The insurance regulator has barred the entry of new employees into existing group pension scheme (GPS) usually offered by companies as an additional retirement benefit for senior managers. Thus, new employees joining a company would not get additional retirement benefits.
Apart from contributing to employees’ provident fund (EPF)—a retirement scheme—several employers allow managers to invest about 15% of their basic salary into group pension plans. However, IRDA's (Insurance Regulatory and Development Authority) draft guideline has barred new recruits to be placed under existing group pension schemes. This is a sad news for employees because their tax liability will increase.
Pankaaj Maalde, head-financial planning, ApnaPaisa.com, said, “Tax planning is an integral part of the financial planning process. We always advise our clients on tax issues and recommend tax efficient road map to achieve financial goals. Superannuation is a one of the powerful tools for tax planning available to senior level employees. Needless to say, the new guideline barring new members from joining the group will badly hit them as their tax liability will increase substantially. This will reduce their surplus available for future goals.”
Employees who are already under the existing group pension schemes would continue to enjoy the benefits but those who are fresh recruits may not get additional retirement benefits from the employer. The new employees would have to start planning for their retirement cover on their own.
Group pension schemes are usually offered at the senior level to employees with 10 to 12 years of experience who mostly come under 30% tax bracket. Though the total remuneration for new executives won’t change on a CTC (cost-to-company) basis, their inability to contribute to the group pension scheme would make that component of their income taxable.
Over 15% of employees’ basic salary is usually invested in such group pension schemes, as it is a tax-friendly retirement product. Contributions into these pension schemes are linked to the basic salary of executives. Under the Income Tax Act, contributions to provident fund and pension schemes up to 27% of a company’s annual salary cost (basic pay plus dearness allowance) are treated as deductible business expenses.
The IRDA had earlier asked insurers to withdraw all group super-annuation products that do not comply with its pension guidelines by April 2012. Now, in the fine print of a June 13 circular, the regulator has said that existing group superannuation policies cannot enroll new members.
Insurers are yet to come up with new pension products as they would have to provide a guaranteed return. Thus, many insurers have decided to stay away from new group pension schemes.