Concerned over profits being eaten away by the new provision of guaranteed returns on pension plans, life insurance companies plan to take up the issue with the Insurance Regulatory and Development Authority to seek reduction of such a commitment.
The Hyderabad-based Irda had, in its new guidelines issued yesterday, prescribed a minimum guaranteed return for pension plans at an annual 4.5 per cent.
"Designing pension products would be difficult,'' said G N Agarwal, Future Generali's Appointed Actuary."We would like Irda to bring down the guarantee to zero per cent, that is, capital guarantee. We will meet Irda on this early next week."
Pension products constitute 20-25 per cent of the total premium collected by the industry. For the last financial year, around Rs 65,000 crore (Rs 650 billion) came from sale of pension products.
Total premium collection went up by 18 per cent during the last financial year to Rs 2,61,025 crore (Rs 2,610.25 billion).
Investors prefer equities, since these outperform debt in the long term, noted Aviva Life managing director and chief executive T R Ramachandran.
"Moving the investment to debt only to ensure the guarantee would not be right for the customers (as the returns would be low). There is no structured instrument to hedge the risk," said Aviva Life MD and CEO T R Ramachandran. "We are going to make a representation to Irda through the council on this."
At present, the Insurance Act does not allow insurance companies to invest in derivatives.
"A return of 4.5 per cent is onerous and it would require more investment in debt. We would be comfortable offering a capital guarantee or, may be, 2.5-3 per cent return," said SBI Life's Appointed Actuary, Sanjiv Pujari. "We will meet Irda and ask them to lower the return."
Kamesh Goyal, the managing director and chief executive of Bajaj Allianz Life Insurance, said the return prescribed by the regulator on pension plans was conflicting.
"Instead of long-term, returns on a yearly basis, like a one-year fixed deposit rate of State Bank of India would have been better," he said.
Actuaries said the revised norms would force companies to come up with a single-fund option. In addition, they will force policyholders to introduce a guarantee charge on pension products.
"There is no long-term instrument available in India which would ensure such a return on pension plans," said Malay Ghosh, managing director and CEO of Reliance Life Insurance Company.
In addition, actuaries said it would be difficult to match the assets and liabilities because of the fluctuation in interest rates, inflation, and performance of the debt and equity markets.
Although some life insurance companies offer a guarantee with unit-linked pension plans, no one offers a guaranteed return with pension plans.
