An increasing number of companies are outsourcing superannuation, gratuity and leave encashment programmes of their employees to insurance companies.
The trend that emerged two years ago has got a shot in the arm with SAIL, Nicholas Piramal, Vishakhapatnam Port asking insurers to manage their employees' retirement programmes.
Last year, several prominent public sector companies in coal, port, steel and bank sectors and private IT, consumer goods and pharmaceutical companies outsourced their employees' retirement benefit programmes to insurance companies, with Life Insurance Corporation (LIC) cornering a bulk of the deals.
SAIL has outsourced its gratuity programme to a consortium of insurers comprising LIC, SBI Life, ICICI Prudential Life and HDFC Standard Life.
"Earlier, we were doing Rs 3,000 crore (Rs 30 billion) of new business premium in the group insurance segment, which has now increased to Rs 10,000-11,000 crore (Rs 100-110 billion) in the last two years," said a senior LIC executive.
SBI Life Managing Director and Chief Executive Officer U S Roy said the trigger for companies to outsource their retirement benefit programme was the revised Accounting Standard 15 guidelines that were introduced last year.
It stipulated that liabilities of employees, whether short term (such as bonus and medical benefits), or long term (such as gratuity, provident fund, superannuation) need to be funded or provided for in the profit and loss account in the first year itself.
Besides, insurance companies are able to offer higher returns to companies. In case a company manages its retirement benefit programme in-house, it has to adhere to the Investment Rule 67 of the Income Tax Act, which limits the ability of managers to earn higher returns.
The rule mandates that at least 25 per cent of employee funds be deployed in central government securities and 15 per cent has to be earmarked for central or state government securities.
Another 30 per cent can be parked in bonds or securities issued by public financial institutions or in term deposits of up to three years or in a collateral borrowing and lending obligation issued by Clearing Corporation of India.
The only flexibility is in investing the remaining 30 per cent in "any of the above instruments".
"Companies are outsouring to earn better returns, seek better quality paper and get a better lot size," said Tarun Chugh, chief of group and bancassurance alliances, ICICI Prudential Life Insurance.
"When companies manage in-house, they do not enjoy the upside of the stock market. Irda (Insurance Regulatory and Development Authority) has a restriction that in case of Ulip (unit-lined investment plan) fund for group schemes, not more than 60 per cent can be invested in equities.
Most gratuity and superannuation schemes invest 20 per cent in equity funds. We and other private players do it as systematic investment planning (SIP). So we do not time the market," said Chugh.
