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Pension Sector: Reforms Not In Sight

By: Sitanshu Swain, The Financial Express

March 17, 2003

There were high expectations on social securities from Jaswant Singh’s maiden Budget (2003-04). But instead of announcing any detailed social security measures which would have kickstarted the pension sector reforms, Mr Singh preferred to make a few announcements, including the 9% special pension scheme called Varishtha Pension Bima Yojana to be implemented by the Life Insurance Corporation (LIC) and the formation of Pension Fund Regulatory and Development Authority.

The scheme has some attractive features and is expected to gross a huge premium income for LIC. Market sources say that since the scheme involves government subsidy, there will be restrictions for buying the LIC’s new cover. For eg., gifting such a policy may not be allowed by the centre. However, Mr SB Mathur, chairman, LIC, says that the return on the scheme is taxable and a person buying more than one policy will not be allowed. LIC is expecting a 2% subsidy from the centre to manage the 9% scheme. If it continues for a longer period and the interest rate continues to fall, the subsidy portion will go up, which may not find favour with the government.

Mr Mathur says that LIC is planning to launch two schemes as a part of 9% pension plan: one will be returning the capital at the end of the policy completion, while the other will not be returning the capital which will make investment cheaper for getting the stipulated return within Rs 200-2000. Any Indian citizen between 55-75 years of age can get a pension ranging from Rs 200-2000 on the basis of his investment. The product is expected to be launched in April after getting approval from Insurance Regulatory and Development Authority (IRDA).

Says Mr Sunil Sharma, Chief Operating Officer, Max New York Life Insurance Company, “The creation of the Pension Authority will open the door to pension reforms. We are confident that the new authority will develop the market and guide the new entrants into the pension market and help the industry grow in the same manner as IRDA.”

The special pension policy with 9% guaranteed returns is a notable gesture and will undoubtedly make pensions popular. According to Mr Sharma, it is the first time that a FM has provided a strong impetus to the core building blocks of our economy, including healthcare and education. The proposed scheme for the aged, while creating some financial burden for the Centre, is a desirable social objective. At the same time, it raises important questions about creating a level playing field for all insurers and not providing sovereign guarantees to a section of the industry.

Agrees Shikha Sharma, CEO and MD, ICICI Pru Life Insurance, “As a private life insurance player, we’re disappointed in not being given the opportunity to participate in the mass pension area like the one to be launched by LIC for individuals aged 55 and above. Private players have done much to expand the retirement solutions market, reflected in their combined market share of over 30%, and ICICI Prudential would have been happy to have an opportunity to participate in this mass pensions segment.”

Pensions, after the liberalisation of the insurance market, is an already tested market. Along with LIC, a few private pension funds have also come up. The contributions to pension funds get a tax exemption up to Rs 10,000. The Kelkar Committee has recommended that the incentive be extended to contributions up to Rs 20,000 a year, but in the form of a 20% tax rebate rather than as exemption. However, these pension funds are seen to cater to the well-off. The labour ministry is moving ahead with plans to formulate social security for the unorganised sector.

While the government would be wary of taking on fiscally onerous obligations even for the welfare of the unorganised sector, it would be willing to extend fiscal incentives to get structured pensions that are partially funded. This is because pension funds also act as suppliers of long-term capital of the kind needed by infrastructure projects.

Promoting infrastructure is another key concern of the government in the current Budget. Encouraging genuine long-term savings is a key concern, which needs to be put into perspective in the backdrop of rising inflation and low interest rates.

Speaking about the current scenario, ICICI Prudential Life chief marketing officer Saugato Gupta pointed out that the highest sale of the company has been in pension products, where his company alone has a 25% market share. Other insurance companies are also targeting funds invested annually in public provident fund (PPF) schemes for the sale of its proposed annuity products. PPF has a sizeable and growing corpus well in excess of Rs 70,000 crore, which has not been tapped by life insurance companies. The above 22% savings rate in India affords immense potential for the sale of annuity products, especially when the country does not have any social security net.

All annuity products have an underlying guaranteed rate of return, in the region of 4%-5%. Based on minimal interest rates, all insurance policies have a guaranteed 3% return. “We have to operate in a challenging regulatory environment even as interest rates are low,” said Jim Morrison, VP, Om Kotak Life Insurance.

But insurers had expected the Budget to double the tax benefit available under Section 80 CCC(i) to Rs 20,000 for investments made in pension plans in line with the Kelkar Committee recommendations. At present, Section 80 CCC(i) allows deduction from gross income for investments in any pension product up to a ceiling of Rs 10,000. Insurance companies have been urging the government to allow a tax deduction ceiling of at least Rs 40,000. The IRDA had proposed a hike in the exemption on pension savings to Rs 40,000 and had submitted its draft report on pension reforms last year to a committee that included representatives from the ministries of finance, labour, social welfare and law.

The industry expects the creation of a sub-limit under Section 88 for insurance and pension products. The tax issue had been addressed because pension products needed to be at par with other financial products.

The recommendations of the VU Eradi Committee are also expected to come through. It had looked into issues pertaining to the taxation of life insurance companies. While the proportion of the aged and non-working in the population who claim pensions have grown, that of young earners, out of whose tax payments pensions have to be paid, has dwindled. The way out is to have funded pensions, with working people systematically tucking away some of their income for securing a post-work income.