FBT on pension plans may stem insurance firms' fund inflows

Thirty per cent fringe benefit tax (FBT) on superannuation schemes is set to make a huge dent in the future funds flow to insurance companies.

A large number of business process outsourcing and software companies, which were considering offering superannuation benefits to their employees, will consider other modes of compensation, said industry sources.

R Venugopal, executive director pension/group schemes, Life Insurance corporation (LIC), said: "Until and unless a company decides to discontinue further contribution to superannuation schemes, there will not be any impact. However, getting new schemes will be difficult."

Chairman of the Insurance Regulatory and Development Authority (IRDA) C S Rao said the FBT will not impact existing schemes immediately, but going forward, companies will have to take a call whether or not to continue with such schemes.

ICICI Prudential Life Insurance's chief financial officer, Sandeep Batra, said FBT will have a significantly adverse impact on superannuation schemes.

The only organised retirement planning other than the mandatory provident fund and gratuity needs to be encouraged from a social angle, he added.

As an immediately fallout of the introduction of FBT, competition will intensify among insurance companies to market their products to existing superannuation funds.

Since the market will stagnate, insurance companies will vie with each other to make their products attractive than the rivals with higher returns.

LIC currently offers a return of 8.25 to 8.50 per cent on the large funds.

Industry sources said employers will find it difficult to exit existing schemes but they are certain to look at alternative modes of compensation.

The options could be deferred compensation or immediate cash compensation. The deferred mode would include issue of ESOPs. The third option for employers would be to restructure existing superannuation schemes in such a manner that their contribution gets reduced to the extent of the tax burden.

Companies contribute about 15 per cent of their employees' cost to the company (CTC) to superannuation schemes, apart from the defined contribution schemes.

To keep the employee cost at the same level, companies could look at reducing their contribution to superannuation funds to the extent of their FBT burden, a source said.

Their contributions could come down to about 12 per cent of CTC in schemes other than the defined contribution ones.

Other superannuation schemes such as individual pension scheme are taxed only once at the annuity stage and thus FBT creates an imbalance within the retirement planning structure.

All superannuation schemes have to be taxed only at one stage and the disparity will eventually get noticed by the authorities, said Bajaj Allianz Life Insurance's Jaydeep Sarkar.

One of the three stages of retirement schemes "" contribution, growth and actual receipt of money "" normally get taxed the world over.

In India, superannuation funds will now be taxed at two stages "" contribution and annuity.

Most companies outsource management of superannuation funds to private insurance companies or LIC. The impact on insurance companies would be loss of prospective opportunity to increase income generation from management of superannuation funds.

An actuary with one of the major life insurance firms said it is not easy to discontinue contribution to superannuation fund if a company has a defined benefit scheme like banks and life insurance companies.

Private companies, on the other hand, may convince their employees to take a higher cash component in their salary instead of the company paying for superannuation. This will lead to dissavings in the economy.

Insurance officials fear substitution of retirement planning with cash benefits to employees would lead to severe old age crises over a period, as individuals generally are not known to save for their retired life.

Bajaj Allianz had entered the superannuation funds management market about eight months back. It had Rs 10 crore under management at the end of March 2005.

FBT will impact the company's growth plans, though there might be an increase in the amount under management given the very small base.