Pensions: Hope lurks

The new regulations for ULIPs that came into force from Sep 2010 effectively killed sales of pension products. Out of the 23 life insurance companies in India, only four life insurance companies launched new pension plans- SBI, LIC, ICICI Prudential Life Insurance and Aegon Religare Life Insurance. Pension sales , which accounted for nearly 30% of the market, reduced to a trickle. In fact, reduced sales of pension products is one of the key reasons why the life insurance market will see flat or negative growth in FY 2011 over FY 2010. The private life insurance companies have seen a degrowth of over 30% between Sep 2010 and Feb 2011 compared to a year earlier. 

The key reason for reduced sales of Pensions by the different Life companies was that IRDA mandated that there has to be a minimum assured return of 4.5% per annum. This guaranteed return created two issues:

a. It is too low a return for the customer to be of any interest when he sees returns around 10% in some traditional long term savings schemes

b. This creates  a problem for  the life insurer as  there are no long term instruments with tenures of 25 years plus which the Life Insurance company can invest in to assure this return.

The life insurance companies, through the Life Insurance Council, had made a representation to IRDA wherein they had request for higher equity allocation in the pension product. In all probability, the 4.5% guaranteed return may not be mandatory for pension products but may be just one of the different pension products that a company can operate, with a particular part of the pensions portfolio being booked under the guaranteed product. Policyholders would also have the option to choose non guaranteed pension products with a risk cover. It is also expected that IRDA will relax the mandatory purchase of annuity with 2/3 of the pension proceeds to about 50%.

We expect IRDA to come out with the new guidelines in the next few weeks. Pensions are too important a component of the Indian life insurance market to be allowed to wither away the way they have in the last 6-7 months. We hope that the corrective measures mentioned above will infuse new life into the health of pensions.