“Pension plans should be made portable”

The life insurance industry shrank 9.2% last year, and this year, too, new business premium has shrunk by over 6%. Is the industry paying for its past sins?
I wouldn’t blame only the regulatory changes for the shrinkage. Any financial investment product grows, at best, at around 1.5 times the nominal GDP. If the GDP growth falls from 8.5% to 4.5%, and consumer inflation goes up to 8-9%, the disposable income is not the best in the world. On the one hand, personal incomes are not rising fast enough and, on the other, expenses have shot up due to inflation. Savings is not the top priority for consumers, and coupled with a range-bound stock market in the past two years, it is not difficult to see why we will not see a 30% growth in the life insurance business in the coming years.
The silver lining is that Indians are no longer culturally averse to taking pureprotection term covers. This is a significant development. We started the online business two years ago and have already sold more than 70,000 term policies through this medium till date. We sell around 4,000 i-Life policies every month, and almost 15% of our total business is accounted for by term plans.
What is the socio-demographic profile and geographical spread of online term plan buyers?
We have sold policies in over 200 cities across India. The median income of our term plan customer is 5.5 lakh per annum and the median age is 31 years. This is a healthy trend because it is best to lock in at a young age when you are hale and hearty. The premium of a 1 crore term plan for a person below 30 years will not be more than 8,000 a year.
Pension plans have come back after a twoyear hiatus. Do you foresee demand for pension products?
Retirement is an important goal for any investor. Given that 65% of India is less than 35 years old, there is a tremendous opportunity for young people to start saving for retirement. However, many of them are not looking 30 years ahead. They should, because the earlier they start, the bigger will be the corpus. As we all know, the power of compounding doubles the money in 5-6 years. So, if one investor starts saving at 25, and another at 30, by the time they are 60, the former would have a far bigger corpus than the latter. However, the near-term financial goals tend to become more important than the long-term ones like retirement. If you consider Alfred Marshall’s economic theory of deferred gratification, human psychology is such that people prefer immediate gains instead of a deferred benefit. Nine out of 10 investors will find it difficult to give up on a smartphone or a foreign holiday in favour of saving for something that will happen 25-30 years later.
Do you have any suggestions to reverse this trend?
Retirement products do not offer liquidity to the investor across the world. It will be in the interest of the investor if we take out liquidity from the plan. The PPF is so successful as a retirement tool because it has a 15-year lock-in period. Look at the Employees’ Provident Fund. If you quit one company and join another, your PF gets transferred to the new company. It is not easy to take it out as cash; the most you can do is take a loan against it in case of an emergency or some specified expenses. You have to be like the Big Brother and tell the customer what is good for him rather than let him make the choice. This is for the simple reason that he may not know what is good for him. Given a choice, the customer, especially the young set, will want to withdraw his retirement savings.
Pension plans, whether it is the NPS or those offered by insurers, don’t offer liquidity to buyers. This is the right thing to do, but disallowing a customer to exit has a downside as well. To make pension plans customer-friendly, these should be made portable. If you have bought a policy from company A and feel that the service is bad, or its office is too far away or the funds aren’t doing well, you should have the option to shift your investment to another company. There should be no surrender charge on such a switch unless you are withdrawing the money.
How do you expect pension plans from insurance companies to compete with a
low-cost product like the NPS?
I believe the NPS is artificially low. Equity mutual funds, on an average, charge 1.25% per year for managing funds. There is no business model for any fund manager anywhere in the world that can manage a corpus for 0.25%. Nobody is in the business for social service. People are putting their hard-earned money in the scheme hoping that it will ensure a comfortable retirement for them. Would you want to penny-pinch in the quality of your fund management, internal controls and risk management systems? Wouldn’t you rather pay 25-50 paise more (per 100) to ensure that the corpus is managed by a professionally qualified team? If you pennypinch, you will not get a professional to do this job because you can afford to pay a salary of only 10,000 a month. You won’t be able to afford a CFA or a chartered accountant, who has the right expertise and knowledge to manage the portfolio.
We should not gyp the customer. So, while a fund management charge of 5% a year is usurious, 1% is within reasonable limits. The new Irda guidelines say that the difference between the gross yield and net yield can be a maximum of 3%. The average charged by a unit-linked plan is around 2.5%. Is this more expensive than the 0.25% charged by the NPS? Yes, it is. But is it usurious? I would argue that it’s not.

Source :The Economic Times.
Date : 29/07/2013

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