Milliman India EB Herald, April 2013

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By Ravi Shekhar, Simon Herborn | 30 April 2013

For frontline managers and individuals managing employee security and benefits in India, Milliman provides updated news and analysis of the latest events and innovations happening in the Indian market. This edition includes information about:

  • A proposed increase in interest on EPFO accounts
  • Extended deadline for PF trusts to seek IT exception
  • NPS fund managers allowed to invest directly in stocks
  • New IRDA guidelines on health insurance ß

EPFO to pay 8.5% interest on PF deposits for 2012-13

According to a piece in the Economic Times the Employees' Provident Fund Organisation (EPFO) is advocating an increase of 25 basis points for the year 2012-2013. Provident Fund (PF) accounts would now earn 8.5% in 2012-2013. In isolation, this number appears to be on the lower side when compared to small saving instruments such as the Public Provident Fund (PPF), whose rate as of the time this was written was 8.8%. For 5-year and 10-year national savings certificates, rates of 8.6% and 8.9%, respectively, have been available since April 1, 2012.

The primary reason for this lower return is the negative balance that EPFO is carrying in its balance sheet, per an audit conducted on EPFO’s accounts. The result has been more money paid out than earned. In order to stem the excess outflow, EPFO has been allowed by the Ministry of Finance to invest in high-quality bonds of private sector firms as well as to invest up to 5% of its funds in equity. The highest decision-making body of EPFO, its board of trustees, has approved additional investment in bonds but has not allowed any investments in equity, fearing the volatility and erosion of capital.

Budget gives one more year to PF trusts to seek IT exemption

In 2006, according to this recent article in the Pioneer, the erstwhile finance minister P. Chidambaram had made it mandatory for all private PF trusts to seek exemption certificates either from the Labour Ministry or the state Labour Department within a year to enjoy the tax benefits. This was based on the observation that, of the approximately 2,700 private PF trusts, a vast number of them don’t have an exemption certificate. This means they are not compliant with the rules and many fear they have been playing “fast and loose” with employees’ money.

This decision led to a huge rush and a big backlog with the Labour Ministry/EPFO. Because all these trusts could not get the exemption certificates in 2006-2007, annual waivers were given by successive budgets, on request from the Labour Ministry. As a result, the Union Budget 2013 has proposed to extend the deadline for seeking exemption certificate by private PF trusts by one year, till March 31, 2014.

(Find more information about the exemptions under Section 17 at http://www.epfochennai.tn.nic.in/excemptions.html.)

Regulator gives NPS funds managers quiet nod to invest directly in stocks

As reported in Live Mint, in January this year, the Pension Fund Regulatory and Development Authority (PFRDA) quietly implemented a big change in the spirit of the flagship National Pension Scheme (NPS). The NPS fund managers can now invest directly in equity. They had earlier been allowed to invest only in index funds (which mimic funds such as the BSE Sensex, Nifty, etc.). Earlier direct equity investments were not allowed. PFRDA says that this would allow fund managers to increase returns. Under the new investment guidelines, pension fund managers (PFMs) may invest in shares of companies listed on the BSE Sensex, Nifty 50 Index, or for whichever derivatives (options, futures, etc.) are available.

Even though this is a good move on behalf of PFRDA because it will allow subscribers the benefit of superior fund management skills, which hopefully will lead to better returns in the long term, questions have been raised about the manner in which this notification was given. As a general practice, other financial supervisors such as the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI) take a different approach, typically issuing a public draft circular or notification before settling on the final regulations. Some have questioned the lack of transparency, which has been missing from this process.

Your health insurance plan cost, features set to change

A recent article on mydigitalfc.com examines IRDA’s newly issued guidelines that affect almost all of the health insurance products/policies used in India. IRDA has said that the appointed actuary or the CEO of the insurance company can approve changes in features, but in case there are any changes in the premium, filing the details with IRDA is mandatory. Some of the changes being implemented are:

  • Customers are entitled to a free-look period of 15 days for nonlife policies beginning from the date the documents are received.
  • Health insurance regulations were revised last month to clarify and address conflicts in the wording and to protect policyholders. These regulations apply to all insurance firms. IRDA has standardized:
    • A list of 199 exclusions
    • Definitions of 46 terms
    • The claim form
     
  • Insurers are now required to offer lifetime coverage on all policies.
  • A minimum entry age limit of 65 years applies.
  • Insurers must offer a 30-day grace period beyond the expiry date of the policy to renew a policy.
  • Insurers may not increase premiums for customers with availed claims. They can, however, increase the premium on entire portfolios of customers.
  • A no claim bonus (NCB), which is a discount offered by an insurer in the case that the policyholder has not made a claim, has been included. The NCB may not be reduced to zero in case of a claim. It must reduce at the same level as it would increase if there were no claims.

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