The Insurance Regulatory and Development Authority (Irda) wants all pension products to do exactly what they are expected to do — provide pension to policyholders.
Speaking to Business Standard, Irda chairman J Hari Narayan explained, “There are many traditional pension plans where annuity may or may not be available. This defeats the entire purpose of a pension plan. We want to make annuity compulsory for all traditional pension products because it is the basic premise of the product.”
If the annuity is not mandated, the policyholder is given a lumpsum at the end of the policy tenure. It works like a retirement fund, where the accumulation happens but the policyholder is not bound to buy an annuity from it. And this, according to Hari Narayan, should not happen.
In a circular issued to insurance companies last week, Irda has clarified that the guideline for pension products will include “all individual and group unit-linked pension products, all individual and group non-unit-linked pension products and all individual and group variable insurance pension products.” This implies that the pension draft guidelines introduced in August would be applicable to traditional plans as well.”
“The inclusion of traditional plans clears the confusion surrounding the draft guidelines as some insurers were under the assumption that they were only applicable to unit-linked pension plans,” said a life insurance company official. The Irda chief also wants more life insurers to provide annuity plans, because at present, apart from the state-owned Life Insurance Corporation of India (LIC), hardly any companies sell annuity products in India.
“There are many players active in the accumulation phase of a pension plan, but after that a policyholder has to shift to LIC. Around 90-95 per cent of the annuity business is concentrated with LIC, making it very risky for the company,” said Hari Narayan, adding that the risk concentration needs to be divided because there would be an increased demand for annuity plans once the New Pension Scheme increases its penetration.
However, in the recent circular, the insurance regulator has softened its stand on the amount that needs to be annuitised at the time of vesting or maturity of the policy. “Also, at the date of vesting or at the date of surrender, the policy holder shall be given an option to commute a percentage of the entire amount under the policy, in accordance with the extant rules of income tax,” Irda said.
“Currently according to the income tax law, commutation up to 33 per cent of the maturity amount is non-taxable, above that it is taxable. So, this has been done keeping in mind the Direct Taxes Code, which is expected to be in force from the next financial year. This move will also give flexibility to both insurers are policyholders,” said K Sahay, MD & CEO of Star Union Dai-ichi Life. Similarly, insurers will have to provide assured benefits not only when the policy matures, but also in case of the death of the policyholder or on the event of surrending the policy. The benefits applicable should be declared when a policy is purchased.
Insurers launched many traditional pension products after the minimum returns on them were made compulsory.
Many of the traditional pension plans launched in this period sold in the absence of any choice. Insurers did not launch new unit-linked plans after the older ones were withdrawn, as giving a guarantee on minimum return was not a viable option according to them.