Returns on Ulip pension plans to rise to 6% in FY12

MUMBAI: Returns on Unit-linked pension products are set to rise to 6% next fiscal after the central bank raised benchmark policy rates in 2010-11 to combat inflation.

The Insurance Regulatory and Development Authority , or Irda, the insurance watchdog had benchmarked that returns on these products should be 0.5%, or 50 basis points, over the reverse repo rate, the rate at which the Reserve Bank of India absorbs funds from banks.

The re-verse repo rate is now 5.75% after a series of rate increases. The Irda had mandated a 4.5% return on unit-linked pension plans last year and had also said that rates would be reviewed annually and vary between 3-6%.

Insurance companies are unhappy with the mandated returns saying that offering a guarantee will hurt their profitability. The share of unit-linked pension products in the overall product mix of insurers has fallen sharply. For insurers such as HDFC Life , the share of pension products which contributed over 30% to overall premium income has dropped to less than 1% after September.

“The structure of the product is such that it is a debt product. Why would anyone buy a product which is offering a return of 4.5% or 6% when inflation is at 9-10 % and the economy is growing at 9%? It is not a good proposition both from the insurer and the customer’s point of view,” said Amitabh Chaudhary MD and CEO of HDFC Life.

Compulsory life cover with pension product and an annuity of two-third of the accumulated sum are also discouraging sales for such products ac-cording to insurance firms. In the revised structure, new offerings by private insurance companies have been restricted to only single-premium, Ulips LIC is the only insurer to have a regular premium pension product guaranteeing a 4.5% return on an annual basis.