The Hindu Business Line : Group superannuation plans — Giving employees a happier retirement

GROUP superannuation schemes offered by insurance companies can be a good option for organisations to systematically plan for the increasingly crucial post-retirement days of their employees. A well-crafted plan can place a sizeable corpus in the hands of an employee, without costing the employer as much as the more visible perquisites such as fancy cars and swanky, company-furnished accommodation.

A few weeks ago, we examined the Group Term plans offered by various insurance players, which endeavours to provide life cover for a set of employees in an organisation.

Continuing our coverage of group plans, we will look at the group superannuation plans offered by such players as LIC, ICICI Prudential, Tata-AIG and Birla Sun Life Insurance.

Features

Group superannuation plans aim to provide an employee with a sizeable corpus on his retirement. This corpus can be used by the retiring employee to take an annuity, which will provide a revenue stream post-retirement.

The annuity can be taken either on the entire corpus or a portion can be commuted and an annuity taken with the remaining amount.

The plan is administered by the employer appointing trustees and drafting the trust deed and rules in consultation with the insurance company that is going to run the scheme. Contributions to the scheme can be made by either the employer alone or by both the employer and the employee (in which case the scheme becomes contributory in nature).

Contributions can be made on an annual, semi-annual, quarterly or monthly basis. A single lumpsum contribution can also be made in certain plans. Contributions by the employer are limited to 27 per cent of the employee's annual salary (basic plus dearness allowance), of which up to 12 per cent can go towards the employee's provident fund.

In the case of plans offered by ICICI Pru and Birla Sun Life, funds can be deployed in one of three schemes, each of which carries a progressively higher degree of risk.

The increase in risk is because of the higher investments in equities. The investments made in each scheme will be in line with the norms prescribed by the IRDA. A charge will be levied for switching between the investment options. In essence, these plans are similar to the unit-linked insurance plans that the companies offer. Likewise, such plans will also entail administrative and other upfront charges which will be deducted from the contributions made.

Eligibility

All employees above 18 are entitled to participate in the scheme. However, it is not imperative that the employer provides this scheme to every employee who meets the eligibility criteria. Cover can be extended depending on either the employee's salary or designation.

Employee benefits

The objective of such a policy is to build a sizeable corpus for an employee as he approaches retirement. A part of the corpus (up to one-third) can be commuted and the remaining amount used to purchase an annuity from the company that is administering the scheme.

Should the employee die during the scheme's currency, the available corpus will be used to provide a pension to the beneficiary.

The beneficiary will also receive a further lumpsum in case the employer has taken a Group Term Plan in conjunction with the superannuation plan.

The costs attached in providing a group term cover are lower than what it will cost each employee to individually take a life cover. Clubbing these plans provides the twin advantages of higher benefits to employees as well as lower costs to the employer.

On withdrawal from the scheme (say, if an employee moves jobs), LIC, for instance, offers the employee three choices:

Transfer the accumulated corpus to the superannuation scheme of the new employer, provided the rules of both schemes permit such a move;

Receive pension according to the normal retirement date provided under the previous employer's scheme; or

Commute a portion of the corpus immediately and also start receiving pensions, in which case the benefits will be subject to tax.

Annuity options

The amount that one receives as pension is also a function of the annuity options chosen. The options available are:

Pension will be paid out over the life of the member and cease on death.

Pension paid over the life of the member, and on his death, the beneficiary will receive the purchase price. (The purchase price is the amount used to buy the annuity.)

Pension guaranteed for a period of five, 10, 15, 20 years and for life thereafter. For example, if the member opts for guaranteed pensions for a five-year period and meets with death in year three, the beneficiary will receive the same pension in year four and five.

Pension will be paid over the life of the member, and on his death, the beneficiary will receive pensions till death.

Pension will be paid out as mentioned in the previous case. However, on the death of the beneficiary, the nominee stands to receive the purchase price.

The pension amount is the highest in the first mentioned option and the least in the case of the last annuity option.

Tax benefits

Investments in such plans also qualify for a clutch of tax benefits. For instance, the contribution by the employer is deductible as a business expense. Additionally, these contributions are also not treated as a perquisite in the hands of the employee. From the employee's perspective, benefits payable on death and the amount commuted on maturity are exempt from tax.

How they suit you?

AS IN the case of group term plans, superannuation plans, too, play an important role in retaining an organisation's key personnel. An added feature of these plans is that contributions can also be made for past service rendered by existing employees. A tax deduction to the extent of 80 per cent of the contribution can be claimed in this case.

With the plan being handled by an independent party, employees can expect their investments to be handled prudently. Additionally, it will also eliminate the possibility of any subjectivity on the employer's part in case the employee lodges a claim. Such interpretation may lead to the company rejecting a valid claim on flimsy grounds. However, administration of the superannuation scheme by a professional outfit will also assure employees that their claims will not be held up unnecessarily.

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