When you opt for a pension plan today, there are no guarantees on the monthly annuity you will receive post-retirement. The Insurance Regulatory and Development Authority of India (Irda) and the Reserve Bank of India are urging the Centre to come out with longer-term papers of at least 30 years. This will provide insurers and pension providers some security in terms of matching their long-term liabilities with the right assets.
HDFC Standard Life Insurance Company introduced its personal pension plan on Wednesday. It will, however, come out with its annuity product only next year, hoping that more long-term papers will be made available in the government securities market.
Irda norms allow investment up to 60 per cent in equity in case of pension plans. However, HDFC Standard Life managing director Deepak Satwalekar said: "When the product becomes an annuity, we will not invest in equity, but only in government securities. This is because annuities offered will be guaranteed".
Since pension players have to lock in funds in government securities, the current 5-to-10-year papers pose a major handicap when life expectancy post-retirement is on the rise. The lack of adequate maturity paper could restrict the ability of annuity providers to offer better returns.
Satwalekar said that it is not possible for insurance companies to give guaranteed returns when they could run the risk of an asset-liability mismatch. He cited the example of the UK that is facing an estimated 15 billion pounds guaranteed returns liability today. "In an era of volatility in interest rates, guarantees are not in the interest of policyholders," he said.
HDFC Standard Life will invest funds in equity only during the savings phase (deferment period), as it has been proved that equities give better returns in the long run. Standard Life, the foreign promoter of the joint venture, invests as much as 75 per cent in equity during the savings stage.
Cautious of the market volatility, Satwalekar said: "We will not invest 60 per cent in equity...but it is too premature to say how much we will invest".
HDFC Standard Life's pension product allows the customer to pay a single premium or regular premiums during the savings period. Accordingly, these are locked in for a minimum five and ten years respectively, before the annuity pay-out takes place. The policy-holder has the option on retirement to switch to any other annuity provider. The product also offers a limited death benefit, which is equal to the premiums paid plus 8 per cent interest.
