The Life Insurance Corporation of India (LIC) has stumped corporates by increasing the premium on all group pension schemes. The insurance behemoth is also planning to drop the interest rate on corporate deposits held under the superannuation plan and reduce the return on annuity plans.
Corporates now have to either pump in more funds into the employees' pension pool to maintain the same level of benefits or switch over to contribution-defined retirement plans for their employees. Employers and employees share the burden under contribution-defined retirement plans, unlike in the case of defined contribution where the employer is the sole contributor.
Public sector undertakings -- including LIC itself -- will be hit hard. LIC offers defined benefit pension plan to its employees at 33 per cent of the last drawn salary. Most private companies, however, opt for contribution-defined benefit.
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"Corporates are finding the premiums quoting this fiscal too high. Many have not paid the sum in full or are asking for a reduction in benefits to bring down the premiums," said LIC senior officials.
"Buying annuity (for monthly pension) products has become expensive as the rate of interest on various investment instruments have fallen," said a leading corporate.
"There have been no switches as yet from defined benefit and contribution benefit pension plans. The corporates would require to go to the unions to do that," the LIC officials said.
LIC recorded a growth rate of 51 per cent in group insurance premium in the first 11 months of the current fiscal. This is partly on account of the increase in premium which corporates have to bear.
Most of the blue-chips including the Tatas, the Mahindras and even financial institutions such as ICICI have bought group plans from LIC. Income-tax rule states that corporates can buy annuity only from LIC through the superannuation trust, which can be either kept with the corporate or deposited with the corporation. The advantage of keeping the fund with LIC is assured liquidity.
LIC dropped the rate on its annuity products from 12 per cent to 10 per cent in July 2000. There will be steeper downward revision now, said LIC officials. The corporation invests in government securities, state government paper, and public sector bonds, all of which have seen decline in yields.
LIC will also shortly announce a reduction in the rate of interest on deposits kept with it under the superannuation plan. In the last two fiscals, LIC maintained the interest on these funds at 10.75-12 per cent in accordance with the individual size of funds deposited by corporates. Sources said this rate will be slashed drastically for the current year to 9-10 per cent.
LIC declares the rate of interest on deposits towards the end of the fiscal depending upon the accumulated value of the fund.