Insurance regulator, IRDA removed Guaranteed Returns on Pension Products

The insurance regulator, the Insurance Regulatory and Development Authority (IRDA), on 9 November 2011 relaxed its earlier decision asking insurance companies to guarantee a minimum return of 4.5 per cent on unit-linked pension policies. IRDA removed the guarantee clause which required all insurers to offer a minimum 4.5 per cent return on the investment made by subscribers.

IRDA mentioned that riders, as a part of pension products, cannot exceed 15% premium. Assured benefit will be based on pension premium and not overall premium. IRDA’s move is expected to revive the pension products industry.

The move will also encourage pension funds to earmark larger amounts towards equities. Earlier, pension funds parked their monies largely in debt since it offered greater stability and predictability in terms of returns, unlike the equity markets.

The doing away of the minimum returns is likely to enable fund managers to innovate and offer new products that would invest in a mix of debt and equity based on the investor’s risk. Being a long term investment, an exposure to equity increases the chances of better returns on the total accumulated corpus.

IRDA mentioned that pension products, which are currently allowed via ULIP and non-ULIP platforms, cannot be provided through variable insurance products. Insurers providing pension can provide annuity on surrender. The insurers also need to ensure investment in pension products are only for long-term saving. The regulator has given an option to commute only up to 33% on surrender and utilise entire proceeds to buy single premium deferred pension.

IRDA made it compulsory for customers to buy annuity from the same insurer with an objective to address the issue of annuity concentration risk which lies with the state insurer Life Insurance Corporation (LIC). Currently about 95 per cent of the annuities are with LIC, posing a huge risk to the entire pension market. Insurers would have to show an illustration of 4 per cent and 8 per cent for both the pension fund as well as for the annuity.

Fact

The period during which an investor puts money into the pension fund, is called as the accumulation phase. When the investor hits the vesting age, normally kept at 55, s/he is supposed to purchase an annuity from the accumulated corpus. The corpus is divided into payments which are known as annuity, paid at defined intervals.