Pension plans are making a comeback

February 19, 2013

(Any opinions expressed here are those of the author and not of Reuters)

Life insurance companies had all but exited the pension sector after tough regulations were put in place to guarantee returns for the investor. This is a vital sector for insurance companies and hit overall business.

In 2010/11, new business of 122 billion rupees was added in the pension sector. This fell to 111.7 billion rupees in the following fiscal year. Worse, deletions in the business increased from 68.9 billion rupees to 195.2 billion rupees last year — surely that would have hurt.

So why did insurance companies drop this huge business opportunity? The sticking point seemed to be the regulation which mandated a guaranteed non-zero rate of return on investments made till the date of vesting.

This guaranteed return was earlier mandated at 4.5 percent by the regulator but was diluted to non-zero returns when it was found to have no takers.

Almost a year went by and there weren’t many pension plans available for sale. But the tide has turned and the focus is back on the pension sector. While many endowment plans (where a lump sum is paid to the customer when the policy matures) were being sold as retirement solutions, these were not the pure “pension” plans in which two-thirds of the accumulated amount would be used to purchase an annuity to give lifelong income to the policyholder.

Now, there are quite a few options in both the traditional and ULIP versions of pension plans. And going by advertisements, pension plans seem to be a big thing for insurance companies. It used to sell really well, it is the tax-saving season and there isn’t a lot of competition with pension plans.

Prominent insurance players such as LIC (New Jeevan Nidhi) and HDFC Life (Pension Super Plus) have launched plans in the traditional space while ICICI Prudential is selling Shubh Retirement Plan which is a ULIP. If you have an appetite for risk, a ULIP may be a good option as the investment horizon is typically longer in pension plans and non-negative returns are guaranteed. Else just stick to the time-tested traditional variant.

It’s good to see pension plans finally being launched and pushed aggressively by life insurance companies. There is demand for it and it should add to the growth of an industry which has not been doing too well in the last couple of years.

You buy a pension plan (also referred to as deferred annuity plans) and keep paying premiums each year to build your investment corpus. On reaching the vesting age (somewhere close to your retirement) you use this corpus to purchase an annuity from the same insurer and you can then enjoy a regular income for life. Currently, you are allowed to withdraw a third of the corpus before buying an annuity for immediate requirements.

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