India's Insurance Regulatory and Development Authority (IRDA) is expected to approve the first private sector applications to enter the pensions business within the next few weeks, opening up a new industry heretofore monopolized by the government's Life Insurance Corporation, says Desmond Chan, vice president and regional pensions director at AIG in Hong Kong. AIG hopes its insurance joint venture, Tata AIG, will be the first to receive a pensions license.
Last year LIC's monopoly on the life insurance and non-life insurance industries was opened, just as the Unit Trust of India's old monopoly on mutual funds was abolished a decade ago. Because no domestic insurance industry was ever allowed to develop, so far the players in this nascent business are foreigners or foreign JVs. Before insurance was nationalized in the 1960s, Tata was India's largest life insurance company.
Gratuity schemes in India are mandatory for all companies with at least 10 employees, and are defined benefit plans that pay a severance lump sum upon a worker's departure, 15 days' pay for every year of service. While the gratuity liability is mandatory, pre-funding it is not - companies have the choice of donating contributions to LIC or paying it themselves, either from a pension fund or from operating expenses. Bigger companies tend to manage these funds themselves, although the investment portfolio of LIC and companies is similar: government bonds and bank deposits.
Superannuation schemes in India are voluntary, come in either defined benefit or defined contribution form, and pay out as annuities. Both gratuity and superannuation schemes accept contributions only from employers. According to India's 1991 census, there are 314 million workers in the country, but only 34 million participate in formal retirement saving schemes.
AIG's pension strategy is to start selling to Tata Group employees û the conglomerate is one of India's biggest private sector employers û and to multinational companies with which AIG has global relationships. For the next few years, Chan believes the market among Indian companies for these services will remain very small, making the core customer base provided by Tata crucial.
It is true that the liabilities are mandatory for all but small companies, but the notion of farming out the management to private players is too new for most companies to take hold. Furthermore, it will take Tata AIG time to build and train a sales force.
Chan expects Tata AIG will invest pension savings mainly in fixed-interest vehicles, but with a higher role for equities and other asset classes as regulations permit. For now LIC is allowed to invest under favourable tax treatment into equities as well as bonds and deposits, whereas everyone else is penalized for putting pension money into equities.
But Chan says the tax authorities are being pressed to change this, and is optimistic the private sector will be allowed to receive equal treatment to LIC. There is no immediate need to rush, given the time required to educate both Tata AIG staff and Tata employees about the benefits of putting pension funds into equities.