Does your pension plan guarantee capital protection?
Sep 26, 2012

Author: PersonalFN Content & Research Team

Planning at an early stage in life is essential, in order to create a corpus which can meet your retirement needs. Planning early also helps you to undertake a little more risk and thereby earn high returns, which otherwise may not possible in case if you are starting rather later.

While planning for your retirement you may have come across pension plans offered by various institutions such as mutual fund houses or insurance companies. But, while selecting a pension plan, especially from an insurance company you need to adopt caution and make sure that the pension product you are opting for is matching your retirement needs and is structured in a manner to do so. Thus, it is noteworthy that a pension plan should have:

A long investment horizon;
Ensures capital protection; and
Disclosure on indicative potential returns that it will generate

But off-late, majority of the pension products of insurance companies have caught the eye of the regulator - Insurance Regulatory and Development Authority (IRDA) for flouting rules laid down by the IRDA for pension products. The regulator noticed that most of the pension plans filed with it, do not comply with regulations, as the features of the same are more or like those of mutual funds having a shorter time horizon.

In the wake of increasing criticism by the insurance industry that the IRDA has been delaying clearances on new products, IRDA Chairman - Mr J. Hari Narayan said, "They may call it pension product, but it is much like MF products. In these products, you make a periodic investment and you can pull back at any point. So, these will not be approved. What we have said is that a pension product should have an annuity. Products without any element of pension will not be approved."

IRDA has made it clear that only pension products living up to their names which end in an annuity will be approved. It made it clear that if there is a facility to withdraw during the tenure of the product - like in the case of mutual funds, a certain proportion can be commuted in cash, but the balance will have to be given in an annuity form. Insurers, in their eagerness to boost revenues with an eye on either stake sales or listing have been conceptualising products that provide flexibility to buyers in a bid to boost sales. But some of them militate against the basic concept of insurance, or pension, which aim at benefits because of accident, or after-work life. Pension products are long-term products. There is an accumulation stage, where the policyholder / investor builds up a corpus, and thereafter the annuity (which the insurer pays at regular intervals) takes care of the retirement needs of the policyholder / investor. The IRDA has directed companies to ensure capital is protected and indicate the potential returns at the time of vesting, death and surrender, even if it is as little as 1%.

We are of the view that, the IRDA has wisely differentiated a pension product from an insurance company, from a pension plan offered by mutual funds houses. Pension plans can aid in retirement planning, provided that capital portion is guaranteed, it has a long-term investment horizon, provides indicative returns and takes care of one’s retirement needs through annuities. Merely having free entry and exit into such plans may not suffice one’s retirement needs, although it could make all business sense for insurers to attract policyholders / investors into such plans.

Investors should act responsibly while planning for their retirement as any incorrect decision taken now can hamper their wealth creation in a negative way. Instead of taking any decision in a haphazard manner, an investor should take guidance from experienced professionals rendering unbiased services in order to lead a happy retirement life.