IRDA chairman appears to inclined towards the idea of guaranteed pension product even after scrapping of the 4.5% p.a guarantee. According to him, the pension ULIPs sold prior to 1 September 2010 were mis-sold as it was not really sold for pension needs
The Insurance Regulatory and Development Authority's (IRDA) pension guidelines mandate non-zero guarantee of returns even if it is lower than the 4.5% per annum guarantee offered by pension ULIPs (unit linked insurance plans) sold post September 2010 regulatory changes. Interestingly, IRDA chairman J Hari Narayan believes that the pension ULIPs sold prior to September 2010 were mis-sold as some financial accumulation products without an insurance component.
Making mandatory annuity of two-third of the corpus at vesting time for both traditional and pension ULIPs is another way to ensure customer keeps the funds locked for retirement needs. Pension ULIPs prior to September 2010 did offer lump sum payment (taxable). This option was removed post September 2010 regulatory changes. The window of opportunity was left open in traditional pension products, but it is now closed.
Another important change is not to allow an option for the policyholder to choose the insurer for annuity phase of the product. The same insurer will have to offer the annuity. If it is not the best offer, the policyholder is still stuck with the same insurance company.
There are mixed views from insurance companies on all the regulatory changes with both sides having valid arguments. Having a guarantee and transparency in surrender value will mean high exposure to debt instruments. The locking up of funds into annuity will enforce discipline. All this leads to questions on target segment for the pension product. Will a financially savvy investor buy pension products?
According to Rituraj Bhattacharya, head of market management and product development, Bajaj Allianz Life Insurance, "The pension guidelines will certainly help the masses. People want guarantee for retirement funds. There will be restriction for financially savvy investors who may want high exposure to equity. The average customer will have the incentive of knowing that there is capital guarantee and some returns. The customer may not know the annuity rates at the time of buying the product, but will have some estimate of annuity payment to be received based on the annuity rates at the times of vesting.
"In short, there will be transparency in the product from start all the way to vesting time and beyond for annuity payments."
The masses may have something appealing, but the classes may not have much to look for. It will be interesting to see how much the pension market grows with these new changes. As such, the slump in pension market from 20%-25% of life insurance business down to 3% has hit a nadir.
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