Impasse over pension products

Retirement planning has become one of the biggest concerns globally.

Retirement planning has become one of the biggest concerns globally. In India,currently there is a lot to be done in the area of retirement planning. Life expectancy particularly is increasing,at the same time the joint family system is giving way to nuclear families.

At the same time,the cost of living has been escalating rapidly. India also does not have welfare schemes like many other developed countries which ensure a certain minimum sustenance for retired people. These trends make retirement planning in India even more important.

Insurance companies

The insurance sector was successfully taking pension products to the retail market and generating a lot of interest in them. Pension products are long term products which typically have an accumulation stage wherein the policyholder builds up a corpus and then there is the annuity or de-accumulation stage during which the insurer pays a regular annuity to the policy holder.

The long term nature of pension plans and the need to cover the risk of living too long make insurance companies the ideal providers of pension and annuity products. These products being long term in nature provide stable long term savings which can be channelised for long gestation projects. It can be one of the best sources of funds for infrastructure for which there is a great need in our country. Till the year 2009-10 pensions contributed to over 20 per cent of the total premium collections of insurers.

Current Impasse

The current impasse on pension products is quite unfortunate. The main causes of concern revolve around the surrender clauses. The understanding that insurers have is that they would need to ensure that other than charges there should be no erosion on capital irrespective of when the policy holder surrenders. This is a big challenge as insurers have no control on interest rates and the capital markets. In case of an interest rate hike,the NAVs would naturally fall and as a consequence there would be capital loss. If insurers are to make good such capital losses in case of surrender,it would put the insurer at considerable financial risk. This is not in the interest of anyone and prudent companies would not undertake such a risk.

The insurers can at best guarantee capital at the end of the policy term.

Another concern is that it has now been specified that even in case of surrender,only one third of the fund value post charges can be paid to the policyholder. The policyholder,thus,necessarily has to take an annuity on the remaining two-thirds of the corpus value. This clause causes some concern to certain prospective buyers as in case of a liquidity crunch caused by unforeseen circumstances they would not be able to encash their savings under the pension scheme.

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While savings in any form is a desirable goal,pension products provide for low cost long term savings which can give reasonable returns and guaranteed annuities. Thus,many people may be deprived of this benefit which is not in the interest of society. As the current working population retires,they may have a situation wherein there is no regular guaranteed income. They may then be at the mercy of other family members or may have to lead a financially constrained life in their golden years.

It is recommended that measures are quickly taken to resolve this impasse and facilitate the launch of pension products by the insurance industry.

Author is Chief Distribution Officer,Bajaj Allianz Life Insurance