There is more demand for pension plans in the country as there is no proper pension plan covering all the citizens in the country.

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 for 2050.

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.

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.

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.

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.

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.