New guidelines of Insurance Regulatory and Development Authority (IRDA) on pension products may revive the Unit-linked pension plan (ULPPs) market; as since September 2010 when IRDA mandated 4.5% guaranteed return on ULPPs) saying it unviable life insurers stopped to launch new ULPPs and as IRDA had capped the commission for agents hence they were also not interested to promote it. Before September 2010 ULPPs use to be the prominent contributor in their premium collection as it accounted for 30% of their sales.
But in its new guidelines on pension products IRDA has removed this guarantee clause hence it is very likely that now insurers will start launching new ULPPs.
Therefore it has become necessary to understand these guidelines comprehensively as what impact they are going to have on life insurers and will it make it more attractive for investors to invest in it or not.
Earlier pension plans launched after September 2010 were considered not feasible for policyholder; as these products in order to provide minimum guaranteed return invested heavily in debt which limited their earning capability in long term.
Although new guidelines have also guarantees but its form has been changed. As now insurers will have to offer either one of the two guarantees; firstly it may be minimum guarantee return or non-zero positive return which should be told to policyholder upfront at the time of issuing of the policy, second option is specific maturity benefit.
Some insurers says that these new guidelines will encourage life insurers to launch new pension plans as there will be no obligation on insurers to provide guaranteed return matched to reverse rate of Reserve Bank of India (RBI) hence they can now formulate there products. Insurers also say guarantee return were barring insurers to offer incentives for agents and now they can offer higher commission to their agents hence they could also market the product.
But, there are also insurers who think that these new guidelines may encourage the insurers to launch new pension plans but it will not get back its past glory. As per insurers IRDA might have removed the 4.5% guarantee clause but still insurers have to offer some kind of guarantee which will restrict them to offer many funds. As insurers would not offer plans that will invest in equities more than 5-10% and even allocating fund into long term bond or in other words insurers will not invest in instrument whose value can be swayed by market price or interest rates.
But to earn healthy return in long term these instruments are essential. As per insurers fund of pension plans should be invested in long term and high yielding instruments but due to new guidelines which had mandated insurers to offer some kind of guarantee this may not be possible.
Another thing that you need to take in consideration in assessing the new guidelines is that it does not provide the policyholder option to surrender the policy and get the lump sum; if you want to surrender or after maturity of the policy you will get one-third of the amount and with remaining two-third you have to compulsorily purchase a annuity at the prevailing rates which guarantee for the life.
Another thing is that you will have to buy an annuity from the same insurer from whom you have bought the pension plan that means you can not buy a annuity from another insurer who at the time when you come to buy a annuity might offering the better rates hence this restricts the choice from the policyholder.
To sum up we can say that some aspects of new guidelines will make ULPPs beneficial for investors as it has relaxed the guarantee return now pension plans will invest more in equities this will increase the return that a policyholder will get, secondly as now insurers will begin to launch new pension plans hence it will give more choice to the investors, new guidelines will also give some comfort to the risk averse investors as it will have alternative guarantees and in the case of policyholder’s death his nominee can withdraw entire proceeds.
However, these new guidelines also have some drawbacks which will make it unattractive for investors like as guarantees are not eliminated but modified hence insurers will not invest substantial amount in equities and long term bonds which will restrict high return and policyholders will be forced to compulsorily invest two-third amount in annuity and you will not get to buy annuity from the insurer who he is offering best rate as you are compulsorily buy a annuity from the same insurer from whom you have bought a pension plan.
After considering all these points pension plans are not the only instrument to accumulate your retirement fund. Firstly you have to exhaust the Public Provident Fund (PPF) which has been increased to Rs 1 lakh; you can invest in New Pension Scheme (NPS), you can also go for equity mutual fund or you can also opt for Fix Deposits (FD) and then you can think to invest in ULPPs.
Even though Insurance Regulatory and Development Authority (IRDA) removed the minimum 4.5% guaranteed clause on Unit-linked Pension Plan (ULPPs) from first December 2011 life insurers are not rushing to launch new ULPPs hence, new pension plans will hit market only by next fiscal.