The insurance regulator plans to lay a floor of 55 years of age for a person to draw annuities from pension plans as it moves to reduce risks for insurance companies and revive a pension market that's ignored by private insurers. However, the move may throw a spanner in the works of those planning early retirement.
The plan, which is still in the discussion stage, is also partly aimed at encouraging private insurers to share the burden of the state-owned Life Insurance Corp, which now bears the burden of the entire annuity risk, said two people familiar with the discussions.
"Fixing the age of annuity will solve the problem of longevity risk,'' said an official at Irda who did not want to be identified. "We are finding out how regulators in other countries manage the pension risk." Pension policies that promise to pay a fixed annual sum to a policyholder till death
are seen as risky with rising life expectancy on higher incomes and better healthcare facilities.
If an insurer sells a pension policy to a 22-year old with annuity starting at the age of 40, the risk is seen higher if the person ends up living till 80 as the insurer will be paying for 40 years. If the minimum age is fixed at 55, the payments are for just 25 years.
"The risk is more at the younger age," said G N Agarwal, Chief Actuary at Future
Generali Life Insurance. Many insurance companies, to market policies easier, had peddled pension policies with annuity payments as early as 35 years which is considered the beginning of the best earning period of individuals. But these companies bear only the lumpsum payment at the end of policy, and the remaining risk of annual payments is borne by LIC, for historical reasons since it has the capabilities.
But the regulator now wants to change that so that one company does not bear the risk and the remaining do not sell policies indiscriminately. "The idea behind fixing the age is that it should not be made to look like a short-term product," said S B Mathur, Secretary General, Life Insurance Council. "It will increase persistency and bring down the risk in the industry.'' The regulator has been taking steps, including mandating at least a 4.5% annual return on pension policies. But that has backfired with private insurers just dumping the product itself.
Pension products were almost a fifth of the total insurance policies sold in the country till fiscal March 2011. But that has plunged to just 2% of the total in the first half of this fiscal, data from industry representatives show.
The regulator circulated a draft norms for insurance companies on pension products. As per the draft norms, policyholders had to take a compulsory annuity of two-thirds of the corpus at the time of the beginning of annuity payments and the remaining onethird could be withdrawn after the lock-in period ends.
This plan if implemented will also bring the pension market almost on par with the New Pension Scheme backed by the government and regulated by the PFRDA. Under NPS
, the retirement age is fixed at 60 years. Also, one can withdraw 40% at exit
and use the remaining for buying annuity. "Most of our annuity plans are sold to group. We encounter early annuity in case of dependents. Restricting an age could take away choice from the customer. The regulator should look at fixing only the minimum age," said Sanjiv Pujari Appointed Actuary SBI Life
Source: Economic Times
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November 3, 2011
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