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 the minimum guaranteed rate of return of 4.5% per annum. The IRDA has also taken into its fold 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.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. "The new guidelines ensure that the capital or premiums of the policyholder is guaranteed," said Kshitij Jain, MD and CEO, ING Vysya Life Insurance Co Ltd. "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."
About equity exposure
Owing to the guarantee, the insurers may still find it difficult to offer ULPPs with high equity exposure. "A high exposure to equity may not be possible because the insurer needs to offer a guarantee," said Andrew Cartwright, chief actuary, Kotak Life Insurance Co Ltd. "But the exposure to equities would depend upon the extent of guarantee. So an insurer offering a minimum guarantee of 1% will be able to offer a higher equity exposure than an insurer offering a minimum guarantee of 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 would translate into zero or minimal equity exposure. "It will become difficult to offer any equity exposure if we need to offer a guaranteed death benefit as well as surrender benefit," said V Viswanand, director and head, products and persistency management, Max New York Life Insurance Co Ltd. "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."
1 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. 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.
What will benefit policyholders and also help agents evolve their sales practices is the new set of benefit illustration and a yearly communication of the benefits to policyholders. A benefit illustration 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 insurer will also have to provide an annual yearly disclosure on April 1 each year including the current accumulated amount and the likely maturity corpus the policy may generate.
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.
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 December 1. Watch this space to get an idea about the new version of pension plans.