Centre to meet pension plan subsidy requirement annually

Industry sources said the Centre has proposed that the scheme be run like any other social security plan of the LIC that is being subsidised.

It was proposed in the Union Budget for 2003-04 that an interest rate differential of two per cent on the 9 per cent assured return pension plan for senior citizens will be bridged by the government.

Under the existing norm, no specific amount is announced as government's yearly contribution. The Centre will be meeting the shortfall in total assured returns depending on how much could be paid from LIC's investment earnings on an annual basis.

While assured return schemes are lucrative for the policyholders, it has become increasingly difficult for insurers to meet the targeted return.

This is because interest rates across maturities are on a decline. In fact, to fill up its kitty with long-term high coupon bonds for asset-liability matching, LIC has been switching short-term papers for long-term ones with public sector banks such as the State Bank of India and its associates, the Oriental Bank of Commerce and Bank of India.

And in order to avoid losing all high-coupon government securities, it is understood to have decided on a very limited participation in the market. But it has consented to participate in the gilt buyback scheme proposed by the government.

Further, LIC plans to surrender government securities maturing in the next 1-2 years and not those beyond the buyback ambit. Under the pension scheme offering 9 per cent return, it has been also decided to remove any cap on the age limit for subscribers.

While the minimum premium has been set at Rs 33,335, the maximum has been capped at Rs 2,77,490.

According to a rough estimate, an investment of Rs 2 lakh is likely to fetch a pension of around Rs 18,000 a year.