After a deep lull that lasted a little more than two years, unit-linked pension plans (ULPPs) have once again started entering the market. Once a popular product in the stable of an insurance company, these plans faced extinction after the Insurance Regulatory and Development Authority (Irda) cracked the whip on them and put in place some customer-friendly norms that were seen as unfriendly for the insurers. The regulator asked the insurers to offer a guaranteed return on investments not just on maturity but also on death of the policyholder during the term of the policy and in case the policyholder decides to quit the policy midway.
Considering the guidelines unviable, insurers stopped offering pension plans altogether. In June 2012, the regulator tweaked the guidelines a little to excuse insurers offering a guaranteed return to the policyholders in case of early surrender. Six months later, HDFC Life Insurance Co. Ltd lined up to offer the first ULPP in December and less than a month later, ICICI Prudential Life Insurance Co. Ltd has come up with a plan too. The timing of these plans coincides with the tax-saving season. ULPPs qualify for a tax deduction of Rs.1 lakh under section 80C of the Income-tax Act. Even on maturity, one-third of the corpus, which the customer can take as lump sum, is tax free. The remaining needs to get annuitized or go into buying a pension product that gives periodic income.
But before we get into how these plans measure on our scale, let’s first understand the basic structure of a pension plan as laid by regulatory guidelines.
The latest ULPPs
Design: ULPPs come with a lock-in period of five years. So even if you wish to surrender or terminate your policy within five years, you will get your money back only after the lock-in period gets over. Even then you can’t take home the entire corpus.
In order to discourage surrender and partial withdrawals, the guidelines dictate that you need to buy either a single-premium pension policy or annuitize a portion of the corpus (even surrender value) from the same insurer. You will need to annuitize at least two-thirds of the corpus. Earlier, you needed to annuitize your corpus only on maturity.
Cost: ULPPs need to conform to the same cost caps to which Ulips do. Just like Ulips, the reduction in yield, difference between gross yield and net yield, can’t exceed 4 percentage points in the fifth year, coming down to 2.25% in the 15th year and thereafter.
Even on surrender, ULPPs can’t charge more than Rs.6,000 as surrender or discontinuance charge and this is applicable only in the first four years.
Investment: Other than the design, the investment pattern of these products has altered too. Earlier, your investment in ULPPs was market-linked. The risk of investment in that sense was borne by you. But now Irda has mandated a minimum non-zero positive return of premiums that will be given on maturity or to the beneficiary in case of the policyholder’s death. The element of guarantee means insurers will not be able to offer pure equity-linked plans.
The trade-off: The element of guarantee comes with two major setbacks for the product. You can no longer get a pure equity-linked investment and it is likely that insurers will charge you extra for offering the guarantee. Says Rituraj Bhattacharya, head (product development and market management), Bajaj Allianz Life Insurance Co. Ltd: “The guidelines have mandated a capital guarantee which will make it very difficult for the insurers to offer pure equity-linked options. Also, even as insurers invest in debt, it isn’t completely risk-free, so in that sense they will still need to account for a capital guarantee. For this, the insurer may charge extra to the policyholder.”
Keep in mind that the charge on guarantee is currently excluded from costs caps. In other words, when you see the illustration of the product, you are most likely to get a published net return which does not factor in costs such as guarantee and mortality costs.
So if you are comparing products, look at the fund value and not the net return.
The two plans
Pension Super Plus: The maximum exposure to equity in this HDFC Life plan is 60%. If you die during the term of the policy, your beneficiary will get the higher of the fund value or total premiums paid accumulating at a rate of 6%. On maturity, the plan returns higher of the fund value or 101% of all the premiums paid.
Pension Super Plus charges a guarantee charge of 0.4% of the fund value. Additionally it also has a mortality cost.
Shubh Retirement: There are three investment options to choose from this ICICI Prudential Life plan: Aggressive investment option caps equity exposure at 75%, moderate investment option caps equity exposure at 50% and the conservative investment option caps it at 25%. The policy promises higher of the fund value or minimum guaranteed benefit on maturity as well as death of the policyholder.
“The guidelines seek to provide greater security of the pensioner’s fund hence this product has built in capital guarantee. However, the guaranteed rate of return should not be the consideration for purchasing this product. The consumer should focus on the investment options that we are offering while looking at capital ,” says Niraj Shah, senior vice-president (products), ICICI Prudential Life.
The guaranteed benefit under this plan varies depending upon your investment option, premium paying term and policy term. For instance, if a 35 year old invests Rs.1 lakh every year for a premium paying term of 10 years for a policy term of 30 years, the maximum under the plan, he will get an assured maturity benefit of Rs.10.1 lakh at the end of 30 years or a maximum death benefit of Rs.10.1 lakh in case of death. Through a conservative investment option, these guarantees would increase to Rs.19 lakh as the guaranteed maturity benefit and maximum assured death benefit.
Shubh Retirement in comparison charges only a guarantee charge of 0.5%.
What should you do?
These plans may not appeal to aggressive investors since they are not purely equity-linked. Even conservative investors should put some thought before buying these since the plans are expensive and the guarantees they offer are not much to write home about.
If you want to save for retirement, capital protection is not very high on the agenda and if you are willing to take little or no exposure to equities, consider investing in the National Pension System (NPS), which is a cost-effective option. The only disadvantage with NPS currently is that on maturity, the corpus, 60% that you can keep as lump sum, is not tax-free. However, this is likely to get rectified soon.
This pension plans adhere to the current set of guidelines, however new product guidelines are on the anvil. Track this space to know how pension plans will change in the new regime.