More options in pension Ulips soon

Pension | admin | November 18, 2011 at 9:48 am

You can soon expect calls from life insurance agents hard-selling unit-linked pension plans (ULPPs) once again.ULPPs have been out of circulation for a while, after the Insurance Regulatory and Development Authority (Irda) imposed a guaranteed-returns clause on them last September.

The authority has now relaxed its norms on guarantees. The new norms, to be effective from December 31, could trigger a partial revival of the pension Ulips category.

New Pitch

For one, insurers do not need to guarantee a return linked to the reverse repo rate of the Reserve Bank of India (RBI ) anymore. The assured-return requirement had been a bone of contention as many insurers felt the target couldn't be met.

Simultaneously, agents felt these pension Ulips were not lucrative as commissions were capped post September 1, 2010. This meant there were hardly any pension Ulips being launched.

Only LIC designed a regular pension Ulip. Companies like SBI Life and ICICI Prudential came out with single premium pension Ulips. In contrast, in the pre-September 2010 era, insurers banked heavily on pension plans to drive their business and these products accounted for nearly 30% of their premium collections.

What's more, the new form of the product being launched after September 1, 2010, was not considered beneficial to policyholders either, as the need for guaranteed returns meant funds had to be directed to safe, fixed income instruments, curtailing their return-earning ability.

Now, in its refurbished avatar, a pension Ulip will come with a guarantee, albeit with a difference. According to the new guidelines, insurers have the choice of offering any one of two types of guarantees – minimum return (a non-zero, positive return) disclosed upfront at the time of issuing the policy; and a specific maturity benefit.

Decks cleared for pension resurgence?

With the main constraint of providing a mandated return eliminated, will insurers go all out to woo prospective policyholders with new products? Some insurers seem to think so.

"Companies will find it easier to formulate new products now. It will add to our premium income and, hence, we will be keen to bring out such plans," says Kamalji Sahay, CEO, Star UnionDai-ichi Life.

"The new guidelines will encourage more companies to launch pension Ulips as the 4.5% guarantee on returns has been eliminated," says Sanjiv Pujari, appointed actuary, SBI Life.

Since there is no need for regulated return guarantee, they would be free to launch more pension Ulips. It will be easier to market them, too, as the carrot of high returns can be dangled in front of prospective customers.

On the flipside, this may allow insurers to offer higher incentives to agents. "The reverse-repo-linked guarantee was helping control the expenses of insurer. But, now, they may offer higher commission to their agents to market the product, which will impact the returns of the policy," says certified financial planner Pankaj Mathpal.

The glitches

There are those who believe that these guidelines will not help pension Ulips regain their lost glory – at least not to a great extent. "You may see new products being launched now, since the norms on guarantee have been relaxed.

However, insurers still have to provide some guarantee," points out GN Agarwal, chief actuary, Future Generali Life. So, what may happen is that pension Ulips may not offer a number of fund options.

For instance, they are not likely to offer funds where equity would comprise more than 5-10% of the portfolio. Similarly, there may not be substantial allocation to long-term bonds. In other words, investments in instruments whose value can be swayed by movements in market prices or interest rates may be limited.

But, unfortunately, these are the very instruments that are essential for earning healthy returns over the long term. "In pension products, what is actually required is investment in long-term, high-return yielding instruments. Because of the need to provide a guarantee, however, this may not be possible," explains Agarwal.

Other changes

While guarantee is the most-talked-about aspect, there are other factors that can affect the potential returns and final corpus of a Ulip scheme. Irda's final guidelines are set to end the flexibility to withdraw corpus once the lock-in period comes to an end.

This, probably, is the only area where traditional pension products will feel the pinch. Policyholders will no longer have the option of surrendering the policy to withdraw a lump sum.

They will now have to compulsorily buy annuities at the rates prevailing then. "For those who are unable to remain invested and have to discontinue, the amount that will be allowed to be withdrawn will be very small. The new guidelines will hit such pension plan holders," says Agarwal of Future Generali.

Policyholders are allowed to withdraw up to 1/3rd of the corpus as lump sum, while the rest will be paid to the policyholder in the form of annuities, which will be guaranteed for life. Secondly, the regulator has made it mandatory that the insurer selling the pension policy should offer annuities, too.

Therefore, the policyholder will not have a choice of approaching the insurer offering the best rate at the time of vesting. In short, the key takeaway for the policyholder is the likely higher exposure to equities, which could translate into better returns. More companies launching products would also mean greater choice.

But, finally, you need to remember that pension plans from insurers are not the only tool available for retirement planning. You can look at exhausting the public provident fund limit (now raised to 1 lakh) and consider other avenues like NPS, equity mutual funds, fixed deposits and so on, before taking a final call.

Source: Economic Times