care for increasing senior citizenry
There is more demand for pension plans in the country as
there is no proper pension plan covering all the citizens in the
The government pension plan serves government servants only.
The other kind of pension plan supported by the government is
the EPF that will give a lump sum on retirement. However, a
regular lifetime payment is not provided for by the EPF. In most
instances, the EPF money is used for other purposes than
retirement (settle loans, buy expensive material etc). Hence, it
does not meet the objective by any stretch of imagination.
Insurance products have been and can also be used to provide
a pension. However, as only 5% of the Sri Lankan population is
insured with life insurance (this is including pensions),it is
only a fraction.
One reason for people not to go for a pension is the lack of
knowledge about the insurance products by the general public and
the tax disadvantage for insurance companies to improve benefits
in pension plans.
The aim of this article is to explain the advantages of
taking a guaranteed pension plan from an insurer and explain how
safe you are with this in comparison with other investment
opportunities available in the market.
As a result of the lighter mortality rate and a low birth
rate, the Sri Lankan population is ageing rapidly. See the
population pyramid for 2005 and the projected population pyramid
During the coming period, the population above 60 (who are
not earning any money) will increase, while the population in
age group 20 to 60 (earning money) decreases. That means as a
country we must have proper pension plans to look after this
huge number of elderly people.
guaranteed pension insurance
Some insurance companies, for instance, the Sri Lanka
Insurance Corporation, have introduced a pension plan with
guaranteed monthly benefits payable for a selected period. Here
any individual can buy a pension policy and he or she will pay
regular premiums up to the retirement age (say 55 years) and
then the insurance company will start paying him monthly
inflation protected pension up to a selected period.
Any individual will compare his/her return in pension with
the current market investment. But here you have to think of a
guaranteed investment rate as long as 40 or 50 years, which
cannot be found in the current market. If someone buys a pension
plan at the age of 30 years and wish to start taking his/her
pension from age 55 up to age 75, the total period covered by
this plan is 45 years (premium paying term of 25 years and
pension receiving term of 20 years). The insurance company bears
this investment risk and issues a pension plan with guaranteed
benefits. In this case, the investment return from the pension
plan will be lower than the current market rates for short-term
investments, but you are benefited in the long run. The relevant
chart shows the interest for one year fixed deposits and the
assumed interest in a pension plan.
Insurance companies protect your money
Once a guaranteed pension plan is sold, the insurance company
does not have the option of changing the benefits in later
years. If the market interest rates drop below the company’s
assumed interest rate, the company will stop selling new
business and revise the benefits of their products. The existing
pension plan holders, however, are secured with their benefits
promised in the policy. Secured because the insurance company
keeps money aside in the form of a reserve for these policies,
reserves which are calculated following heavy guidelines of the
Insurance Board of Sri Lanka (IBSL).
The Board will assess the insurer and see whether the company
has enough reserves to meet future liabilities. Hence, the
individual who obtained the pension plan is much secured with
the insurance company while getting a long- term guarantee too.
Why a lump sum
cannot serve you well
Some suggest a lump sum benefit at retirement age through
which the individual can invest anywhere is the best retirement
option. The risk here is once you get a lump sum of money, you
may have many other needs for spending it. For instance, as said
earlier, to pay off debts or on a dowry for your beloved
daughter, on your house, etc. After that you may either be a
dependant of somebody or you find that in a couple of years
there is no more money left. If you enter into a regular payment
guaranteed pension plan, your future pension is totally secured.
Sources insurance companies have in promoting pension plans
Life insurance companies sell their contracts for long
periods, such as 40 years. The insurer maintains the life fund
for at least the same amount of years. For instance, Sri Lanka
Insurance has maintained their Life Fund for 44 years. The
insurer has expertise to manage the fund. It is a must that a
qualified actuary has to give a valuation report on the fund at
the end of each year. Actuaries are qualified in giving
financial solutions for long-term insurance/investment problems.
Normally the company has to spend a large amount of money to
hire/recruit/(employ) a qualified actuary. Due to this fact, and
the lack of qualified professionals and high consultation
charges, only a few insurance companies hire actuaries in Sri
Lanka. Banks and few other companies consult actuaries for
selected (projects) assignments.
Although the insurance sector has the best expertise in this
area, pension plans are not much popular due to the fact that
insurance companies have to pay a tax rate of 32.5% on
investment income minus expenses. Hence the company cannot offer
much benefit to the customer.
If the government could reduce the tax rate payable on
pension products, more attractive pension plans could be
designed. The non- contributory pension scheme for the
government servants is becoming a burden for the government day
by day with the increasing number of ageing population.
Many demographic and economic analysts have highlighted the
need of improving more pension It is high time that the
government supports other ways of pension solutions by means of
reducing tax rates payable on pension products.
The author is working as Assistant
Manager Actuarial in Sri Lanka Insurance and has 11 years
experience in Life products.