Last year, the Insurance Regulatory and Development Authority (Irda) put in place a mandatory minimum guarantee clause for all unit-linked pension plans (ULPPs). But the response to the product that emerged was tepid due to certain inherent problems. To address this, Irda now proposes to alter the nature of guarantees offered on pension products.
Also See | Other Proposals (PDF)
In a “draft exposure on pension plans”, issued on 1 August, Irda proposes to drop the guaranteed rate of return of 4.5% per annum on ULPPs and has instead given insurers three options to offer guarantees in different forms.
According to the draft guidelines, insurers will need to offer at least one of the three guarantees on all pension products: a minimum positive return, absolute value of maturity corpus and a guaranteed rate of annuity. Annuities are pension products that give you regular income against payment of a lump sum.
Illustrations By Shyamal Banerjee/Mint
The regulator had earlier mandated all ULPPs to give a minimum guaranteed rate of 4.5%, which was indexed to the Reserve Bank of India’s (RBI) reverse repo rate at which RBI borrows from banks.
A minimum guaranteed rate made it difficult for insurers to offer meaningful ULPPs—in order to give the guaranteed rate, they had to give equities a miss. Pension products are ideally long-term products and equities work best over a longer tenor. Lack of equity funds made ULPPs unattractive.
In fact, most insurers have stayed away from the unit-linked pension market for some time now.
Assured benefit: Though Irda proposes to drop the 4.5% guaranteed rate clause, guarantees are not going anywhere. According to the new draft guidelines, a pension product should have an assured benefit to be disclosed at the time of selling the policy. The assured benefit should be any one of the following:
• A minimum return which is a non-zero positive return on the premiums paid.
•A guaranteed maturity benefit in absolute amount.
• Purchasing a guaranteed annuity at the time of maturity; in other words, guaranteeing a regular payout.
Of the three, insurers find the guarantee of maturity benefit most practical. Says Andrew Cartwright, appointed actuary, Kotak Life Insurance Co. Ltd: “The most practical guarantee to give is the capital guarantee on maturity or return of premiums. Giving a guaranteed rate of return is difficult unless it is the minimum possible rate of return. Also, guaranteeing the annuity rate in the beginning will be difficult since annuity rates depend on interest rates and mortality costs; to make an assessment of these parameters when the payout is to happen in the far future will be difficult.”
The fact that guarantees on return would remain, even though in different forms, means that pension products will continue to be more of debt-oriented products. Says Sanjeev Pujari, appointed actuary, SBI Life Insurance Co. Ltd: “Having guaranteed products makes it difficult to offer pure equity products. ULPPs will see more of debt funds and balanced funds now.”
Sticking with the same insurer: The draft guidelines have also suggested that the annuity product be purchased from the same insurer. Currently, there is no such rule; on maturity, the policyholder can buy an annuity product from another insurer. Says Rituraj Bhattacharjee, head (product development), Bajaj Allianz Life Insurance Co. Ltd: “Ideally, on vesting (maturity) of a deferred annuity contract, the policyholder should have the opportunity to opt for the best annuity rates available.”
But this seems to be an interim provision in order to develop the annuity market. Says J. Hari Narayan, chairman, Irda: “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.”
Disclosure and sale: The draft guidelines have suggested that an illustration be given at the time of sale of pension products to make the customer understand the costs and returns of the policy. For the purpose of illustration, assumed growth rates of 4% and 6% can be taken.
However, for the sale of unit-linked insurance plans (Ulips), the regulator mandates an assumed growth rates of 6% and 10% for illustrative purposes, but even that is under review. Says Narayan: “An illustration based on 10% return gives a false kind of comfort to the customers. We want the assumed rate of return to be more conservative. We have proposed it for pension products and will also look at changing the assumed rate of return for regular Ulips.”
What will benefit policyholders and possibly help agents explain pension plans better is the disclosure of an illustrative target purchase price or maturity corpus and an illustrative targeted annuity at the time of sale of a policy. Simply put, depending on the premium you are willing to pay, the agent will need to show you how much maturity corpus you are likely to accumulate and what will be the annuity or regular income against that lump sum.
These are only draft guidelines, which will be finalized after receiving comments from the insurers.