Even as the Centre is working towards throwing open the government employees? new pension scheme (NPS) to the country?s entire workforce, some workers are already getting used to the idea of individual retirement accounts with the option to change their asset allocation mixes, as envisaged under the NPS.
Employers, who provide a superannuation pension benefit to their workers over and above the contributions made to the employees? provident fund, have increasingly started outsourcing the management of these pension and gratuity funds to private insurance companies.
The interim Pension Fund Regulatory and Development Authority has set up an expert group under the chairmanship of HDFC honcho Deepak Parekh to examine the mix of investment options that the NPS should offer to private individuals who become voluntary members. In this context, there could be some learning from the insurers? experiences with superannuation pension funds.
?Superannuation funds were very much in vogue in the 1980s, when they were managed by the companies on their own. At that time it was a system of defined benefits, which gradually became very expensive to administer and manage. By the late 1990s, many companies switched to a system of defined contributions,? pointed out Amit Gopal, vice-president, India Life Capital.
Post 2006, when contributions over Rs 1 lakh by employers in superannuation funds began attracting fringe benefit tax, more companies moved to a defined contribution plan, which are largely handled by insurance companies.
Companies such as Oracle, Pepsico, American Express and Bata have already switched to private insurers. Also, most gratuity policies have been outsourced?SAIL, United Breweries and Haryana Vidyut Board being some instances.
?Our superannuation products provide tax benefits to both employees and the employer, financial security to the employees and help employers create a well-planned fund,? Vishal Gupta, associate director (marketing) Aviva Life Insurance Company said while enumerating the benefits of companies to move over to such schemes.
The superannuation business continues to be the stronghold of Life Insurance Corporation (LIC), as is the case with most life insurance schemes. With the insurance sector opening up, many private companies have also jumped into the market. Most companies believe the sector has a tremendous growth potential, which is estimated at Rs 14,436 crore for 2008-09 as per a recent IRDA report.
However, at present only about 10% of the paid workforce is estimated to be saving for retirement. ?We feel the market has the potential to expand many folds as the penetration of retirement planning is still quite low. Also, those who own retirement plan are not adequately investing to ensure a quality retired life,? said Rajesh Sud, deputy managing director Max New York Life Insurance.
?There?s huge scope of growth. Not only the number of companies opting for such schemes is increasing, a large number of people are also being hired for the same,? Tarun Chugh, chief alternate channels and group sales, ICICI Prudential Life agrees.
Apart from providing ease of administration, insurance companies also bring in expertise in terms of asset management. In fact, just like the New Pension Scheme (NPS) wishes to do, these players have been offering employers and employees asset allocation choices with the option to switch anytime.
They typically offer varying degrees of exposure to risk and range from a pure debt fund to a pure equity fund or can be a mix of both. Along with the option to choose a specific fund, employees can also decide the asset allocation within the fund. For instance, they can choose how much of their savings should be invested in equities. Most insurance companies offer up to 60% exposure to equities. In debt funds, they can choose from various options such as government securities, corporate bonds and money market instruments. However, the option to switch over to a different plan mostly rests with the employer. Depending on the kind of plan, insurers offer anywhere between 2 to 24 free switches annually.
The NPS too is planning to offer similar products when it begins operations, which is scheduled for early 2009. It is expected to provide five investment options to private individuals. ?We will start with simple products and investment options, not more than four or five in all,? Dhirendra Swarup chairman, Pension Fund Regulatory and Development Authority told FE.
It will invest up to 50% of the individual?s total savings in equities. Individuals can opt for a safe scheme that would invest only in government securities. There would also be a default option based on life cycle planning, which would automatically come into play if the subscriber fails to exercise his/her choice. Based on the subscriber?s risk appetite and age, the default option in the initial years would invest more in equities and gradually move on to debt instruments.
Nearly 80 million people are expected to sign up for the NPS. While the insurance industry remains upbeat about the growth prospects of the superannuation business, most private players are now beginning to wake up to the threat that NPS may pose. ?The NPS is definitely going to be a big player, but let?s see how it gets executed,? said the head of a private insurance company.
?While individuals will surely like to join the government-run NPS, the group superannuation business may not be so badly hit. But it is early days to forecast,? another insurer said.
Analysts believe that while the NPS will give a lot of choice to subscribers in terms of the products they offer, insurers don?t need to worry too much. ?If the NPS gives the same tax benefits, there will be some competition at the accumulation phase. But nothing can beat the annuities that insurers give,? Gopal said.