25th July 2016
Response
to the Query from Shri.R.K.Sahni
1) On 16th
July, I received a Mail from Shri.R.K.Sahni, requesting me to give my
observations on the following two statements.
a) "As on
31/03/2015, there is an amount of Rs.33503.52 cr. in the LIC Employees Pension
Fund...For 2014-15, LIC has paid Rs.839.42 cr. including commuted pension. The
interest income alone is Rs.2425.16 cr. Even if our pension is upgraded with an
increase by 100% on an average, the pension outgo will be less than 1% of the
operating surplus." --- Mr C H Mahadevan in a blog.
b) Dear Mr Mahadevan,
b) Dear Mr Mahadevan,
I know that you
wouldn't have come out with this statement unless you were convinced that your
SOURCE is impeccable and can stand the scrutiny of a High Court judge and even
pass it because I have a hunch that this may well be the fulcrum on which the
entire case turns
Warm regards.
P. Ramanathan.
2) I gave
my response immediately. But, when Shri.Sahni asked me whether he can publish
it in his Blog, I told him that it may not be prudent to do so, since many may
not feel happy with my comments. After thinking over the matter for two days, I
changed my mind, purely out of my personal regard for Shri.Sahni. He may not be
aware of it, since we had never worked together and interacted also only on
very few occasions. My response is given below, in the form of a fairly long
article. It is more a statement of facts
and it is left to the readers to arrive at the conclusion. As I have said, most
of our members may not feel happy with what I have stated in the article.
.
My
Observations
3) Let us
first take the statement, “Even if our pension is upgraded with an
increase by 100% on an average, the pension outgo will be less than 1% of the
operating surplus". This appears to be very simple. But, is it
really so? What are the issues involved? Let us see.
4) It is
not clear whether the term “Operating Surplus”, mentioned by Shri.Mahadevan,
refers to the Revenue surplus emerging from the total operations of the LIC
Employees’ Pension Fund or to the Revenue Surplus emerging from the total
operations of the LIC. Let me first take up the case of LIC’s operations.
Consider the data given in the Table-1 below. This has been extracted from the
Revenue Account for the year 2014 – 2015, given in the corresponding Annual
Report of the LIC (Pages 130 to 133 and Page 138). To simplify the
presentation, I have considered only the Non-Linked, Within India business,
which accounts for a major portion of the Operating Surplus.
TABLE –
1
Annual
Report of the LIC, for the year 2014 – 2015
Non-Linked,
within India Business
|
Sl.
No.
|
Item
|
Amount
(Rs.
Crore)
|
|
1
|
Total Premium
Income
|
2,37,277
|
|
2
|
Total Investment
Income
|
1,48,919
|
|
3
|
Other Income
|
276
|
|
A
|
Total Income
|
3,86,472
|
|
1
|
Policy outgo
(Surrenders, death Claims, Maturity Claims and Annuity Payments
|
1,20,634
|
|
2
|
Commission
|
15,033
|
|
3
|
Employees’
Remuneration and Welfare Benefits
|
14,118
|
|
4
|
Other Operating
Expenses
|
7,704
|
|
B
|
Total Outgo
|
1,57,489
|
|
C
|
Operating
(Revenue) Surplus [ A – B]
|
2,28,983
|
|
D
|
Increase in
Liability
|
1,87,083
|
|
E
|
Valuation Surplus
[C – D]
|
41,950
|
5) The
value of, (Income – Policy Outgo – Management Expenses – Increase in
Liability) is known as the Valuation Surplus. This is the equivalent of
Profit in the case of non-life insurance companies. While the Operating Surplus
is Rs.2,28,983 crores, the Valuation surplus, is only Rs.41,950 crores. That is
less than 20%. The real surplus is thus only Rs.41,950 crores and
one percent of it is about Rs.420 crores. Let me explain what is meant by
Valuation Surplus.
6) A life
insurance company incurs a liability (i.e. liability to the policyholders) whenever
a new policy is issued and an additional liability when a renewal premium is
received. This liability is to be estimated by actuarial techniques, using
appropriate discount and probability factors. The difference between the total
liability as at the end and beginning of a financial year is known as the
increase in liability during the year. In the determination of valuation
surplus, what is given as Increase in Liability is the difference between,
·
The
liability at the end of the year before the allocation of bonus and
·
The
liability at the beginning of the year
7) The
increase in liability, given in the Revenue Account, is the difference between
·
The Liability (after
allocation of bonus) at the end of the year and
·
The Liability at the beginning
of the year
The Liability as at
the end of the year, before the allocation of bonus, is not available in the
Annual Report and I have derived its approximate value from the other figures
given. The liability after allocation of bonus will be much higher than the
liability before allocation of bonus. So, the increase in liability shown in
the Revenue Account will be much higher than the real increase in liability.
Consequently, the valuation surplus shown in the Revenue Account will be much
less than the real valuation surplus.
8) Can
just one percent of the valuation surplus be transferred to Employees’ Benefit
fund, for improving the benefits to pensioners? The answer is a firm NO. Let us
see why.
9) The
first charge on the valuation surplus is Tax, @14.1625% (12.5% tax, 10%
surcharge and 3% education cess). So, amount of tax payable is,
(14.1625% of 41,950)
= Rs.5,941 crores.
The balance surplus
is (41950 – 5941 = Rs.36,009 crores)
10) As per
the LIC Act, not less than 95% of the balance surplus has to be allocated for
the benefit of with-profit policyholders and the balance, not exceeding 5%, is
to be paid to the Central Government as dividend on the capital provided by
it. So, Rs.34,209 crores will be
allocated to policyholders as reversionary bonus and Rs.1,800 crores will be
paid to the Central Government as dividend. (This figure is available in the
Revenue Account, under Appropriations – Page132 of the Annual Report)
11) To
explain why only the valuation surplus and not the operating surplus is the
real profit, let us consider the example of banking operations. A bank gets in
a year, say Rs.10,000 crores, towards fixed deposit and Rs.6,000 crores as
interest income on its investments. The total income for the year is Rs.16,000
crores. The management expense during the year was, say Rs.900 crore, and
payment made towards deposits that were redeemed during the year was, say
Rs.4,000 crores.. Its operating surplus during the year will be,
16,000 – 900 – 4,000 = Rs.11,100 crores.
If the bank thinks that it has a huge operating surplus
and gives a percentage of it to employees each year as bonus, it will have to
close down within a few years. From the operating surplus, it has to provide
for the increase in liability arising from the net increase in deposits during
the year and the interest accrued (but not yet paid) on the deposits.. Only the
balance, if any, will be the Profit.
12) The
first charge on this profit will be tax, @35% + surcharge + education cess. The
balance left belongs to the shareholders.
13) In the
case of Employee’s Pension Fund, the operating surplus will be used to cover
the increase in liability during the year and generally, there will be no
balance left, since the employers (in this case LIC) will not pay excess
contribution
14) Let us
go back to the case of Life Fund of the LIC. It is not possible to amend the
Income Tax Act and the LIC Act in order to be able to transfer a portion of the
valuation surplus for pensioners’ benefit. Suppose we are able to
persuade the Central Government to transfer to the pension fund 20% of the
dividend paid to it (i.e. one percent of the valuation surplus after tax). The
pension fund will then get Rs.360 crores. In view of this additional amount, available,
can we enhance the pension benefit by say 40%, if not by 100%? The answer again
is a NO. Let us see why.
15) This
time the auditors will come in the way.
As per the Accounting Standards (AS26), once a certain quantum of
pension benefit is agreed upon, the Actuarial Liability in respect of pensions
payable in future has to be estimated and a fund equal to this liability has to
be set up. The Employees’ Pension Fund
as at 31.3.2015 was Rs.32,578 crores. It may be above Rs.37,000 crores as at
31.3.2016. If pension benefit is
increased by 40%, the Fund required will be about Rs.51,800 crores and the
Corporation will not be able to transfer another Rs.14,800 crores to the
pension fund, without bringing down the bonus rates to significantly lower levels. Such a step will affect the future new
business very adversely, which in turn may even jeopardise the viability of the
Corporation.
16) There
can also be a more serious problem. Twenty years ago, when the option was given
between P.F and Pension, a clear indication of what the pension benefit would
be, was given. Now, if there is
significant increase in pension benefit, a second option has to be given to P.F
optees (It is easy to enforce this legally).
This may involve transfer of another Rs.7,000 crore to the Pension
Fund. Neither the Corporation nor the
Government will find it possible to identify resources for this additional
(14,800 + 7,000 = Rs.21,800 crores).
One cannot then stop the Government from going for
Disinvestment to raise the additional resources needed.
Whenever there is a significant change, for the better,
in the nature of pension benefit, the Second Option has to be given to the PF
optees.
17) The
figures given in the Table below were taken from the Annual Reports of 2013 – 2014
(page 177) and 2014 – 2015 (page 185).
The Annual Report of 2015 – 2016 is not yet available.
LIC Employees’ Pension Fund All Amounts in
Rs.(crore)
|
|
As at March 2013
|
As at March 2014
|
As at March 2015
|
|
Fund at the beginning of the year
|
16,554
|
21,073
|
27,039
|
|
Investment Income
|
2,111
|
1,950
|
2,439
|
|
Contributions
|
3,923
|
5,042
|
4,378
|
|
Benefits Paid
|
(1,515)
|
(1,026)
|
(1,278)
|
|
Fund as at the end of the year
|
21,073
|
27,039
|
32,578
|
18) The
entire fund, shown in the last row does not belong to the Pensioners, as some
would wish to imagine. About
80% of it would belong to Pension Optees among employees still in service and
only the balance 20% to Pensioners and Family Pensioners. The fund shown in
respect of Pensioners and Family Pensioners does not include the
actuarial value of the Pension Policies already purchased from the LIC under
the Group Pension Scheme, since this liability pertains to LIC and not to the
Employees’ Pension Fund. These values
will not be available in the Annual report, and will be available only in the
valuation abstract submitted by the LIC to the IRDA, which is a confidential
document.
19) What
does the Fund at the end of the Year represent? It represents the
liability as at the end of the year. The components of this liability are,
·
Liability
in respect of pension optees still in service,
·
Liability
in respect of pensioners and
·
Liability
in respect of family pensioners
20) In the case of members (i.e. pension optees) still in
service:
The liability will be the sum of the liabilities in respect of,
·
Commuted
Value of pension, payable on the date of retirement, in case the optee survives
upto the date of retirement,
·
Monthly
pension payable after retirement, in case the optee survives upto the date of
retirement,
·
Increase
in D.A (once in six months) corresponding to possible increases in the cost of
living index,
·
Restoration
of commuted Pension in case of survival of the optee upto the end of 15 years
after retirement
·
Liability
in respect of Family pension payable in case of death of the optee either while
in service or after retirement
The quantum of pension payable will be estimated on the basis of,
·
The
service put in by the optee as on the date of valuation, subject to a maximum
of 33 years and
·
The
expected salary of the optee at the time of
retirement,
21) In the case of pensioners,
The liability will be the sum of the liabilities in respect of,
·
Future
pensions, taking into account the possible increases in dearness allowance,
once in six months and
·
Restoration
of the commuted pension in case of survival of the pensioner upto the end of 15
years after retirement
·
The
family pension payable in case of death of the pensioner
22) In the case of family pensioners
The liability will be the value of future pensions, taking into account the
possible increases in dearness allowance, once in six months. (I have
deliberately ignored the value of possible pension payable to minor children in
case of death of both pensioner and his/her spouse, since this liability is
quite negligible.
23)
Benefits paid during a year is the sum of,
·
Commuted
value paid to those who retired during a year,
·
The
cost of pension policies purchased under the group pension scheme in respect of
pension optees who retired during the year,
·
The
cost of pension policies purchased under the group pension scheme in respect of
increase in Dearness Allowance in the case of pensioners and family pensioners,
·
The
cost of family pension policies purchased under the group pension scheme in the
case of pension optees and pensioners who died during the year
(The actual pension paid will not come under benefits paid, and this will
appear only in the Revenue Account of the Pension department and is not available
in the public domain)
24)
Contribution paid is the total amount transferred by the LIC to the pension
fund and is equal to,
[Pension Liability as at the end of the year ─
(Value of the fund as at the beginning of the year +
Investment income received during the year ─ Benefits paid during the year)]
25) Value
of the Fund at the beginning of the year will be the same as the Pension
Liability at the beginning of the year. So, Contribution paid by the LIC will
be,
[(Pension Liability at the end of the year – Pension Liability at the
beginning of the year) – (Investment income during the year – Benefits paid
during the year)]
So, Contribution Paid = (Increase in liability during the year – Operating
Surplus during the year)
There will be no surplus in the Pension Fund unless additional contribution
is paid by the LIC and so, there will be no scope for increasing the benefit.
26) As
seen in paragraph (18), the entire fund does not belong to the Pensioners.
About 80% of it would belong to Pension Optees among employees and only the
balance 20% to Pensioner and Family Pensioners. The exact bifurcation is not
available in the public domain and is also not material.
27) So,
the Fund pertaining to the pensioners and family pensioners will only be (20%
of 32,578 = Rs.6,516 crores). Since the
Annual Report for the year 2015 – 16, is not yet available, I have given the
figure as at 31st march 2015. The interest income per year on this
fund, assuming a rate of return of 9%, will only be Rs.587 crores. This corpus
of Rs.6,516 crores, with future investment income, will be barely sufficient
for meeting the liabilities listed under (21) and (22).
28) The
value of pension fund as at 31st March 2008 was Rs.3,273 crores and
has increased to Rs.32,578 crores, as at 31.3.2015 (almost 10 times) in 7
years. The average rate of
growth is thus about 39% per year.
29) Let us
now consider the impact of the contributions to the Pension Fund. In
2014 – 2015, contributions made to employees’ pension fund was Rs.4,378 crores.
This would have reduced the
valuation surplus available by Rs.4,378 crores. There is also an indirect effect. This increases the total
expenses by Rs.4,378 crores and the “Per Policy Expense” would have
correspondingly increased. The per policy expense is defined as, [(Total
Management Expense Less Expenses on Agency commission) divided by total number
of policies].The liability per policy is defined as,
[Present Value of benefits payable (including future
bonuses) + Present Value of future expenses + Present Value of future
commissions – Present Value of premiums receivable in future].
When the expense per policy increases, the Present Value of future
expenses, and hence the total liability will also increase, thus reducing the
valuation surplus by a corresponding amount. So, as a result of the
contribution made to the pension fund during a year, the valuation surplus will
get reduced, directly and also indirectly. This, in turn, will reduce the bonus
that can be declared. How much will be this decrease? In the absence of
required data in the public domain, it is not possible to discuss this aspect.
The approximate value of this reduction can be derived indirectly from the
available figures. But, it is not proper on my part to do so in an article of
this kind.
30) Now consider Table-3 below
Table-3
|
Year
(1)
|
Employees Remuneration, including transfer to pension
fund
(2)
|
Amount transferred to Pension Fund
(3)
|
(3) as a Percentage of (2)
(4)
|
|
2007 – 08
|
5,048
|
2,711
|
53.7%
|
|
2008 – 09
|
5,774
|
2,153
|
37.3%
|
|
2009 – 10
|
8,052
|
2,519
|
31.3%
|
|
2010 – 11
|
12,055
|
5,531
|
45.9%
|
|
2011 – 12
|
10,100
|
3,978
|
39.4%
|
|
2012 – 13
|
11,895
|
3,923
|
33.0%
|
|
2013 – 14
|
14,705
|
5,042
|
34.3%
|
|
2014 – 15
|
14,523
|
4,378
|
30.1%
|
All the above figures have been taken from the respective Annual Reports.
For example, in the year 2014 – 15, the figure in column 2 is available in Page
96 of the Annual Report and the figure in column 3 can be obtained from Page
183 of the Annual Report. In the year 2014 – 2015, the total expenses in
respect of “Employees’ Remuneration and Welfare Benefits” is Rs.14,523 crores.
[In Table-1, this figure was given as Rs.14,118 crores. Why this difference?
Figures given in Table 1 pertain only to within India, Non-Linked business and
were taken from Revenue Account. Figures given in Table-3 pertain to Total
Business.
31) But
the percentages given in the last column may be less than the actual
percentages. The figure given in the second column is the total remuneration,
including expenses in respect of employee benefits, of all employees. This
includes the expenses in respect of P.F optees and also that of those not
eligible for pension (i.e. new entrants). The figures given in column 3 pertain
only to pension optees. This means that the denominator used in the calculation
of percentages is higher than what it should be and so, the percentages given
in the last column are less than their real value.
32) The
last column of the Table gives the expenses due to pension benefit as a
percentage of total expenses in respect of employees. This will give a clear
idea of the strain on the finances of the Corporation (i.e. on the
policyholders’ fund) due to pension benefit granted to employees.
33) Let us take a look at Table 4
Table – 4
Different Components of Expenses as
A percentage of Total Premium Income
|
Year
(1)
|
Agency
Commissn
(2)
|
Salary and other benefits excluding pension benefit
(3)
|
Pension Benefit
(4)
|
Other Management Expenses
(5)
|
Overall Expense Ratio
(6)
|
|
2007 - 08
|
6.39%
|
1.56%
|
1.81%
|
2.18%
|
11.94%
|
|
2008 – 09
|
6.38%
|
2.31%
|
1.37%
|
2.09%
|
12.15%
|
|
2009 – 10
|
6.51%
|
2.97%
|
1.36%
|
2.25%
|
13.10%
|
|
2010 – 11
|
6.54%
|
3.21%
|
2.72%
|
2.42%
|
14.89%
|
|
2011 – 12
|
6.82%
|
3.02%
|
1.96%
|
2.37%
|
14.27%
|
|
2012 – 13
|
7.08%
|
3.82%
|
1.88%
|
2.31%
|
15.09%
|
|
2013 – 14
|
7.04%
|
4.08%
|
2.13%
|
3.83%
|
17.08%
|
|
2014 - 15
|
6.30%
|
4.24%
|
1.82%
|
3.29%
|
15.65%
|
These figures were again taken from the Annual Reports. In the case of year
2014–15, these percentages are available in page 96. The percentage
corresponding to “Salary and other benefits to employees” has been bifurcated
into, “Salary and other benefits excluding pension benefit” and “Pension
benefit”, by using the percentages derived in the last column of Table–3. As
stated in paragraph (31), the percentages in the last column of Table–3 are a
little understated. If the correct percentages can be derived, it would be
found that the cost of the Pension benefit is about 2% of the Total Premium
Income.
34) What is the significance of the above conclusion? If
the cost of pension benefit is 2% of total premium income, can the pensions be
doubled with just 1% of the operating surplus of the LIC (or, is it 1% of the
operating surplus of the pension fund?)
It is left to the readers to answer this question.
35) It can
be seen from Table-4, that Salary and other benefits, excluding pension
benefit, constitute 4% of the total premium income. There was no pension benefit in 1994 – 95,
twenty years ago. What would have been the ratio of salary and other benefits
to the total premium income at that time? One would be surprised to know that
it was about 9.3%. The reason was simple. In 1994 – 95, the total premium
income was just 11,528 crores. In 2014–15, it was, Rs.2,39,483 crores. That is,
almost 21 times. But, the total number of employees has increased only
marginally. This was made possible by the remarkable improvements in the
underwriting and policy servicing Systems that were brought about, without much
fanfare, during the last twenty years. The credit for the growth in premium
income goes to the tremendous efforts put in by the agents and the marketing
wing. It was these efforts that sustained the pension benefit till now. But, it is an irony that, the agents did not get any
extra benefit for the efforts they put in.
36) Now,
with intensifying competition and diminishing scope for further system
improvements, pension benefit is likely to come under pressure.
37) RBI has
issued guidelines to Banks for choosing the basis for valuing retirement
benefits. As per these guidelines, the
rate of discount to be used in the case of pension benefit valuation is to be
based on the average balance service left, before retirement, of the pension
optees. If the average balance service to retirement is, say x years, the rate
of discount to be used will be the yield, as on the date of valuation, on the
Central Government bonds of duration x years. The rate of discount used by the
LIC for valuing the pension benefit almost corresponds to this guideline. But
the rate of inflation to be used is only 5% as per RBI guidelines and the rate
used by the LIC is 6%. (This information too has been taken from the Annual
Report). Thus the valuation basis being used by the Actuarial department is
quite strong and consequently, the Pension Fund is also quite adequate.
With the yield on investments gradually falling, the
discount rate, linked as it is to the yields on Government bonds, will decrease
further, leading to further increase in pension liability and the contributions
to be made to the pension fund.
38) As a
consulting actuary, I have been doing pension benefit valuation for more than
two decades. The basis chosen by me has never been as strong as that being used
by the Corporation. Twelve years ago, when there were no RBI guidelines in this
regard, adequacy of the liability estimated by me in respect of a public sector
bank was questioned by the Auditors. In my detailed reply, I stated that,
“If the basis used is slightly weaker than what it should be, the value of
the Pension Fund would also be less than what it should be. However, the
contribution made to the pension fund will gradually become higher and higher
each year. If, in my opinion (based on the balance sheets), the institution
concerned would always be capable of making these increasing contributions in
future, I would prefer to keep the liability at the minimum, but safe, level
and allow the institution to deploy its resources more profitably in its day to
day operations. I concluded my reply with the statement. “Adoption of a strong basis
may lead to a very healthy fund position. But, such a strong fund position can
also lead to a demand from employees for further enhancement of benefits and
place additional strain on the resources of the institution".
My reply was accepted by the auditors. Three years ago, I
gave a similar reply (orally) to the C.A.G Auditors, in respect of pension fund
valuation of a public sector undertaking (PSU).
39) I am
glad to note that the statement forwarded to me by Shri.Sahni, proves my
point. The Actuarial department of the
LIC should also take note of this. The sincerity displayed by it in ensuring
the adequacy of the pension fund has to be appreciated. But not everyone will
look at it in this light. My personal
advice to it is to bring down the pace of funding and adopt the guidelines
issued to the banks.
40) In
paragraphs (15) and (16), the problems that the LIC is likely to be confronted
with if pension benefit is enhanced, were discussed. One may ask as to how the
Government is able to go on increasing the pension benefits, without any limit.
·
There
is no need for the Government to set up a pension fund and it pays the pension
from current account, euphemistically called “Pay as You Go” system.
·
It can
always print paper currency to meet the pension payments.
·
In the
Government system, those who demand an increase and those who have to sanction
it are both the same
41) A life
insurance company does not have any of these advantages. The money required for any enhancement in benefit has to
be taken from the premiums paid by the policyholders, reducing in the process
the returns to policyholders. In a highly competitive environment, this can
have serious impact on the flow of new business and the viability of the
company itself.
42) One
may ask as to how the viability of the company can be affected. Insurance Act,
1938 and Insurance Rules, 1939 prescribe ceilings to New Business and Renewal
expense ratios. New business expense ratio is defined as the ratio of (total
expenses pertaining to new business) to the (total weighted first year
premium). The weights depend on the premium paying term. The weight is 100% for
premium paying terms not less than 10 years and lesser percentages for lesser
terms. Similarly Renewal expense ratio is defined as the ratio of (the
difference between the total expenses and the expenses pertaining to new
business) to the (total weighted renewal premium). On the average, these
ceilings used to work out as 90% of the first year premium and 15% of renewal
premium. These ceilings were imposed in order to safeguard the
interests of policyholders.
43) In the
mid sixties, when the renewal expense ratio of the LIC exceeded 15%, it
received a warning from the Controller of Insurance. In 1971, the first year
expense ratio exceeded 100%. After that,
the LIC has been able to maintain the expense ratios well below the ceilings..
44) It
seems that the IRDA has now lowered these ceilings (I have not yet seen the new
regulations) and is also taking a serious view if the ceilings are breached.
When a company breaches the ceilings for the first time, a fine is imposed and
a warning letter is also issued. If the company is not able to bring down the
expense ratio below the prescribed levels, the IRDA can ban the company from transacting
new business till it is able to conform to the regulations. The idea behind this tightening of controls is purely to
ensure a fair return to policyholders.
45) A
private insurer can bring down the expense ratio by closing a few branch
offices and retrenching staff. But, a public sector company cannot adopt such a
method. It cannot also reduce the commission rates or salaries. It can be seen
from Table-4 that, the “Other Management Expenses” are already quite low and
there is not much scope for making any significant reduction in them. The only
way to bring down the expense ratios is by raising the new business growth rate
and increasing the premium income. In a highly competitive environment, it is
easily said than done. So, once the expense ratios of the LIC breach the
ceilings, it would be too difficult for the organisation to bring them down
again. The bad publicity accompanying such a contingency will have a severe
impact on the flow of new premium income, which in turn, will further increase
the expense ratios and affect the very viability of the organisation.
46) Such a
contingency may not affect the existing pensioners and family pensioners.
Pension policies have already been purchased from the P&GS department,
corresponding to their current level of pension and, as per Sec.37 of the LIC
Act, 1956, these policies come under Government guarantee. But the pension
optees among employees still in service will not have any such protection.
47) It was
seen in paragraph (16) that, “Whenever there is a significant change, for the
better, in the nature of pension benefit, the Second Option has to be given to
the PF optees”. The only benefit that
the PF optees are getting now is a contribution of 10% of their basic pay to
the Provident Fund. The contribution being made to the Pension Fund would be
higher than 15% of the Gross Pay (Basic + D.A). Even at the present level of
benefits there is significant difference between the benefits being paid to the
two groups of employees within the same organisation. Only legal experts can
say whether such blatant differential treatment of two groups of employees can
be justified.
48) The
falling interest rates and improving mortality experience (i.e. reducing
mortality rates), are also adding to the problem. Whenever a pension optee
retires, a pension policy is purchased from the LIC by the pension fund, for
the payment of his/her pension. A policy is purchased also when the commuted
pension is to be restored to a pensioner. Similarly, pension policies are
purchased in respect of pensioners and family pensioners whenever the D.A.
increases. Due to the falling yield on investments and decreasing mortality
rates, the Corporation has been revising (upwards) the premium rates under
pension policies. With every such revision, the cost of purchasing new pension
policies is going up, placing additional strain on the Pension Fund.
49) Another
problem that is now emerging is the changing composition of LIC’s new
business. It is found that continuously
increasing proportion of single premium policies is being issued. One may
wonder as to what connection can be there between this and the pension benefit
to employees.
50) In
paragraph (42), mention was made about the ceilings on expense ratios. In the
case of single premium policies, there will be no renewal premium income. When
more and more single premium policies are issued, the renewal premium income
will start reducing. In the calculation of the weighted average first year
premium income, the weight given to single premiums is also quite low. The
combined effect of reduction of renewal premium and lesser weight to single
premium may increase the expense ratios and the probability of these ratios
breaching the prescribed ceilings will also increase. There is nothing wrong,
per se, in encouraging single premium policies. But, it has to be ensured that
these single premium policies are not procured by cannibalisation of regular premium policies. It is the duty of actuarial department to
alert the management in this regard.
51) If I
am asked as to what are the major strengths of the Corporation, my unhesitating
reply would be (a) its agency force and (b) its Computer professionals
·
Its
agency force is the major strength of the Corporation and more attention has to
be paid to its training and retention. Such a step would not only increase the
new business flow, but would also raise the public image of the Corporation.
·
The
Corporation has built up a very good team of highly skilled computer
professionals over the last 50 years. The number of such professionals in its
service can be the envy of any organisation. Proper utilisation of these professionals can bring down its
expense ratios and increase the valuation surplus and hence the bonus rates..
52) Much
more can be written on this topic, but I would like to conclude the article for
the present. My sincere thanks are due to Shri.R.K.sahni for giving me an
opportunity and also inducing me to place the above facts on record.
25th July 2016
R.RAMAKRISHNAN
No comments:
Post a Comment