Pension product numbers dwindle at life insurers

Additional tax incentives were introduced for NPS in Budget, none were provided for pension policies from insurers

New pension products from life insurance companies still continue to dwindle as insurers are looking to get a level-playing field in this space with National Pension System (NPS). While additional tax incentives were introduced for NPS in the Budget, no such exemptions were provided for pension policies from insurers.

The finance ministry, in the budget, said that 40 per cent of the pension wealth received by an employee from the National Pension System Trust will be exempt. Their aim was to bring a uniform tax treatment to the recognised provident fund, national pension system and superannuation fund.

A senior insurance executive said that even before this budget, they had demanded that even their pension products should be given equal treatment with respect to tax, so that customers are encouraged to buy the products. But, they were not given any incentives.

 

With respect to insurers' pension plans, these products, which earlier used to be almost 25 per cent of the overall product portfolio, has now dropped to less than 10 per cent. Insurance executives said that they have been constrained by the provision to provide non-zero returns that are to be guaranteed to customers at time of purchase.

"With volatility in the market, is is difficult to offer any fixed return since there is an interest rate risk. Rates may move lower or upward in a long-term and hence we are not able to offer guarantees and have decided to wait till some relaxation on this provision is provided," said the chief executive officer of a mid-size life insurer.

In January 2012, the Insurance Regulatory and Development Authority of India (Irdai) had said pension products would have to guarantee an assured benefit in the form of a non-zero rate of return, which would need to be disclosed up-front. Further, it said annuity had to be bought from the same company. These regulations had led to slower approvals of pension products. Initially, there was a dearth of pension products in the market. However, the gap was filled after some private life insurers launched pension products.

Industry data showed that there has been a big fall in the premium collection in the pension product space. The overall collection fell to less than Rs 3000 crore in last fiscal compared to Rs 20,000 over five years ago. Further, tough competition from National Pension System (NPS) has also affected sales.

During the last budget, addition exemption of Rs 50,000 was provided for NPS which proved as an attractive tax saving option. Insurers had also sought separate tax provisions for pension products in the budget. However, no such provision was provided for.

Most life insurers feel the guarantee element has made pension products different from NPS, while their fundamental structures are the same. Unlike NPS, service tax is applicable to pension products. Insurers also have to maintain a conservative strategy in terms of investment, to give these 'non-zero' returns.

The number of new pension products in the market have also dropped since insurers are taking a wait-and-watch approach. Also with the five products per year norm into place, insurers are looking at other product categories for new product launches and product heads in companies said that pension was not a top priority till some clarity emerges on any possible relaxations in tax or guarantees.