The Indian pension market is rapidly vanishing. The market shrunk almost 90 per cent in 2002-03, with assured and guaranteed long-term annuities being discontinued.

The Life Insurance Corporation of India, which has a 70 per cent share in the pension business, is expecting a premium income of Rs 275 crore (Rs 2.75 billion) from this segment for 2002-03. This is around 10 per cent of the Rs 2,564 crore (Rs 25.64 billion) it mopped up in 2001-2002. In 2000-01, it earned Rs 563 crore (Rs 5.63 billion).

The declining figures in 2002-03 have partly been attributed to lower sales of pension plans. "Customers are not happy with LIC removing guarantees even on deferred annuity contracts," LIC Chairman S B Mathur said.

LIC agents pointed out that at one point of time, the earlier Jeevan Suraksha pension plan offered a 9.5 per cent guaranteed rate of interest till death. This effectively meant that LIC was taking a view on interest rates for the next 45 years, in the case of an individual buying a deferred annuity product at the age of 30.

With falling interest rates, this proved unviable and LIC had to scale down its assured yields and remove guarantees on deferred pension plans.

Private insurance companies, especially ICICI Prudential Life and HDFC Standard Life, have grabbed a big chunk of the shrinking pension market.

ICICI Prudential Life's premium income from the sale of pension plans increased four-fold in the second half of 2002-03 from the first.

In April-September 2002, the private insurer collected Rs 17.5 crore in pension sales. This increased by Rs 70.2 crore in the second half of the financial year, bringing the year's total to Rs 87.7 crore.

"People are buying pension policies for retirement planning and not for guarantees," Saugato Gupta, chief marketing officer of ICICI Prudential Life, said.

Even though private companies like Max New York Life, Tata AIG Life, Birla Sun Life, OM Kotak Life, SBI Life and Aviva Life entered the pension market during the year, several insurance firms do not expect the sale of pension plans to grow significantly in 2003-04 without tax incentives.

Section 80 CCC of the Income Tax Act allows exemption of up to Rs 10,000. The insurance industry has been demanding that the limit be doubled.

Gupta, however, points out that considering the average ticket size of Rs 11,500, "sales have not been solely driven by the current tax exemption".

The pension markets in developed nations like the US and the UK have been driven primarily by tax reforms. In India, on investing Rs 10,000 annually for a period of 20 years, one only gets Rs 4,000 a month on retirement. "People are waiting for pension reforms and this partly explains why sales have not increased in 2003," Mathur said.