LIFE Insurance Corporation of India is set to offer up to six per cent annual return on Pension Plus, its unit-linked pension product. This comes at a time when the insurance regulator has been forced to withdraw the controversial 4.5 per cent guaranteed return clause on unit-linked pension plans following opposition from private life insurers, who argued such returns were not viable.
Pension Plus is thus the only regular premium unitlinked pension scheme based on guidelines mandating a minimum guaranteed return of 4.5 per cent. “We are going to declare the annual return for the financial year 2010-11, and it should be up to 6 per cent depending on the age and tenure of the policies,” says asenior LIC official, on condition of anonymity. Moreover, buoyed by the good response for the product, the largest life insurer in the country is likely to continue with the existing scheme, even if the pension guidelines are revised in the coming months. “Given that it is the only product of its kind available in the market right now, sales have picked up. If the new regulation permits, we would like to continue with this minimum guarantee as it will provide another option to policyholders,” says the official.
Pension Plus was launched in September last year and collected a premium of nearly Rs.400 crore. The Insurance Regulatory and Development Authority (Irda) has now offered to drop the guaranteed return clause in pension product norms, as private life insurers have refused to launch any products. The revised draft guidelines on pension plans, issued by the regulator last month, talked about a “nonzero” or capital guarantee instead of a fixed guarantee.
An Irda official says the success of LIC proves the product is “workable” and “saleable”, unlike whats perceived by private life insurers. Private insurance companies say a six per cent return is good, considering the guaranteed clause, which inherently restricts investment freedom. Another says traditional pension plans are offering seven-nine per cent return, so a six per cent return may seem to be a bit low. But, it is justified due to the guaranteed clause. In September 2010, Irda introduced pension product guidelines that mandated returns on such products to be linked to the reverse repo rate, and insurers were asked to offer an additional 50 basis points over the same.
The minimum guaranteed return was fixed at 4.5 per cent last year, based on the reverse repo rate. Reverse repo is the rate at which banks park their excess funds with the Reserve Bank of India.