What Sort Of Pension Is This?

WHEN Jeevan Suraksha, the new LIC pension scheme for the elderly, was announced in Finance Minister P.Chidambaram’s maiden Budget speech, it was seen as one of the very few concessions extended in an otherwise harsh budget. It was also seen as a welcome move; very few people, after all, are unconcerned about the uncertainties that old age brings with it. Strangely, the scheme has pleased few. Then again, when you read the fine print, it isn’t all that strange.

For, Jeevan Suraksha is actually rather less attractive than the pension schemes that LIC already offers. Indeed, the new scheme is even being described by some as a disguised move by the Government to withdraw the better benefits that are now available to this class of people.

The scheme as such is simple: You contribute Rs 250 per month for 30 years and from your 55th year onwards, you receive a monthly pension of about Rs 3,505. But LIC has two earlier schemes—Jeevan Dhara and Jeevan Akshay —which give perhaps better pension options and also provide for a return of capital or a lumpsum payment in case of the holder’s death. This is not available with the new scheme. The only attraction or advantage in the new scheme, say LIC agents, is perhaps the tax shield that it provides. But this benefit, weighed against the total benefits of the other schemes, becomes expensive. The better tax shield demands more premium and the purpose of insurance is not served as there is no return of capital in case of the policy holder’s death.

Says an employee agent of the LIC: "The sum assured that one gets at the end of the term of any policy along with the accrued bonus will fetch more if it is re-invested, than the pension given under Jeevan Suraksha, even at the prevalent interest rates. If interest rates increase in the future, the returns will be even more." 

The Association of Mutual Funds in India (AMFI) made a representation to Finance Secretary Montek Singh Ahluwalia recently, where it stated that in Jeevan Suraksha, LIC was taking away 75 per cent of the accumulated savings of the investor for providing life cover. Assuming an annual contribution of Rs 3,000 and interest compounded at 12 per cent, the investor accumulates about Rs 7.24 lakh after 30 years. LIC keeps Rs 6.24 lakh after commuting Rs 1 lakh and still gives a monthly pension of only Rs 3,500 whereas a 12 per cent interest on the balance works out to a monthly pension of Rs 6,240 at existing interest rates. AMFI sources also claim that pension or monthly return schemes offered by the Unit Trust of India and other mutual funds too give monthly pensions which are more attractive than Jeevan Suraksha.

In another representation, the Company Pensioners’ Association has stated that LIC itself launched a scheme in July 1987—the Return of Capital Group Superannuation scheme—which, with almost the same contributions, gives nearly twice as much benefit to the people. Under this scheme, a monthly premium of Rs 300 for 30 years fetches a pension of Rs 6,347 on retirement. And the capital is returned after the pensioner’s death to his nominee. However, this is a group scheme and can be taken by government employees, company employees or members of a cooperative society or people in organised groups. But how could there be such a difference in return in group and individual schemes, ask sceptical LIC agents.

The minimum monthly payment for the 1987 scheme is Rs 300, which is Rs 50 higher than the new scheme. But if a 30-year Rs 250-per-month contribution is allowed under the 1987 scheme, the pension would still be far higher than under Jeevan Suraksha. Moreover, in the 1987 scheme, the capital accumulation was worked out at the interest rate of 10.34 per cent per annum. The present rate of accumulation is even higher: 12 per cent. At this rate, even a contribution of Rs 250 a month for 30 years would yield a pension of at least Rs 7,000 a month. And, to make matters even more worthwhile, the policy holder’s nominee will get the capital in case of the holder’s death.

So, better alternatives are clearly available. Why, then, was Jeevan Suraksha launched with so much fanfare? Didn’t the Government do its homework well? Is it just a planned empty gesture? Or is it the precursor to a withdrawal of the better schemes? A lot of people would like to know the answers.