitly defined assured benefit that is applicable on death, on surrender and on vesting, which is disclosed at the time of sale.”
This would translate into zero or minimal equity exposure. Explains V. Viswanand, director and head, products and persistency management, Max New York Life Insurance Co. Ltd: “It will become difficult to offer any equity exposure if we need to offer a guaranteed death benefit as well as surrender benefit. In this case pension products will either be in the traditional space or debt-oriented in the unit-linked space. Guaranteeing a corpus on maturity is okay but if an insurer needs to guarantee a corpus even when the customer breaks a contract as is the case with surrendering a policy, then how can the insurer allow equity exposure.”
However, insurers are still seeking clarity on this point since later in the circular, the guidelines seem to be fluid with regard to guarantees on surrender and death benefits.
The insurers are happy that the regulator has done away with the option of offering a guaranteed annuity rate as was proposed in the draft guidelines. Annuity is a pension product that gives you regular income for a lifetime. Says Cartwright: “Guaranteeing an annuity could have proved onerous. Annuity rates depend upon the prevailing interest rates and the insurer will have to essentially guarantee a rate at present which may not be so in the future when the policy matures and the corpus is ready to be annuitized. So in the future if interest rates tank, the insurer will have to suffer losses because it will still have to offer an annuity at the guaranteed rate.”
One insurer clause remains
The regulator has retained a much-debated clause in the draft guidelines: at the time of vesting or on maturity, the annuity shall be provided by the same insurer that sold the original pension policy. Currently, there is no such rule. At present, a policyholder on vesting or on maturity of his pension policy can take the lump sum and buy an annuity product from any other insurer offering immediate annuity.
The regulator seems to have changed this rule in order to develop the annuity market. Mint Money had spoken to the regulator at the time the draft guidelines on pension products were announced. Irda chairman J. Hari Narayan has said, “Currently, the annuity market is not developed and typically LIC ends up paying the annuity. Companies are not developing the annuity market and this proposal is a beginning in that direction. Moving forward, we will review this.”
However, the guidelines seem to have left a loophole which can be exploited to circumvent the clause. According to the guidelines, on maturity or on surrender of the policy and after the lock-in period, the policyholder has an option to utilize the entire proceeds to purchase a single-premium pension product. The guidelines do not clarify whether this pension product has to be bought from the same insurer. In other words, you could move to another insurer when surrendering your policy or on maturity.
Adds Viswanand: “The guidelines are silent on this front and we are waiting for some clarity in this regard. I am not sure if moving to another insurer will be in line with the spirit of the regulations which wants to tie a customer to the same insurer.”
Transparency in illustration
What will benefit the policyholders and also help agents evolve their sales practices is the new set of benefit illustration and a yearly communication of the benefits to the policyholders. That a benefit illustration needs to accompany every sales pitch of a unit-linked plan is known, but now it has been made mandatory for the entire range of pension products.
Further, the illustration has been modified to ensure a better understanding of the benefits. Now the illustration will have to show all the three guaranteed benefits—maturity, surrender and death—for the entire term of the policy. The regulator has also allowed the insurers to assume two rates of return for illustrative purposes: 4% and 8%. The insurer can use these rates to show the non-guaranteed benefits. In the case of ULPPs, the illustration will also have to show the break-up of costs as is the norm currently.
The insurer will also have to provide an annual yearly disclosure on 1 April each year. This disclosure will include the current accumulated amount and the likely maturity corpus the policy may generate, depending upon the prevailing economic conditions then, and the likely pension or annuity amount that the policyholder will get, depending upon the prevailing rate then and on assumed interest rates of 4% and 8% per annum. This is to ensure that every year the customer not only understands the growth in his funds but also gets a clearer picture of the return that his investment is likely to generate and the pension amount he is likely to get in the future.
What it means for you
The regulator has taken some stringent measures to make the product transparent and user friendly, but owing to guarantees, the insurers may still be reluctant to offer pure equity-linked pension policies. Says Nanda: “Compared with a guarantee of 4.5%, the new set of guidelines are more relaxed and place a greater freedom in the hands of the insurers. However, owing to guarantees, a 100% equity product is unlikely.”
So if you are a young investor wanting to invest early on for your retirement, pension plans offered by life insurance companies may not be the best option for you. Says Cartwright: “We may see an equity exposure up to 40% but even that is less for a young investor who would be looking for an equity kick to his portfolio. In such a situation, pension plans are likely to become unpopular with investors who are looking for investment in equities.”
How these guidelines take shape in the form of a product still remains to be seen as the guidelines kick in from 1 December. Watch this space to get an idea about the new version of pension plans.