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Firms shift from LIC to others

LIC gives 7% rate of return; corporates have to fork out that much extra to meet gratuity liability

india Updated: Feb 15, 2006 01:57 IST
Arun Kumar

The insurance space is becoming more intense as private insurers try to grab a larger share of the wallet. After making good inroads in the metro zones, private insurance companies are now targeting the corporate houses.

Many of India’s leading corporate houses are shifting their gratuity funds to private insurance companies from PSU monolith Life Insurance Corporation of India (LIC).

LIC is currently managing Rs 18,000 crore of gratuity funds.

The move is aimed at increasing the cost of funds so as to reduce the cost of the companies. LIC is giving a rate of return of seven per cent which means that corporates have to fork out that much extra to meet the gratuity liability.

In case the return is 10 per cent, the liability is reduced by 30 per cent. Since gratuity is a defined benefit scheme and entirely borne by the employer, company managements are looking at private insurers to reap a higher return from the surging equity market.

Some of the leading companies like ACC, Nicholas Piramal, Ingresoll-Rand and L&T have already shifted their gratuity funds from LIC either completely or partly to the private insurance companies like Birla Sun Life, ICICI Prudential, HDFC Standard life, Kotak Life and others. In fact, many more leading corporates are in the process of shifting out.

On an average, it is believed that large corporate houses contribute between Rs 3 to 5 crore annually, depending on the HR cost of the company. The way it works is that employer's contribution should be 8.33 per cent of the basic plus DA. “Since gratuity is a defined benefit and the liability to pay a guaranteed sum of money is on the employer, our objective is to increase the return while protecting the principal,” said the chief financial officer of one of the companies. Sources said that some of the companies have left the existing portfolio with LIC but fresh contributions are being diverted to private insurers.

The payable amount on account of gratuity is equivalent to 15/26 multiplied by the last salary drawn multiplied by the number of years of service, provided that the minimum service period is of five years. The maximum statutory gratuity payable is Rs 3.5 lakh.

The employers currently have two options — create a fund or pay as you go i.e. not create a fund and pay an exiting employee as and when he leaves.

The fund can be managed either in-house or can be outsourced to an insurer. But in case the company decides to manage it in-house, it has to adhere to investment norms statutorily specified under Rule 67 (2) of Income Tax, which in many ways restricts the avenues. This, in turn, affects the earnings. Against this backdrop, many companies have traditionally outsourced their gratuity to LIC in the past.

But over the last four years, the returns from LIC have been continuously declining. For larger funds, LIC has given a return of 10.5 per cent, 9.5 per cent, nine per cent and 8.2 per cent for financial years 2001- 02, 02-03, 03-04 and 04-05 respectively.

For smaller funds, the returns are 9.25 per cent, 8.25 per cent, 7.55 per cent and seven per cent respectively.

First Published: Feb 15, 2006 01:57 IST