The Insurance Regulatory and Development Authority (Irda) has recommended to the Union government to evolve a social security system for citizens that does not promise a guarantee on repayment of capital but extends tax sops on both contributions to the pension scheme as well as annuity payments.
The authority has also recommended that the initial development expenses of the pension fund market should be borne by the pension funds authority, which is to be set up shortly while subsequent maintenance and administration costs should be shared by the fund managers.
The authority has submitted its recommendations to the group of ministers recently. Announcing this at a two-day national seminar on pension schemes organised by the Institute of Insurance and Risk Management, N Rangachary, chairman of Irda, emphasised that in a market that is volatile and with interest rates constantly moving southward, pension fund managers could not assure guaranteed returns to the contributors.
"We have seen what has happened to schemes that have promised returns in recent times. The Life Insurance Corporation had to withdraw its previous Bima Nivesh scheme on the advice of Irda since it used to offer high returns and even the existing Bima Nivesh scheme needs to be stopped because of the volatility in the interest rates," Rangachary said.
The existing super annuity scheme offered by LIC, which is the only scheme in the country that resembles a pension scheme, taxes the annuities since it offers tax benefit to the contributions. Even the maturity amount from the provident funds is taxed when it is invested elsewhere.
"What, we at Irda feel is that both the contributions as well as annuity payments need tax exemptions since the quantum of contributions would be much lower than the existing exemptions available to the individuals and the funds would be locked in for a very long time. We have also recommended that no pre-withdrawals should be allowed from the pension funds except for certain contingencies," the Irda chairman said.
The regulatory authority has also suggested that the new pension system shall start with voluntary compliance from individuals and there should not be more than twelve instalment of contributions in a year.
Irda has indicated that banks, insurance companies and mutual funds can act as pension fund managers. Unfortunately, there is no great response from these institutions to set up pension funds except from few institutions like HDFC, Rangachary said.
Andhra Pradesh governor C Rangarajan, who delivered the key-note address at the seminar, said a well designed pension system will provide much needed income security to the aged ones and enhances savings in the economy. Creation of a sinking fund becomes essential where re-payment is expected to be made over several years, he suggested.
