Have policyholders & Central Government gained at the expense of LIC pensioners

THE MYTH OF POLICYHOLDER BEING DEPRIVED OF BONUS DUE TO PENSION UPGRADATION- HAVE POLICYHOLDERS  AND THE CENTRAL GOVERNMENT GAINED AT PENSIONERS' EXPENSE DUE TO DEFAULT BY LIC?

 

When the Writ Petitions submitted by six petitioners were being heard by the two judge Bench of the Delhi High Court in early 2017,the LIC counsel backed by the officials of LIC argued that if   upgradation of pension is granted to LIC employees,LIC would face the prospect of  exceeding  the statutory expense limits as laid down by the Insurance Act 1938 and the valuation surplus of LIC will also  get reduced resulting in policyholders getting reduced bonus.The Bench was successfully misled by the LIC's arguments not withstanding the fact that upgraded pension was as much of a legal right under the LIC Pension Rules 1995 as the obligation to pay pay pension as assured under Rule 5(3) of the Rules.LIC had also submitted before the DHC the figure of about Rs 32000 Cr( as at 31/3/2015) as additional outlay if upgraded pension was to be granted to employees.The apparent adverse effect on statutory expense limit and the impact on policyholders' bonus was highlighted despite the fact that pension was only deferred wage for past services rendered  as repeatedly reiterated  in various Supreme Court judgments and these constraints were equally relevant in regard to 5  five yearly wage revisions which had been taking place since the Notification of the LIC Pension Rules 1995.The amount that goes into the corpus of the Pension Fund is but a part of the Salary Expenses & Other Benefits to employees and which is  a small part of the total management expenses of the Corporation which constitute but just about  15% of the Total Premium Income of the Corporation on annual basis.By singling out pension upgradation outlay as the culprit for  expense limit violation and policyholder bonus deprivation,LIC had in fact made a mountain of a mole hill and the DHC Bench has been unfortunately  misled into accepting the arguments of LIC.

What has been lost sight of is that liability of LIC to the tune of Rs 32000 as at 31/3/2015  was an accumulation of defaulted contributions of the LIC to the Fund over a period of 17 years from 1997-1998 to 2014-15.If the contribution had been made by LIC from year to year starting with the year ending 31/3/1998,the Corporation would have been required to contribute only Rs 1134 Cr per annum on an average. Of course,  based  on the annual actuarial valuations of the Pension Fund,  there  would have been varying amounts from year to year.This  average additional amount of Rs 1134 Cr would have been only a small part of the total premium income earned by the Corporation.This default in providing for upgradation is a material budgeting lapse on the part of the Corporation as well as an omission of accounting operation to meet its legal obligations.

To the extent the amount of Rs 1134 Cr p.a has not been spent towards pension upgradation ,the valuation surplus has been more to that extent and 95% of the surplus has been added to the policyholders' bonus.So it can be said that LIC policyholders have in fact been rewarded at the expense of LIC pensioners.Interestingly 5% of the the excess  surplus has also been paid to the Central Government by LIC at the expense of pensioners.Thus the Central Government instead of granting benefit to LIC Pensioners, has been received the part of required contributions by LIC to pay legitimate pension benefits to the employees.

 

One other important point that needs to be noted and one that was not in public domain  when the case was being fought in the DHC ,was a very important guideline provided to life insurers  by IRDAI by  its circular dated 4^th October 2019,as follows:

 

"Presentation of Excess of Expenses of Management (EoM) 

 

The Authority vide IRDAI (Expenses of Management of Insurers transacting Life Insurance business) Regulations, 2016 has specified the limits of expenses of management for life insurers. In case actual expenses of management exceeds the allowable limits specified in the Regulations, the excess is required to be charged to Shareholders Account I.e. Profit & Loss A/c"

 

This means that  the burden of excess expenses incurred by LIC over the statutory limits fixed by the Regulator should not be made to fall on the policyholders but  but  should be borne by the shareholder, viz, the Central Government.

The effect of the above guideline is that the policyholders' bonus will not be impacted by any life insurer exceeding the statutory limits of  expenses on account of LIC exceeding the statutory  limit  due to any item of Management of Expenses   as the burden of such excess will fall only on the shareholders and policyholders will get whatever benefits they are entitled to get under their policy contract in such situations. LIC as a major life insurer   has also to abide by these guidelines.

More than the present pensioners the loss has been suffered by the families of tens of thousands of pensioners who have died during the past 24 years without receiving the legitimate benefits due to them till their death.

The sum and substance of the above is that a case that rested on strong legal grounds was lost  at the DHC by the petitioners on account of  the hearings being hijacked by irrelevant and extraneous financial grounds at the DHC.This needs to be  effectively corrected during the final arguments in the Supreme Court.

 

C H Mahadevan