Pension ULIP products will enter the market after 4.5% per annum guaranteed return has been scrapped, but some guarantee will ensure high exposure to debt and hence returns will not even beat inflation. Will customers shy away?

The Insurance Regulatory and Development Authority (IRDA) has announced new pension guidelines for insurance companies. The guidelines need all pension products to explicitly define the assured benefit that the customer would get at the time of surrender or vesting age. At the time of vesting, the annuity shall be provided by the same insurer who contracted the original policy. On surrender of policy post the lock-in period or on the date of vesting, the policyholder can commute to the extent allowed under Income Tax Act (1/3rd at this time) and utilise the remaining amount to purchase immediate annuity guaranteed for life at prevalent annuity rates, or buy a single-premium deferred pension product.

Insurance companies except Life Insurance Corporation of India (LIC) have been reluctant to launch regular premium pension plans post September 2010. Will anything change after the new guidelines? Will the customer really benefit? Gorakhnath Agarwal, chief actuary, Future Generali India Life Insurance, gives a realistic perspective. According to him, “The new guidelines, though appear to be relaxed in terms of guarantee, may still not achieve the objective of reviving sales of pension products.”

In less than two years there have been a lot of changes in pension ULIPs (unit linked insurance products). From allowing high equity exposure due to ‘no guarantee’ to high debt exposure due to ‘4.5% p.a. guarantee’ to possible continuation of high debt exposure due to ‘non-zero guarantee’, pension products have undergone frequent changes. Here are three hiccups in store for customers along with ‘what could have been better option’:

1.    High exposure to debt will continue – Mr Agarwal says, “Retirement saving is meant to provide protection against inflation. Any kind of guarantee would restrict investment freedom (insurers will invest in debt products in order to meet the guarantee) and hence may not achieve the objective of providing protection against inflation. This might lead to under provision for retirement.”

‘No-guarantee’ option not on the table – Pension ULIPs prior to 1 September 2010 had no guarantee and hence the policyholder had the flexibility of high equity exposure. According to Amitabh Chaudhry, managing director and chief executive officer, HDFC Life, “Would we have liked an option for no guarantee? Yes, since that would have allowed flexibility for the funds to be invested in equity in a higher proportion which would have meant potential higher returns. But I think the regulator is rightly focused on ensuring capital protection for customers who are saving up in a pension plan for their retirement.”

2.    Annuity from same insurer – IRDA may have genuine reasons for enforcing same insurer to continue with annuity phase of the product due to LIC taking 95% burden of it, but where does it leave the customer? According to Gorakhnath Agarwal , “We already offer our deferred pensioners purchase of annuity from our company, but we are still of the view that choice to purchase annuity from any insurer should have continued as it is in the interest of the policyholder and he should be given the opportunity of a competitive deal.”

Annuity at what rate? The captive customers for annuity phase may ensure less motivation for insurers to offer best rate. The annuity rates will be decided at the time of vesting of pension. If at that time another insurer offers better annuity rates, you are struck with your insurer for literally rest of your life. To top if off, annuity in India is taxable which itself is the biggest snag.

3.    Enforced annuity – Pension ULIPs, prior to September 2010, did offer lump-sum payment (taxable). This option was removed post September 2010 regulatory changes. The window of opportunity was left in traditional pension products, but it is now closed. While one-third of the corpus can be taken out tax free at the time of vesting, the remaining two-third will be forced into annuity. Even if you surrender the policy before the policy term, the annuity is mandatory. Mr Agarwal says, “While we appreciate the need of annuitisation of pension corpus, making it compulsory in all cases may lead to problems. The examples are—surrender value is generally too small to buy the pension or the policyholder might be suffering from some critical/ terminal illness, etc. In such cases lump-sum should have been allowed.  In other countries including the UK, lump-sum is permitted in such cases which, of course is subject to tax.

Exit option – Taxable lump-sum withdrawal used to be an exit option, though there are valid arguments against it. Mr Chaudhry adds, “Pensions are meant to accumulate a corpus during your productive years that can be then utilised in a systematic way during your non-productive years. A complete withdrawal leaves the customer open to risk of choosing another investment vehicle based on the right advice at a particularly vulnerable stage in her life. While a lot of us might differ on forcing an option on the customer, I think we should consider the maturity of our market and see this as the right move in the interest of the customer.”  

The million dollar question is whether customers will get attracted to non-zero guarantee even if the returns are low, annuity from same insurer and enforced annuity? A veteran LIC agent summarizes it accurately. He says, “What is the real incentive for customer to go for pension product anymore? They can as well take regular life insurance policy and get the corpus on maturity as tax free. If they wish to lock money in annuity, immediate annuity is an option. If they do not want to lock anywhere, invest in any other instrument. There is flexibility here for high equity exposure in life insurance policy, choosing any insurer for immediate annuity, tax benefits and not worry about locking money forever at any stage.”

Moneylife view is that pension ULIPs prior to September 2010 did not have anything harmful (except for high charges). As the saying goes, “If it ain’t broken, don’t fix it”.