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Friday, September 9, 2011

IRDA withdraws the controversial 4.5% guaranteed return on pension products

Life Insurance Companies in India can rejoice at the IRDA’s withdrawal from the controversial 4.5 per cent guaranteed return on pension plans. Usually these returns are fixed according to the reverse repo rate. Reverse Repo rate is the rate at which banks deposits their excess funds in the Reverse Bank of India (in simple words it is the rate at which RBI borrows from the banks). The mandatory return on these pension products was supposed to be 50 basis points more than the reverse repo rate. A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. For example, if the RBI raises interest rates by 50 basis points, it means that rates have risen by 0.50% percentage points. If rates were at 2.50%, and the RBI raised them by 0.50%, or 50 basis points, the new interest rate would be 3.00%.

However amidst this decision the Indian life insurance frontrunner Life Insurance Corporation, India (LIC) has set to offer upto 6% return on it’s unit linked pension product, Pension Plus. Even during the time when the mandatory 4.5 % return was in effect, LIC was the only company to have offered such pension plans. The private players refrained from taking such a risk. The unpopularity of this guideline has forced IRDA to revise it. This revised guideline talks about non zero or capital return instead of a fixed return. Although seeing LIC’s magnanimous premium collected (Rs 400 crore) since the last year through Pension Plus stands testimony to the fact that the guaranteed return guideline should actually work, we should not overlook the fact that other life insurance companies are far behind LIC in terms of size and penetration.

Now we shall all have to wait and see what the private insurers have to offer for pension products.

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