Life insurance companies are shying away from launching new pension plans following new norms, which mandate that all unit-linked pension plans will have to offer a guaranteed return of 4.5 per cent.
Most life insurance companies have not launched any new unit-linked pension plans after the new ULIP guidelines came into effect from September 1. Life Insurance Corporation of India's Pension Plus is the only unit-linked pension plan currently on offer in the market.
Companies said the guaranteed return regime would force them to move away from equities and increase debt exposure, which may affect profitability.
It was launched on September 2. Pension products constitute 20-25 per cent of the total
premium collected by the industry. During the last financial year (2009-10) around Rs 65,000 crore came from sale of pension products --- representing a quarter of the total premium collection of Rs 2,61,025 crore.
Firms also said that to provide a guaranteed return of 4.5 per cent, companies would have to earn about 6.75 per cent to 7 per cent.
“This guaranteed (4.5 per cent) return is applicable on maturity date for policies where all due premiums are paid. Mortality and, or health cover could be offered along with the pension/annuity products as riders, giving enough flexibility to policyholders to select covers of their choice,” the IRDA guidelines said.
Insurance companies said an underdeveloped long-term debt market offers limited options for them to park their money that would ensure a steady risk-free return for tenures extending up to 30 years.
“For long term investments, the best returns can be earned through equity but with the guarantee, life insurance companies would have to invest in debt instruments and that pose some problems,” a Max New York Life spokesperson told Hindustan Times.
“We are evaluating the pension market in the light of the new regulation and seeing when we can launch a pension product,” Yateesh Srivastava, chief marketing officer, Aegon Religare Life Insurance however said.
An annualised return of 4.5 per cent does not compare well with other long-term savings instruments. A savings bank account offers 3.5 per cent, while the employees’ provident fund raised interest rates to 9.5 per cent for 2010-11. A PPF subscriber earns 8 per cent per annum.
“At 4.5 per cent guaranteed return (for unit-linked pension plans) even customers may not find it attractive,” a senior executive of a Mumbai-based life insurance company said, requesting anonymity.