IRDA scraps 4.5% guarantee on pension products

In its final guidelines on pension products issued on Wednesday, the Insurance Regulatory and Development Authority (IRDA) has scrapped 4.5-per cent guarantee on capital, giving insurers greater flexibility in determining returns on such products. The new guidelines come into effect from 1 December.

Though guarantees on pension products would remain, these would now be determined by the insurer, who will have the option of offering either returns on premiums paid during the period of the contract, or guaranteed maturity benefits.

Thus insurers will henceforth specify assured benefits on pension plans, applicable on death, surrender or vesting. This will be disclosed at the time of sale of pension products.

In early 2010, IRDA, in its draft guidelines, had proposed a minimum guarantee of 4.5 per cent, linked to the reverse repo rate. This did not go down well with the industry, and insurance companies did not launch any new product during the year.

Under the new guidelines, the regulator mandates that insurance companies give a guarantee on capital, which could be anything higher than zero per cent. This is expected to make the pension market more competitive as different players will offer different rates of return.

In another move that will bring relief to often disgruntled unit-linked insurance policy (ULIP) holders, IRDA now allows policy-holders who intend to discontinue after the lock-in period to get back the amount invested from the fund. The new guidelines enable the nominee to withdraw the entire corpus, which he or she can use for buying an annuity.