Unit Linked Pension Plans (ULPPs) have been out of favour since last September, after the Insurance Regulatory and Development Authority (IRDA) imposed a guaranteed-returns clause on them. Now, with the authorities relaxing the norms on guarantees (effective from 31st December, 2011), you can surely expect the insurance agents gunning for you with their new plans.

According to the new guidelines, insurers have the choice of offering two types of guarantees – minimum return (a non-zero, positive return) disclosed upfront at the time of issuing the policy, and a specific maturity benefit. Another key departure from the current practice is putting the onus of providing annuities on the insurer selling the pension plan. Prior to September 2010, the assured-return requirement linked to the RBI’s reverse repo rate (4.5 per cent guarantee on returns) had been a bone of contention, as many insurers felt the target couldn’t be met. Simultaneously, agents felt that these pension ULIPs were not lucrative, as commissions were capped post September 1, 2010. This meant that there were hardly any pension ULIPs being launched post September 2010. This was in sharp contrast to the pre-September 2010 era, wherein insurance companies banked heavily on pension plans to drive their business, and these products accounted for nearly 30 per cent of their premium collections.

There are two schools of thought with regard to how the new guidelines will play out. Some experts are of the view that insurers will go all out to woo prospective policyholders with the new policy in place. This will mainly be because companies will find it easier to formulate new products and add to premium income. However, once there is finality on the tax advantage of ULPPs (contributions currently have the same Section 80C concession as other investments, but result in taxable income after retirement), these products are likely to become extremely popular. It will be easier to market them, too, as the carrot of high returns can be dangled before prospective customers. Additionally, with agents getting higher commissions, they are likely to publicise these products with greater enthusiasm.

There are others who believe that these guidelines will not help pension ULIPs regain their lost glory, primarily because these plans may not offer a number of fund options. For instance, they are not likely to offer funds where equity would comprise more than five to 10 per cent of the portfolio. Similarly, they may not see substantial allocation to long-term bonds. Unfortunately, though these are the very instruments that are essential for earning healthy returns over the long term, the need to provide a guarantee results in low investment in high-yielding instruments.

While guarantee is the only factor emphasised when it comes to ULPPs, there are other factors that can affect the potential returns and final corpus of a ULIP scheme. IRDA’s final guidelines are set to end the flexibility of withdrawing the corpus once the lock-in period comes to an end. This is one of the main factors that will lead to a lot of discomfort, as policyholders will no longer have the option of surrendering the policy to withdraw a lump sum. They will now have to compulsorily buy annuities at the rates prevailing then. Policyholders are allowed to withdraw up to 1/3rd of the corpus as lump sum, while the rest will be paid to the policyholder in the form of annuities, which will be guaranteed for life. Additionally, the regulator has made it mandatory that the insurer selling the pension policy should offer annuities too. Therefore, the policyholder will not have the choice of approaching the insurer offering the best rate at the time of vesting. This factor will also be a major irritant.

In sum, whatever your insurance agent may tell you, remember that pension plans from insurers are not the only tools available for retirement planning. One should look at exhausting the Public Provident Fund (PPF) limit, which has now been upped to Rs 1 lakh, and also consider other avenues like NPS, equity mutual funds, real estate, fixed deposits and so on, before taking a decision.

KEY POINTS:

•    According to the new ULPP guidelines, insurers have the choice of offering two types of guarantees – minimum return disclosed upfront at the time of issuing the policy, and a specific maturity benefit. The onus of providing annuities is also on the insurer.
•    ULPPS will see low investment in high-yielding instruments like equity and long-term bonds because of the need to provide a guarantee.
•    The new guidelines are set to end the flexibility of withdrawing the corpus once the lock-in period ends and policyholders will no longer have the choice of approaching the insurer offering the best rate at the time of vesting, which will both be major irritants.
•    Pension plans from insurers are not the only tools available for retirement plans; explore other options like PPF, NPS, equity mutual funds, real estate, fixed deposits, etc.

Positives

- Guaranteed alternative will ensure some level of comfort for risk-averse policyholders.
-   In the case of the policyholder's death, dependants can withdraw the entire proceeds.
- Those looking to buy pension ULIPs will now have a wider range of products to choose from.

Negatives

- Since the guarantee has been modified, not eliminated, insurers may continue to tread cautiously by investing in safe, but low-return-yielding avenues.
- Policyholders forced to discontinue their policies will not be able to withdraw a lump sum upon surrender. A part of the corpus (2/3rd) will have to be converted into annuities.
- Since the insurer selling the product will be responsible for offering annuities, policyholders cannot approach the insurer offering the best rate.