The Insurance Regulatory and Development Authority (Irda) has decided to do away with the 4.5 per cent guaranteed annual return clause from pension products. In a draft exposure on the pension plans, the insurance regulator, while allowing more flexibility to insurers, said these products should carry an “assured benefit” disclosed at the time of issuance.
“The Irda had earlier required all pension products to ensure an accumulation at a rate of 4.5 per cent which was also indexed to the reverse repo rate of the Reserve bank of India (RBI). Because of the uncertainty in relation to investment returns, etc, that requirement of Irda did not find wide acceptance in the market. Irda has since reviewed the position and proposes to expand the option of pension products,” the insurance regulator said in the draft.
A pension product (deferred annuity contract) will have an assured benefit disclosed at the time of sale, where the assured benefit is an amount in absolute terms which becomes payable on the vesting date, it added.
The assured benefits could be of three types—first, a minimum positive return on the premiums paid; second, a guaranteed maturity benefit in absolute amounts; or a guaranteed annuity.
The revised guidelines also said the pension products should be structured on the basis of benefits that were to be guaranteed and would be priced accordingly. The customers can have a varied equity exposure but on maturity two-thirds of the corpus must be converted into an annuity. The insurers have welcomed the move from the regulator, saying this would enable them to introduce pension products. “This undoubtedly provides more flexibility to the insurers. Since there is no guaranteed rate, insurers will be able to invest some part of the fund in equities thereby generating better returns,” said G V Nageswara Rao, MD & CEO, IDBI Federal Life Insurance Company.
In September 2010, Irda introduced guidelines for pension products which mandated returns on such products to be linked to the reverse repo rate and the minimum guaranteed return was fixed at 4.5 per cent. The insurers argued that in case of a guaranteed annualised return, they would be forced to invest only in debt instruments. This led to a sharp fall in the sale of pension products, as private insurers did not introduce any regular premium unit-linked pension products based on the new guidelines.
During 2010-11, private insurers posted a marginal 2.55 per cent rise in premium collection, the lowest growth rate since 2002-03 when the industry sales had dropped by 14 per cent. The decline continued during the first two months of this financial year too, as the year premium collected by private life insurers fell by 23.2 per cent in April and May, compared to the corresponding period last year.