TYPES_OF !l£f1Rf.

MENT SCHEM~S CHAPTER 7

iii. Agree in advance to renounce a dividend in exchange for an employer's

contribution to a top hat scheme. This option is only available to
shareholder·employees.

The salary/bonus/dividend sacrifice must be agreed in advance of the point

at which the next salary, bonus or dividend is due, in order to ensure that no
income tax and national insurance is payable.

d) Additional Voluntary Contributions (AVCs)

An AVC arrangement allows a member to make additional personal

contributions up to 15 per cent of pensionable remuneration minus personal
contributions routinely paid to the main scheme.

There are three kinds of AVC arrangements:

l Added years

This option is normally only available to members of the large public sector
superannuation schemes. The member "buys" each extra year at a cost
calculated by the actuary. In an soth scheme, each year purchased confers
an extra pension of 1/ 80th of pensionable remuneration plus an additional
lump sum of 3/ 80th times pensionable remuneration.

The number of extra years that the member can buy is constrained by the 15
per cent of pensionable remuneration rule and overall scheme benefit
limits.

I. "Scheme" or "in-house" AVCs

Members of occupational pension schemes have the legal right to pay AVCs,
using a money purchase facility linked to the main scheme. The member can
contribute the balance of 15 per cent of pensionable remuneration as
defined by the main scheme rules. Full tax relief is obtained at source
through the net pay arrangement.

Scheme AVC benefits may be taken as pension only through an annuity. A

tax-free lump sum cannot be taken. Benefits are constrained by overall
scheme limits but need no longer be taken at the same time as main scheme
benefits.

The principle advantage of a scheme AVC is that charges are likely to be

lower than on FSAVC schemes because the former are group rather than
individual arrangements, with economies of scale.

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iii. Free-standing AVCs

An FSAVC plan, however, is governed by Inland Revenue rather than main

scheme limits and can therefore be used to pension all emoluments
excluded under main scheme rules.

FSAVCs are open to all members of approved company schemes except

controlling directors. A member can only contribute to one FSAVC plan per
year. FSAVC benefits need no longer be drawn at the same time as main
scheme benefits.

A free-standing AVC plan is arranged by the member with an independent

provider. Contributions are paid net of basic rate tax and higher rate relief
is recovered at the end of the tax year through the member's self·
assessment return . Benefits are taken as pension only through an annuity.

FSAVC charges tend to be higher than those on a Scheme AVC because the
FSAVC is an individual rather than a group arrangement. An FSAVC is
therefore only likely to be good value if you intend to make use of the wider
definition of pensionable remuneration to maximise personal contributions.

8. Occupational Pension Schemes in India

a) Occupational Pension Schemes fn India

Diagram 1: Occupational penston schemes in India

rr ····· . - -~· .,
.OccupAtional Penston Schemes tn lndta ·,
L ·•"-" c~ ·• ~
1
,..
I
' ..., I
' 1
Provident Fund Gratuity ' Superannuation
~ .
<Ill

In India the Occupational Pension Schemes available for the organised

workforce are Provident Fund, Gratuity and Superannuation.

l Provident Fund is over regulated but under supervised as provided in

the Employees Provident Fund and Miscellaneous Provisions Act, 1952
(the PF Act) at least for those employees who are coverable under the PF
Act. There are Provident Fund Schemes run by the employers for the
benefit of employees who are excluded from the provisions of the PF
Act. These Schemes run by typically called Excluded PF Trusts are only
governed by the Income Tax Act, 1961.

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TYPES OF RETIREMENT SCHEMES
CHAPTER 7

if. Gratuity as a b~nefit is mandated under the Payment of Gratuity Act,

1972 (the Gra~u1ty Act)_ and the employer is under a statutory obligation
to pay gratuity to h1s employees under the stipulated conditions.
However the modus of providing the benefit is largely unregulated
except for the provisions in the Income Tax Act, 1961 (IT Act)

iii. Superannuation is a voluntary Occupational Pension Scheme adopted by

many of the employers and is again governed only by the provisions of
the IT Act.

In India, The Provident Fund and The Gratuity are statutory depending on
the number of persons employed by an employer, whereas the
Superannuation is a voluntary. The Provident Fund and Gratuity are
discussed in detail under the chapter 'Social Security Scheme'.

The Government provides various tax concessions as incentives in order to

expand these social security measures. These concessions are subject to
employer complying with the terms and condition as stipulated in the
Income Tax Act 1961.

In the following paragraphs the subject matter connected to the

Superannuation scheme will be discussed.

b) Factors that contributed for the development of Superannuation

Schemes

Various factors have contributed for the development of Superannuation

Schemes in India. These factors may be grouped under three broad
categories viz. Social Aspects; Economic Aspects and Legal Aspects.

i. Social Aspect

The advancement seen in Medical Science has greatly contributed for the
improvement in longevity. The Inflation coupled with taxation and wage
structure resulted in hardly any worthwhile savings during the active service
period. In the absence saving employees are forced to look upon the Monies
received in lump sum from various retirement benefits to address pressing
social needs. Normally these lump sum benefits gets diverted to met
emergent social needs connected to age viz. Housing, Marriage of Children,
Medical cost etc pushing them to awkward financial position during rest of
their life span. To protect from this situation there is a genuine need for a
regular income. In this back drop Superannuation Scheme comes handy.

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ti. Economic Aspect

Trade competition makes it compulsory for industrialist to manufacture at

lowest cost. This has lead to keep the wage bill minimal in relation to the
output. In general the efficiency of a member affect with the passage of age
making it economically advisable to replace them with fresh blood. It so
happens that sometimes employers are forced to offer voluntary retirement
schemes to fine tune the age mix. This has catalyzed the development of
Superannuation scheme as an incentive. Some time to retain the skilled and
key persons; the employers are compelled to look towards attractive
remunerative packages. The Superannuation Scheme is a tool in both the
situations. The Payment of Bonus Act limits the benefit on the basis of
salary / wages. Under the circumstances the superannuation scheme are used
as a tool to hold the skill and creamy layer of the work force.

iii. Legislative Aspects

The government has played pivotal role in development of the

superannuation scheme. The Government is offering year after year various
incentives on Income Tax liability to both employer as well as employee
under various heads making Superannuation Scheme attractive.

The employer's liability under various retirement benefits such as PF,

Gratuity, Leave Encashment, Pension etc. are, in general, incremental in
nature. With each years of service put in by the employee, the employers
liability towards retirement goes on increasing. To address these in a
systematic method, the Income Tax Act stipulates formation of Trust for
managing the liability of employer. These Trusts are grouped under
Charitable Trusts, under Indian Trust Act, as they function without any
profit motive. These Employee Benefit Trust Deeds need to be registered
with the respective Registration Authority as they do not fall under the
purview of exempted category from doing so under the Indian Registration
Act 1908.

A Trust created and Registered by an employer for the benefit of his

employees in a manner noted herein above, is a separate legal entity. This
legal entity continues to exist till the objects under which they are
conceived are fulfilled in Toto. This existence of trust is irrespective of the
status of the employer who has created them under the provisions of the
Income Tax Act 1961.

formation of trust to manage the employer Superannuation liability is not an

obligatory but advisable on the basis of advantages it brings in.

The primary objective of the Retirement Scheme - Superannuation Scheme

is to provide pension. There are number of ways of achieving the same.

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 TYPES Of RE11RrEMENI ~lHtMt~ CHAPTER 7

c) Payment by Employer

Several employers do not undertake any responsibility to pay pension to all

their retiring employees. They would like to grant benefits which they are
obliged to give by the laws. Nevertheless when some employees who made
significant contributions for the success of the business by rendering long,
meritorious service retire, employer may be pleased to reward with a grant
of a monetary benefits intending to support them during rest of their life
time.

No definite rules/ schemes to be formulated to shape their intentions. It can

I be achieved by board resolutions deciding to grant pension for a specified

amount to the employees concerned. The recurring liability on account of
this commitment need not be funded and no monies are required to be set
apart for the benefit. It can be paid, as and when a payment falls due, by
charging current years revenue, from current resources. It is called pay as
you go method. The process can further be secured by purchasing an
immediate annuity.

The limitation of this approach is that in a year of financial strain to the

company, the out go further adds to the woes. The pension granted is
unsecured. The taxation also acts adversely.

d) The Trust Deed and Rules and Scheme Administration

In order to avail various Income Tax incentives available both for the
employer as well as employee an Irrevocable Superannuation Trust needs to
be created in tune with the provisions of the Income Tax Act 1961 and In
accordance with the Indian Trust Act. This trust will adopt the Rules and
Scheme of Superannuation as conceived by the employer.

The employer delegates the trust the power to manage the liability.
However the responsibility as well as the accountability of paying the
benefits lies with the employer only.

This is a safe, secured and systematic approach to fund the liability

The employer is responsible for:

i. Ensuring payment of employer and employee contributions in case the

scheme is contributory in nature
ii. Providing up-to-date data
iii. Notifying the scheme of changes to membership, e.g. new employees,
employees leaving the scheme, employees retiring.

The trust funds will vest with the trustees. It will be the trustee's
responsibility to invest the monies according to the prescribed pattern given
by the revenue authorities and secure pension as and when it falls due. The

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fund will have to be approved by the Commissioner of Income Tax under

Part B of the Fourth Schedule of IT Act 1961 .

There are two options available to the Trustees.

i. To enter into a scheme of Insurance with an Insurer and pay the

contribution received from the employers to secure the benefits .
Insured Schemes.
ii. To accumulate the contributions. Approach an annuity provider to pay
pension - Trustee Administrated Schemes.

The Trustees shoulder the responsibilities of administering the fund under

Trustees Administered Schemes. The managing the investments' made by
the employer, in accordance with the pattern approved by the Central Board
of Direct Taxes, realizing the maximum yield on the investment etc are the
responsibilities which lies on Trustees.

Superannuation Scheme may be contributory or non contributory. Similarly it

may a Benefit Purchase Scheme (Defined Benefit Scheme) or Money
Purchase Scheme (Defined Contribution Scheme).

In case the scheme is Benefit purchase, the Trustees have to arrange for
valuation of liability.

Under Insured scheme, the Trustees are passing the following on to an

insurer.

i. Investment Risk - Finding suitable instruments, investing in the pattern

approved by CBDT, getting maximum yield etc.
ii. Administration/Management responsibilities - Occasionally Insurer wilt
also help in legal and Actuarial requirements.

e) Insured Scheme Vis-a-v1s Trustees Administered Schem~

Often under Insured Scheme the benefits are confined to pension for life. In
contrast under Trustee Administered Scheme flexibility is more, benefits can
be explored for disablement pension, discretionary pension, ill health
retirement pension, early retirement pension etc.

Insured Scheme goes with Uttle bit rigid on pace of funding the liability i.e.
the rate at which fund has to be built. Trustee can take a call on this
depending on circumstances.

Insured Scheme has better investment option by virtue of size and expertise.
Trustee Administered Scheme has limited size and consequently restricted
investment options.

Insured Scheme provide guarantee on premium rates and annuity rates.

230 IC·8l GROUP INSURANCE AND RETIREMENT 8EHEEFITS

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TYPES OF RETIREMENIT SCHEMES CHAPTER 7

Trustee Administered Scheme not shielded from this risk.

f) Employer to Decide

To Start with for installing a Superannuation Scheme, the institution has to

decide on following:

i. How to meet the same?

ii. Will it be on pay as you go method (charging current year out go to
current year revenue)?
iii. Whether a trust has to be created? If Trust is to be installed will it be
Insured Scheme or Trust Administered scheme?
t-J. Will it be Contributory or Non Contributory one?
v. To whom it shall be opened? What shall be the benefits stream?

The pension is treated as a deferred salary. Hence it attracts tax. During the
Active service period, additional income to employees wlll add to tax and
reduce his take home pay. Hence employees prefer to Superannuation
benefit as the tax liability during retired period will be considerably less.

Employees drawing salary of more than Rs.2, 500/ • p m are not eligible for
Bonus as per The Payment of Bonus Act. To compensate the same
Superannuation scheme will be handy for employer.

g) Approved Superannuation Fund:

In order to avail Income Tax Concession creation of an Irrevocable Trust in

tune with the provisions of Income Tax Act 1961 is a must.

A Superannuation Fund approved by the Income Tax Authority is called an

approved fund. An Irrevocable Trust is created for the purpose of providing
Superannuation in order to get approval from the Commissioner of Income
Tax under Part B, Fourth Schedule of Income Tax Act 1961

Under an approved superannuation fund The Employers' and Employees of

wlll get following Concession in Income Tax.

i. The Employer's ordinary annual contributions within the prescribed

limits will be allowed as deduction for the purposes of computation of
the Profits and Gains of Business or profession. The Initial contribution
paid by the employer relating to the past service of the employees
Within the prescribed limits will be allowed as admissible deductions and
the relief will be spread over five years, commencing from the year in
which the contribution is paid.
ii. The employer's contribution will not be treated as perquisites in the
hands of the employees.
iii. The employee's contribution will qualify for Income Tax relief u/s SOc of
the IT Act 1961 in the same way as insurance premium.
.,.. .. - . 7'H

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CHAPTER 7 TYPES OF RETI REMENT SCHEMES
•
iv. The interest income from the investment belonging to the scheme will
not be taxable.
v. The commuted value of the pension, the lump sum receipt , will not be
taxed, subject to prescribed limit on certain conditions.
vi. Income Tax Act put a cap of 27% salary on maximum allowable quantum
for tax concession by employer. This 27% of salary is inclusive of
employer contributions towards Provident Fund.

The approval to the Superannuation fund from the income tax authorities
once granted will in general continue as long as the scheme continues. Once
approved, any amendments to the scheme have to be with the concurrence
of the IT authorities. Such modifications/ amendments' to the scheme will
be through the Deed of Variation to the Principal Deed.

Formation a Trust and its approval by the IT authorities is not an obligatory

but is an advisable option. The approval will provide Income Tax concession.

The benefit patterns suiting the needs of the employer I employees can be
designed. The Scheme may be contributory or non-contributory. The
alternative methods of calculating pensions for future service are many; all
of them have their advantages and disadvantages. The various patterns must
be carefully considered in the light of individual circumstances as well as
the general characteristics of the employees entering the scheme.

h) Defined Benefit (DB) Schemes

Defined benefit pension schemes guarantee benefits based typically on final

pensionable salary and years of service since joining the scheme etc. ,. If the
underlying investments of a defined benefit scheme under-perform, then
the employer may have to pay more money into the scheme to honor the
guarantee. Apart from the above, as the salary is incremental in nature; the
liability will go up, Inflation, monetary value, mortality, interest income
etc. , are also add to the need for infusion of fresh funds to meet the cost.

Few benefits patterns that figure out under DB methods are as noted herein.

i. Flat Rate: The simplest form· Each member will be granted a unit
pension. The employees may contribute a fixed amount.

Example: Rs.1000/- pension per month from the Normal Retirement date for
each member. The member will be contributing Rs.100/- per month in his
active service tenure.

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 TYPl) VI .. ~ • . .

I. Graded Schedule: A _typica~ graded schedule pattern may provide grades

depending of grades m serv1ce/salary etc.

Example: A Junior Executive will be eligible for Rs. 1000/ - pension per
month from the Normal Retirement day.
A Senior Executive will be eligible for Rs. 5000/- pension per month from the
Normal Retirement day.
Managerial Personal will be eligible for Rs.10000/- pension per month from
the Normal Retirement day.

iii. Average Salary: Annual pension accrual for each year of qualifying
service wnt be equal to a fraction - say 1/60 Th of salary earned.

iv. Final Salary: An annual pension calculated as a fraction for each year of
service, but based on the final salary received on the last year of
service.

As already stated benefits pattern may be designed to suit to their needs

and requirements. The above patterns are only indicative and not
exhaustive.

i) Cost

The cost of defined benefit schemes depends upon

1. The level of future investment returns,

ii. How long the pensioners live on retirement and
iii. The cost of administration

Therefore. the cost of benefit scheme will be known only on meeting all the
I
benefits. Periodical Actuarial valuation of liability is a must to ensure
systematic I pace of funding. In an inflationary economy DB scheme gets
distanced from employer as it demands consistent funding to meet
guarantee.

j) Defined Contribution (DC) Schemes

Defined contribution occupational pension schemes non-guaranteed

benefits. The liability of the employer is known at the inception hence can
be provide for in the books of accounts. As the benefits are not
predetermined Actuarial Valuation is not required

The system provides for commutation of pension. In general the maximum

ceiling is one third of the accumulation provided the member is eligible for
gratuity. In gratuity is not payable, and then the commutation is allowed up
to SO% of the accumulations.

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-· · •"~-' t ._.,, I TYPES OF RETIREMENT SCHEMES

The balance of the fund after commutations used to buy an annuity.

This system does not provide need based pension. There will not a strain on
salary as observed in the DB Schemes

k) Hybrid Schemes

A hybrid scheme offers both defined benefit and defined contribution

sections or benefits that are the greater of two amounts.

I Example l
A main benefit that is defined contribution tn nature, with a promise the
benefit will be at least a defined benefit amount

A main benefit that is defined benefit in nature, with a promise the benefit
will be at least a defined contribution amount.

These schemes usually exist as a modification of defined benefit schemes with

the condition that the value of the benefit will be no less than the value of
accumulated member contributions. As the employer usually pays the major
part of the contributions, such condition does not usually affect and when it
does it will usually only be for the youngest members on withdrawing soon after
joining. This is because in a defined benefit scheme the present value of a
young member's future pension benefits will be quite low as

i. The member has very little past service

ii. The member is a long way from retirement and so there is a heavy
element of discounting
iii. On leaving the scheme, the benefits are based on salary at date of
leaving, with (perhaps) statutory revaluation (normally at a low rate) to
retirement.

As a result the accumulated value of the member's contributions may well be

greater than the defined benefit.

In defined contribution schemes, the above condition of defined benefit is

sometimes applied to protect the members against some of the risks of low
investment returns. The level of the condition is often at a level that would only
apply in the event of exceptionally poor investment conditions.

A more generous condition may be applied after a conversion of a scheme from

a defined benefit form to a defined contribution form. These conditions are
usually only applied on a temporary basis, and are useful to help an employer
ease through a change in the nature of the scheme.

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TYPES Of RETIREMENT SCHEMES CHAPTER 7

I) Funding Superannuation Liability

Funding the liability is making advance financial provisions on a scientific

basis to build up sufficient funds to discharge the liability which is emerging
at a distant future.

When a scheme is introduced as a service benefits, pension will be

calculated on exit as per the pattern adopted for each year of service. It is
an incremental liability. It is desirable both on business prudence as well as
on sound financial principles to fund this by setting aside adequate money
every year. The balance sheet will disclose the true and fair view of the
status of affairs. Non f unding will also means deferring the eligible tax
concessions, charging the profit margin in year in which it is provided,
reducing the dividend to that extent.

A solution to the situation noted herein lies in creation of Trust and getting
it approved by the Commissioner of Income Tax. This stipulates systematic
funding

The employer has two options in providing superannuation benefits.

i. To enter into a scheme of Insurance with an Insurer and pay the

contribution received from the employers to secure the benefits. Insured
Schemes.
ii. To accumulate the contributions. Approach an annuity provider to pay
pension. Trustee Administrated Schemes.

Under Insured schemes various plans are used for funding the benefits. The
choice of the same depends on the benefits offered under the scheme.

Under the second option also the insurer in general grants a Group Annuity
Policy.

The Group Term Assurance plans are aligned to meet the event premature
death of the superannuation beneficiary. In such an event the accrued
accumulations may not be sufficient to fetch a decent quantum. An added
Term Assurance benefits will compensate this shortcomings.

m) Benefits under Superannuation Scheme

The sole object of a Superannuation Scheme is to provide pension when the

active service comes to an end. Pension for widows, children and/or
dependents are also conceived.

There are several types of contingent pension

N.ormat Pension This refers to pension payable under normal

Circumstances/by default. Example: Pension payable on superannuation.

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Payment will . be '!lade in general on monthly intervals starting from the

month f~llowtng hts/ her r~tirement. In case the member dies immediately
~f~er ~et1r~ment, t~e penston normally ceases. This will leads to a feeling of
~nJu~ttce. m the mmds of the family. Hence an element of guarantee is
tmbtt>:d m system. For example, Pension guaranteed for fifteen years. In
that Ctrcumstance, pension will continued to pay irrespective of existence.

Types of Pension: Under the systems members are allowed to choose the
type of pension out of the options available. Numbers of options are
available.

i. Life Pension - Pension payable till survival.

ii. Guaranteed Pension - Pension guaranteed for a period
iii. Joint Pension - Pension payable for member till his survival and to
continue payment to his spouse on his demise.
iv. Return of Purchase - Pension payable for life and on demise the purchase
price will be returned to legal heirs in lump sum.

Depending on the requirements of the employers and/or employees N

number of Option can be conceived .

Apart from pension payable from normal retirement date, pension payable
for various contingencies are also conceived say.

i. Pension on early retirement.

ii. Pension on late retirement.
iii. Pension on premature retirement due to ill health.
iv. Pension on leaving service before normal retirement date.
v. Pension on the death before normal retirement.

Commutation: The sole objective of Superannuation scheme is to provide

stream of payouts at periodical intervals. However a provision i~ al~o made
on superannuation to meet the need. for lump s~m a~ount. Thts wtll allow
commuting a part of accrued pens1on to recetve m lump sum - called
Commutation

In an approved fund, Rule 90 of the Income Tax Rules 1962 stipulates the
quantum of commutation.

i. The commuted value shall not exceed one third of the a~nuity which the
member normally eligible wherein he is eligible for gratu1ty.
ii. The commuted value can be one half the annuit~ which the member
normally eligible wherein he is not eligible for gratutty.

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TYPES Of RETIREMENT SC HEMES CHAPTER 7

n) Methods of Costing

Under an Insured Superannuation Scheme, the method of costing the pension

is very important. This will decide the pace of funding, the rate at which the
corpus is built up to meet the liability when it emerges. Different methods
are adopted to suit the needs of the employers.

In generaL, under contributory insured scheme, the members' contribution

will be used under with returned deferred annuity, whereas employers'
contributions will be used under both with/without returned deferred
annuity.

i. Single Premium Costing (SPC)

In this method a defined unit of pension in respect of a year of service will

be purchased fully by payment of one single premium in that year.
Alternatively if it is a fixed contribution scheme, one year contribution will
be utilized to purchase a fully paid-up pension which will become payable
from normal retirement date. This method is simple and easy to understand.
It is best suited for defined contribution scheme. Even wherein the
contribution is discontinued, the pension already purchased remains intact
and is payable from the Normal Retirement date. Since the pension is
purchased on year to year basis, with the passage of age, the cost increases
and quantum of pension decreases.

Under Single Premium costing the premium to purchase a unit pension will
go up with the age of member. In case the age distribution is low, it is
possible that the cost to employer may be negligible in the early years but
increases with the lapse of time. In case of regular inflow of new members
this variation will be minimal The Age distribution will play pivotal role.

Balance Table: In a scheme wherein large number of members participates

to arrive at the employers cost every year individually is tedious. The
Balance table presents One Unit of Pension in relation to One Unit of
employees contribution recorded for each age.

This can be applied only if the employees' contribution has a fixed

relationship with the amount of pension.

The total cost for a large group of members could be calculated easily by
grouping the members according to age, totaling up the number of units of
pension to be provided for each group, multiplying such totals by
appropriate unit cost and adding up the premium of all age groups.

In case the ratio of employee's contribution to pension varies from one

salary class to another, a separate balance table has to be prepared for each
ratio and separating grouping of members in each class.

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Exce~s Poension: Since the pension is depends on age, the em lo ,

co~tnbut1ons at the younger age is more than sufficient to purc~aS:~ s
0

Umts of pens10n necessary. The excess pension thus purchased will be k e

on reo serv_e. Employers will use his contributions only when the mem~is~
cont':lbut1on does not suf~ice to purchase the required quantum. The excess
pens1on thus purchased m the early years will be utilized in subseq
~~ ~nt

The pr~mium under SPC will be low during early years and acts as a
0
0

mot1Vat1on t? mstaoll the scheme. Particularly wherein employer has to pay

for past serv1ce, th1s method will result in fewer burdens to start with.

Under SPC bulk of the employer premium will go for purchase of pension for
older members. Rather in respect of member leaving early the cost to
company will be minimal.

For group with large membership base SPC will produce more stable annual
cost Vis-a-vis APC.

Under SPC It is easy to address major alteration in benefit structure of the

scheme

i. Annual Premium Costing (APC)

In this method the total pension as per the scale prescribed by the rules of
the scheme is paid for by equated level annual premium during the future
service of the member. The amount of premium does not vary unless there
is change in benefits. In case of discontinuance of premium, the pension
secured will have to be determined by calculating paid up pension which will
bear the same ratio to the total expected pension as the premium actually
paid bears to the total amount of premium payable up to the normal
retirement date.

Revision in premium rate will not affect the annual premium but will be
applicable only to the increase in pension, if any, to be secured for the
member as a result of change in the salary slabs.

The cost will remain the same as long as the member remains in the same
salary class. When the member moves to the . high:r salary cla~s, the
additional premium for increased amount of pens1on Wlll be determmed on
the basis of age of the member in the year in which he moves to higher slabs

Under APC an attempt is made to anticipate the future liability and equalize
the cost of providing for this liability during the entire span of future
service.

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 CHAPTER 7

Under APC, like salary the employer can provide very easily for exact annual
outlay. It is easy for taking consideration of outlay in case of increase in
salary and addition of new member.

Premature exit provide higher paid-up value in APC than that of SPC.

APC is more advisable where the membership is low as this provides uniform
outgo year after year.

In case of premature death at the early stage of service, there may n0t be
sufficient accumulation to fetch a decent pension to the widow. To address
the same a Term Assurance may be conceived either within the
Superannuahon Scheme or on parallel

til. Controlled Funding (CFC)

Unlike SPC and APC, in this method pension rights are not purchased till the
member gets eligibility for pension. The premium received will be utilized
to secure the total and expected benefits at Normal Pension Date, for the
oldest employees as far as the premium permits. This method of costing is
useful wherein the benefits are based on final salary and with profit insured
schemes. No distinction is made between the Past and Future Service
liability. This system results in no purchase for younger members. In non·
contributory Scheme, Employer will not be put to lose if the younger
members' leaves, as there will not be any purchase of pension for him. The
annual outlay could be fixed on general consideration as no attempt is made
to purchase a specific amount of pension each year. Hence it could be
possible to provide for expected salary escalations. It is an unallocated
method of funding wherein there is no relation between employer outlay
and pension rights secured by employees. In the event of discontinuance of
scheme, it is desirable to ensure that pensions accrued for the members can
be fully purchased by reallocating the premium paid.

Insurance Companies quote the premium, generally on with return basis and
all surrender values which may arise by death or withdrawal as well as with
profit returns will be used as additional premium from year to year when
expressed as percentage of the pensionable salaries of the members. The
level of funding and the rate of premium required will be re-assessed by
insurer regularly .

It is a possibility under this method costing that on member leaving early his
full pension may not have been purchased. Under the circumstances, it can
be done by reallocation of premium already paid and allocated to members.

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 In case of contributory schemes there are two alternatives:

1. Restrict the controlled funding costing to employer's contributions only

and use the member's contribution for purchase of his rights under APC.

2. Apply Controlled Funding System to both employers as well as

employee's contributions. In case of member leaving early, refund will
be met out of current premium.

The loss to employer will be minimal in case of death and/ or leaving of

employees under controlled funding.

The cost expressed as percentage if the salary bill tend to remain stable.
This is more flexible method of funding.

iv. Definite Funding Method of Costing (DFC)

Under this method lump sum cost in respect of each employee as on date of
commencement can be equated to an annual payment payable for a fixed
term of years. In effect the lump sum is treated as a loan repayable in
installments.

Under the system an assumption about future deaths/ exit etc., are
provided in quoting. Hence premium must be continued till the end of the
agreed term in each case even if the member dies before retirement.

Under the system the employer undertakes to continue payments for a fixed
number of years. Any breach of this agreement will create hitch. This will
force to reallocation of purchases already made.

Withdrawal of employer before the term creates complications when the

pension purchase might have been made already. Similar complication will
also arise in case member leaves before Normal retirement and before past
service payments are completed.

v. Indefinite Funding Method of Costing

This method of funding is designed to overcome the limitations encountered

under definite funding method. Under this method, the initial lump sum will
be taken as a guide to decide annual payments. The annual premium once
determined is applied as series of single premiums in successive years.

The employees are arranged on a roster in the order of their proximity to

the normal retirement and commencing with those nearest to the normal
retirement date. The first payment when received will be applied as a single
premium to purchase the past service pension in full as far down the roaster
as it will go. Any balance will be applied to purchase a portion of pension for
the employee next in the roster.

240 IC-83 GROUP INSURANCE AND RETIREMENT BENEEFJTS

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rYPES OF RETIREMEN~ S~_H_
EM_E_S-----------------~~~~
CHAPTER 7

The ~ext prem_ium when received is applied to purchase the reminder of the
pens10n for th1s employ~es and the balance is then applied as far as it will
go to purchase the pe~s10n to those next on the roster. This process will be
repeated every year t1ll all the required pensions are purchased when th
payment wi~l _terminate. The final payment would generally be a reduce~
amount suffJClent to purchase the remaining pension in full.

Each purchase is made at a single premium rate corresponding to the

attained age of the member at the date of purchase. At the commencement
date it will be possible to estimate the number of payments that wili be
required on the assumption that none of the members dies or withdraws
before his pension has been purchased. The exact number of payments
cannot be accurately determined at the outset because in practice there
will always be some deaths or withdrawal occurring before the past service
pensions concerned has been purchased. When such an eventuality the
member concerned are removed from the roster and no purchase will be
made for them. This will accelerate the priority of the· member down on the
roster and will result in lesser number of payments than visualized at the
outset

Before adopting this system the following points should be borne in mind .

./ The amounts of annual payments must be sufficient to ensure that the

pension of every employee would have been fully purchased by the time
he reaches the normal retirement date.

./ There should be no reallocation of the premiums once utilized in the

purchase of pensions. If an employee retires or withdraws before his turn
comes, there will be no past service pension purchased for him. Similarly
if an employee dies after his pension has been purchased, there can be
no question of cancelling the purchase .

./ If the employer were to discontinue the payment of premium fo~ t~e

past liability, the pension of those already retired and those st1ll m
service nearest to the pension age will have been fully secured. But no
provision will have been made for the younger employees.

Cash Accumulation System

'The Cash Accumulation System' - in an insured scheme, is a m7thod of

funding liability. The contributions received by the insurer ~re cred1te~ to a
running account maintained for the policy holder. The mter:st Wlll be
allowed every year. On the happening of . the event ~.e.. Deat~
/ Superannuation /Resignation, The amount contnbuted along w1th mteres
accrued will be utilized for providing pension.

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CHAPTER 7 TYPES OF RETIREMENT SCHEMES

The receipts will be credited to a running account maintained in favor of

Trustees. The monies for purchase of pension will be realized from this
running account. The Insurer will undertake regularity actuarial valuation of
liability Vis-a-vis fund available in the running account. The Trustees are
advised on the basis of actuarial valuation, about the desirable contribution.
Generally this will be expressed as a percentage of salary. The balance will
fetch interest. Under this method of funding premium there is no rigidity in
providing pension to member and/ or his beneficiary. This method will
ensure higher yield. There is no question of surrender of annuity as the
annuity will be effected on the date on which they become payable. Hence
there will not be any loss on this account.

I Test Yourself 1
Under Trust-based occupational pension scheme, the sponsoring employer will
set which of the following?

I. The terms of the trust

H. Requirement for member's contributions
II. Eligibility criteria for membership
W. All of the above

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 '""''"""'• '~"I

[summary
a) Under Trust-based occupational pension scheme, the sponsoring employer
will set:

i. The terms of the trust,

n. The benefit levels,
iii. Requirement for member's contributions and
w. Eligibility criteria for membership
b) The sponsoring employer is likely to be responsible for:

I i Ensuring payment of employer and employee contributions

i . Providing up-to-date data

! iii. Notifying the scheme of changes to membership, e.g. new employees,

employees leaving the scheme, employees retiring.

c) Defined benefit occupational pension schemes generate guaranteed benefits

based typically on final pensionable salary and years of service since joining
1' the scheme.

d) Under defined benefit pension schemes, the rate of benefit accrual is such
that benefits fall within maximum emerging benefits.

e) Defined contribution occupational pension schemes generate non-

guaranteed benefits based on the fund value at retirement, subject to
maximum emerging benefits.

f) A hybrid scheme offers both defined benefit and defined contribution

sections or benefits that are the greater of two amounts.

g) One of the defining characteristics of occupational pensions is that they are

"tested" on their emerging benefits rather than on contribution levels. The
Inland Revenue imposes limits on the size of the pension, the tax-free lump
sum and death benefits, known as maximum emerging benefits.

h) The calculation of final salary can be based on emoluments earned in years

prior to retirement and inflated by the retail price index to the year of
retirement. This is known as dynamising.

i) An employer's contribution of at least 10 per cent of total contributions is a

mandatory requirement of an exempt approved occupational pension
scheme, except where the scheme is over-funded.

j) A member's personal contribution is not a mandatory requirement of an

exempt approved occupational pension scheme. In practice, however, a
personal contribution to the main scheme is usually a condition of
membership.
IC-13 GROUP INSURANCE AND R£TIREMENT BENEEflTS 243

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CHAPTER 7
_ _SUMMARy

k) An AVC arrangement allows a member to make additional personal

contributions up to 15 per cent of pensionable remuneration minus personal
contributions routinely paid to the main scheme.

l) There are three kinds of AVC arrangements: Added years, "Scheme" or "in -
house" AVCs and Free-standing AVCs

m) In India the Occupational Pension Schemes available for the organised

workforce are Provident Fund, Gratuity and Superannuation.

n) The Liability under Various Retirement Benefits are incremental in nature.

The liability will goes on increasing with each year of service put in by
member.

o) Under Superannuation scheme Pay as you go method refers to charging

pension current year liability to current year revenue.

p) An Approved Superannuation Fund refers to the Superannuation Fund

created in tune with provisions of Part B of the Fourth Schedule under
Income Tax Act 1961 and recognized by the Commissioner of Income Tax.

q) Defined Benefits Scheme also called Benefits Purchase scheme necessitates

continuous infusion of funds in an inflationary economy.

r) An Insured scheme relieves both employer and trustees from the various
administrative jobs relating to management of funds including complying
with guidelines of CBDT on investment of funds.

s) An approved Superannuation Funds shall go back to IT authorities for any

modification either in rules of the scheme or changes in conditions.

t) Normal Pension refers to the type of option adopted by the employer which
will be offered to member by default.

u) Commutation of pension to the extent of 1I 3'd is allowed wherein the

member is eligible for Gratuity. The same will be ~ in case member is not
eligible for gratuity.

v) Each types of pension option are designed to meet specified needs.

w) Various methods of costing Superannuation Scheme are in vogue. Each has

its own advantages,

x) Cash Accumulation System refers to pooling of contributions. Investment will

be done taking the entire fund as one single entity. It is very easy to
understand and manage the liability.

• • 4 - . ·- •• · - · - - •• • - - • , · - - · - - • • ..... •-r D r:' ~t CC C ITC:

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 CHAPTER 8
VALUATION OF LIABILITIES

[ Chapter Introduction J
The valuation of liabilities for defined benefit plans involves estimating the
amount and timing of future benefit payments and then discounting these to
the present time. It is not necessary to hold enough assets to cover the full
expectation of future benefit payments (i.e. benefits relating to both past and
future service) to all current members. Alternatively, a common approach is to
pay regular contributions that are expected to accumulate to cover the benefit
payments by the time they begin to be paid.

The valuation models may be used in an attempt to produce a generally stable

contribution or a contribution that varies to meet other funding objectives.

The criteria that may be used to assess a funding strategy are

a) Security,
b) Stability,
c) Durability,
d) Realism,
e) Liquidity,
f) Opportunity cost and
g) Flexibility

The contribUition rates for a group Defined Contribution scheme may be set up
by targeting a particular level of benefits, for example 1/80th of final salary for
each year of service.
This chapter contains details about valuation models in setting up contributions
for defined benefit (regular contribution funding methods) and defined
contribution plans.

ILearntng Outcomes Jl
A. Funding Methods
B. Assessing Defined Contribution Schemes

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 -. 1
CHAPTER 8 FUNDING METHODS
------

I A. Funding Methods

This module contains details about the funding methods and criteria to be used
to compare the funding methods.

Only the timing of meeting the cost, not the fundamental long-term amount, is
normally determined by the funding methods. In other words, funding methods
are essentially about when you pay, not what you pay.

1. Cost of a benefit plan

The cost of a benefit plan depends on:

a) The level of benefits granted. Example - pension increases

b) The actual financial experience of the scheme. Example - return on any
scheme assets
c) The actual scheme membership. Example - number of early retirements
or mortality rates.

2. Methods used to set the contributions for defined benefit pension

schemes

The following methods are commonly used to set the contributions for defined
benefit pension schemes that are funded in advance by regular contributions:

a) Prospective methods, which target a stable contribution rate, include

i. Attained Age method (AAM)

ii. Entry Age method (EAM)

b) Accrued benefits methods, which fund for a target level of cover of

benefits accrued to date, in other words target the Actuarial Liability
(Al), include

i. Projected Unit method (PUM)

ii. Current Unit method (CUM)

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FUNDING METHODS CHAPTER 8

Diagram 1: Methods used to set the contributions for defined benefit pension
schemes

Methods used to set the

contributions for cleffned
benefft penston schemes
I
I I

Prospective Accrued Beneffts

Methods Methods

Attained Age Entry Age Projected

Method Method Unit Method

3. Essential Valuation Assumption

The essential valuation assumptions include:

a) the discount rate

b) the rate at which earnings grow
c) the rate at which pensions increase in payment
d) the rate at which leaving service benefits are revalued
e) the age at which members retire from the scheme
f) the age at which members enter the scheme (entry age); and
g) the rate at which new members enter the scheme (new entrant rate)

4. Prospectiv,e Methods

For both of these methods the Actuarial Liability is the difference between the
discounted value of the total expected benefits for the members and the
discounted value of the future expected contributions.

a) Attained Age Method

i. The Standard Contribution Rate (SCR) is determined as the contribution

rate which, if paid over the expected future membership of the active
members, would provide for the expected benefits payable in respect of
them arising from their future service.

it. The Attained Age Standard Contribution Rate (AASCR), expressed as a

percentage of earnings, is: the present value of all benefits that will
accrue to present members after the valuation date, by reference to
service after that date and projected final earnings I the present value
of total projected earnings for all members throughout their expected
future membership.

IC-8l GROUP INSURANCE AND RETIREMENT BENEEFITS 251

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CHAPTER 8 FUNDING METHODS

iii. The Attained Age Actuarial Ltabflity (AAAL) is: the present value of
total benefits based on projected final earnings for members in service
minus the value of the SCR multiplied by the present value of total
projected earnings for all members throughout their expected future
l
membership.

The AAAL can also be expressed as: the present value of all benefits
accrued at the valuation date, based on projected final earnings for \
members in service.

iv. The Modified Contribution Rate (MCR) can be defined as :MCR = SCR +
variation arising from the fund not being equal to the AL (effectively the
spreading of any past service surplus or deficiency).

v. If there is a surplus, the second term will be negative.

b) Entry Age Method

i . The Standard Contribution Rate is determined as the contribution rate

which, if payable over the expected future membership of a group of
new entrants, would provide for the total expected benefits payable in
respect of that group. This includes any past service accrued at the time
when the calculations are performed.

The calculation of this method is similar to the Attained Age method but
is performed at the beginning of that member's service period.

Taking the example of a final salary pension scheme:

ii. The Entry Age Standard Contribution Rate (EASCR), expressed as a

percentage of earnings, is: the present value of all future benefits for a
member joining at the assumed entry age, by reference to projected
final earnings/ the present value of total projected earnings for the
member throughout his/her expected membership

iii. The Entry Age Actuarial Liabiltty (EAAL) ts: the present value of total
benefits, based on projected final earnings for members in service minus
the SCR multiplied by the present value of total projected earnings for
all members throughout their expected future membership

The above definition is same as that of Attained Age Method. However,

it will not give the same answer in most cases because the SCR will be
different.

iv. In the following cases the AAM and EAM will have the same SCR and
AL:

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 -FUNDING
- - - -· · METHODS
-- --- - . . . .. . CHAPTER 8

r ./ If all the scheme' s members are all exactly the same age as the
assumed entry age, provided the assumptions used in the calculations
are the same .

./ If the average age of a scheme's members is equal to the assumed

entry age, but the AASCR is a weighted average so they are unlikely
to be exactly the same.

Normally, the average age of scheme members is expected to exceed

the assumed entry age, hence the AASCR to be higher than the EASCR for
any given scheme.

5. Accrued Benefits Methods

In these methods the Actuarial liability for active members is based on

pensionable service accrued up to the valuation date or to the end of the
Control Period, as appropriate.

The prospective methods are driven by the contribution rate and the accrued
methods are driven by the funds.

Accrued benefits methods target a certain level of funding at all times, i.e. they
aim to keep the assets at least equal to a certain percentage (usually 100%) of
the value of the liabilities under the method, i.e. the actuarial liability.

a) Projected Unit Method

i. The Actuarial Liability is the discounted value of the benefits that have
accrued over the past period of membership of the beneficiaries. In
determining this value allowance is made for any future expected
inflationary growth of the on-going benefits up to retirement age.

ii. The Projected Unit Actuarial Liability (PUAL) is the present value of all
benefits accrued at the valuation date, based on projected final earnings
for members in service.

iii. The Projected Unit Standard Contribution Rate (PUSCR) is usually

based on a one year time period.

iv. The PUSCR, expressed as a percentage of earnings, is then: the present

value of all benefits that will accrue in the year following the valuation
date, by reference to service in that year and projected final earnings I
the present value of all members' earnings in tlhat year.

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 CHAPTER 8
FUNDING METHOOS

\
b) Current Unit Method

The target level of funding is determined in a similar manner as for above

method. But no allowance is made for any inflationary growth that Will
apply to the benefits between the date at which the target fund should be
held and the date payment starts. I
I
i. The Current Unit Actuarial Liability (CUAL) is: the present value of all
benefits accrued at the valuation date, based on current earnings for
members in service.

ii. The Current Unit Standard Contribution Rate (CUSCR) is derived, in a

similar way to the Projected Unit method, by comparing the AL at the
valuation date with the AL one year (or a control period) later and
thereby determining the amount that needs to be paid over that year (or
period).

The CUSCR, expfessed as a percentage of earnings, is: the present value

of all benefits that will accrue in the year following the valuation date,
by reference to service in that year and projected earnings at the end of
that year

Plus

the present value of all benefits accrued at the valuation date in respect
of members in service, multiplied by the projected percentage increase
in earnings over the next year

All divided by

the present value of all members' earnings in that year

As described in chapter 20 also control period is the period over which

the Standard Contribution Rate has been calculated to remain constant,
assuming that the Funding Ratio at the beginning and end of the period
is 100 per cent.

iii. The Funding Ratio is the ratio of the Actuarial Value of Assets to the
Actuarial Liability.

Note:

a) For all except the Entry Age method, the SCR increases with age. The
EASCR remains constant because it is only dependent on the assumed
entry age, i.e. it is only calculated once.

b) The AASCR will equal the PUSCR one year before retirement age

. . ....
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 FUNDING METHODS CHAPTER 8

c) The behaviour of a Standard Contribution Rate when applied to a scheme

will depend on the profile of the membership.

[Example

The PUSCR will remain stable from year to year if the membership profile is
stable in terms of its age, sex and salary distribution.

This is because the PUSCR for a scheme is not just an average of the individual
SCRs, but is also weighted by salary.

d) A large ongoing open scheme in a mature position is likely to have a

broadly stable age/ sex/ salary structure, hence the Projected Unit
method is a suitable one to use for funding such schemes.

6. Conditions that a scheme must satisfy for stability of the Standard

Contribution Rates

The conditions that a scheme must satisfy for stability of the Standard
Contribution Rates of different methods are as follows:

a) CUM: Stable age, sex and salary profile, plus stable past service. The
past service requirement is due to a need for the revaluation part of the
SCR to be stable as well as the accrual part.

b) AAM: Stable age, sex and salary profile.

c) EAM: Entry age assumptions unchanged.

7. Conditions for the Modified Contribution Rate (MCR) = Standard

Contribution Rate (SCR)

For each of the EAM, PUM and CUM, the MCR will be equal to the SCR if:

a) Experience follows the assumptions inherent in the method (for example

stable age I sex/ salary structure), and

b) Experience follows the parameter values used in the calculations, and

c) The SCR is paid throughout.

d) For AAM, additional condition is on the calculation of the contribution

rate i.e. the contribution rate must be calculated only once for SCR =
MCR.

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 ... ~ ~ ·---~.,.
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CHAPTER 8 FUNDING METHOOS

8. Model Chotce

The funding method can be chosen by assessing the following basis:

a) Security

I Deflnttion
The security of a funding method is defined as the ability of a funding method
to ensure that there will be sufficient assets t o meet a scheme's liabilities.

The method that produces the largest target fund (i.e. Actuarial liability)
will provide the greatest security (all other things being equal and assuming
that the money is actually put into the fund) .

b) Stabtlity

The modified contribution rate (MCR) can only be totally stable if there are
no fluctuations in the experience affecting the benefits or investments. This
is unrealistic and instability will in practice result from deviations between
actual experience and the assumptions that are implicit in the funding
method as well as those made in setting the parameter values.

c) Realism

If the underlying assumptions are unlikely to be met in practice then clearty

the method is not realistic.

All the methods are unrealistic to a greater or lesser extent because some of
the implicit assumptions are not borne out in practice except where the
approach used for setting assumptions deliberately counteracts market
movements.

d) Flexibtltty
In order to make the best use of its finances an employer will often want the
flexibility. In the long term it may also be of benefit to scheme members.

This flexibility is best achieved by using a method that targets a good level
of security while not running a large risk of breaching any statutory
maximum level.

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 ... .... ''-'' u

[rest Yourself 1
Which of the following method used to set the contributions for defined benefit
pension schemes targets a stable contribution rate?

1. Current unit method

11. Projected unit method
111. Entry age method
IV. All of the above

IB. Assessing Defined Contributions Schemes

1. Assumptions

The best estimate assumptions should be used to set contributions levels for a
defined contribution scheme. It is generally inappropriate to include margins
within assumptions since such margins can lead to a higher or lower pension
than the sponsor wishes to provide.

The benefit provided to the employee in the Defined Contribution scheme is not
known in advance and it will depend on

a) the contributions that are paid,

b) the investment returns on the funds in the period before retirement and
c) the cost of buying a pension at retirement

2. Contributions to a group scheme

The contribution rates for a gruup Defined Contribution scheme may be set up
by targeting a particular level of benefits.

IExample
1/ 80th of final salary for each year of service.

a) The initial contribution rates will then be calculated as for a group

defined benefit scheme using the individual entry age method possibly at
a range of different ages.

b) The assumptions like salary growth, marital status will be used to

determine these contribution rates. It is assumed that all members will
remain in the scheme until the normal retirement age since the
contribution rate must be sufficient so that with investment returns they
Will provide the target pension in full at retirement.

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 •w
CHAPTER 8
ASSESSING DEFINED CONTRIBUTIONS SCHEMES

c) All pre-retirement demographic assumptions is excluded from the basis

including mortality before retirement as lump sums and spouses'
benefits on death in service are usually covered by insurance.

d) Contribution rates can be structured in many ways. The contribution

rates may be a fixed rate for all members or may be age or service
related , with higher rates payable for older I longer serving members in
order to reflect the increasing cost of benefit accrual with age and
service.

e) It is important that assumptions used initially in calculating the

contributions are not too prudent as it can be difficult for the sponsor
to reduce the future level of contributions without upsetting the
workforce.

f) The sponsor can agree to pay a multiple of the contributions made by

the member. This is also a one of the method of determining the
contributions. There is normally a maximum limit on the member's
contributions that may be taken into account in determining the
sponsor's contribution.

g) The advantages of this method are as follows:

i. Encourage members to save more for their retirement

ii. Favours those who are able to make significant contributions

h) The disadvantages of this method are as follows:

i. Some employees (example - low earners) will be unable to make

significant contributions.
ii. Increased administration.

3. Contributions to an individual arrangement

Here an individual is setting up benefit provision for themselves and acts as

both the sponsor and the recipient.

The expected salary growth, actual marital status ~nd age o! spouse, r~uired
retirement date etc. of the individual can be cons1dered while calculatmg the
contribution rate to target a particular level of benefit for an individual
arrangement.

Contributions are limited to what can be afforded. The contribution rates will
need to be reviewed from time to time in light of the actual experience of the
member's fund if a particular benefit is being targeted.

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<4. Benefit Projections

Generally on annual basis the benefit projections wllt be provided for members
The projections help the members in deciding whether there is any need t~
increase their contributions. These are also used by the sponsor to determine
whether a review of the contribution design is needed.

The projections should allow

a) for inflation,
b) for any expenses that will be charged to the member's arrangement,
c) for future pension increases if appropriate and
d) for any statutory restrictions on benefit and / or contribution levels.

While projecting the benefits it is normally assumed that the member continues
to contribute to the arrangement up until their normal retirement age.

5. Insured Benefits

a) Death Benefits

If the member dies before retirement and the benefits are not insured, the
accumulated fund may be very small and insufficient to provide an
appropriate benefit for a dependant. Therefore, many sponsors choose to
insure a lump sum and possibly a dependant's pension so that a benefit is
payable in these circumstances.

The accumulated fund may be very small if:

i. the member has a short period of service and I or is young

ii. the contribution rates to the scheme are low
iii. investment returns have been poor

The insurance could be used to top up the accumulated fund to a particular

level or could be independent of the amount of the accumulated fund.

b) Ill-health beneftts

If a member retires on ill-health grounds before retirement, the insurance

could be used to

i. top up the accumulated fund which is then used to provide cash and
purchase an annuity, or

ii. provide an income of a percentage of the member's salary until

retirement or the member's health recovers. The member would then be
treated as remaining in service and pension contributions would continue
to be paid as if the member was still in employment.
ar -• , '""-· ·- .. ·- . 259

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 c) Benefits on retirement

t. Annuity purchase

The key assumptions while estimating what annuity might be purchased

from the fund in any projections are:

./ the (post-retirement) investment return the insurance company would

use
./ the rat,e of any pension increases (especially if these are linked to an
inflation index)
./ the mortality rate assumption
./ the insurance company's expense and profit margins

In setting annuity rates at the time the member retires mortality after
retirement should reflect assumptions likely to be used by insurance
companies. Some allowance will be needed to cover mortality improvements
both before and after retirement.

it. Direct provision from the fund

The sponsor of the scheme will take on the investment and mortality risks of
paying the annuities where the schemes pay pension direct to the member
from the scheme. The benefit at retirement switches to defined benefit
with all the associated risks and additional regulatory restrictions.

Annuity conversion rates will need to be set and the following assumptions
will be needed if pensions are paid from the scheme:

./ Future investment return that will be earned on funds,

./ Mortality of members and their dependants,
./ Future improvements in the mortality of members and their dependants,
./ Expenses of paying benefits,
./ Rate of pension increase

6. Investment

In defined contribution schemes the member takes on the investment risks and
can usually control the way in which their funds are invested. This investment
choice may be attractive to the members and the sponsor is less responsible if
the member's fund is low due to investments failing to meet expectations, since
the member choose the investment funds.

However, the investment choice has disadvantages also as some members may
feel that they do not have the knowledge to make a choice, members may make
inappropriate decisions, the scheme will need to offer a range of investment
options which will have an impact on cost.

260 IC·83 GROUP INSURANCE AND RETIREMENT BENEEFITS

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- ASSESSING DE FINED CONTRIBUTIONS SCHEMES CHAPTER 8

The sponsor may limit the choice of funds in which the member can invest for
group schemes as offering a full range of funds confuses members.

At the minimum, usually the sponsor offers an equity fund, a bond fund and a
cash fund. It is likely that the member will need the financial advice.

The sponsor will usually seek advice in the choice of investment manager who
will invest the members' retirement funds.

7. Income drawdown

Under 'Income drawdown' arrangement the fund remains invested, instead of

buying an annuity, and the member withdraws an amount of the fund each year.
This may be j ust the income earned on the fund or may also include some of the
fund capital.

There may be legislative restrictions on the amount of the fund that can be
withdrawn each year and age at which drawdown must cease and a pension
must be purchased.

The risks associated with 'income drawdown' for the member are as follows:

a) If only the income earned on the fund is taken each year, the member's
income could be volatile

b) If a fixed income is taken the capital could potentially reduce to zero

before the member dies leaving the member dependent on the state at
the end of his or her life

c) The costs of administering the arrangement may be high

d) The remaining fund on the member's death may be insufficient to

provide adequate benefits for a dependant

8. Guarantees

The Guarantees offered to the members of group defined contribution scheme

by the sponsors fall into the following two categories:

a) Investment returns, for example, the members' accounts will earn at

least 4% investment return per annum.

b) Benefits, for example, that benefits witt not be less than for example
1/80th of final salary for each year of service.

Generally the guarantees protect the members from extreme adverse

experience and so are not expected to apply very often.

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 CHAPTER 8 ASSE_SSING DEFI~E O CONTRIBUTIONS SCHEMES

The more generous the guarantee the more likely it is to apply and so the more
likely the sponsor will face the additional cost of meet ing the guarantee.

9. Investment return guarantees

Investment return guarantees can be

a) Real,
b) Nominal,
c) Fixed and
d) Indexed

The longer the period used the lower the impact of the guarantee as returns
averaged over a longer period are less likely to fall bellow a guaranteed level.

10. Benefits

Minimum benefit guarantees usually relate to the amount of pension on

retirement, for example, the minimum of 1/100th or 1/70th of the member's
salary at retirement for each year of service.

If the scheme offers a minimum benefit there is a risk that either members will
choose a more risky investment strategy than they otherwise might have, since
they know they have a minimum benefit promise or members will choose a very
safe investment strategy with relatively low expected returns.

11. Costing guarantees

A separate fund may be set up to meet the cost of any guarantee or these can
be met as and when they arise. The sponsor needs to weigh up the
disadvantages, example- opportunity cost, versus the advantages, example-
reduced liquidity risk, associated with setting up a separate fund compared with
financing on a PAYG basis.

ITest Yourself 2
Investment return guarantees can be

1. Real and Nominal

11. Fixed and Indexed
111. Real, Nominal and Fixed
IV. Real, Nominal, Fixed and Indexed

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 CHAPTER 8

[ summary
a) The cost of a benefit plan depends on:

i. The level of benefits granted

ii. The actual financial experience of the scheme
iii. The actual scheme membership

b) Prospective Methods and Accrued benefit methods are commonty used to set
the contributions for defined benefit pension schemes that are funded in
advance by regular contributions.

c) Prospective methods target a stable contribution rate and includes

i. Attained Age method (AAM)

ii. Entry Age method (EAM)

d) Accrued benefits methods, which fund for a target level of cover of benefits
accrued to date, in other words target the Actuarial Liability (Al), includes

i. Projected Unit method (PUM)

ii. Current Unit method (CUM)

e) For Prospective methods the Actuarial Liability is the difference between

the discounted value of the total expected benefits for the members and
the discounted value of the future expected contributions.

f) In Accrued benefit methods the Actuarial Liability for active members is

based on pensionable service accrued up to the valuation date or to the end
of the Control Period, as appropriate.

g) The prospective methods are driven by the contribution rate and the
accrued methods are driven by the funds.

h) The funding method can be chosen by assessing the following basis:

i. Security
ii. Stability
iii. Realism
iv. Flexibility

i) The benefit provided to the employee in the Defined Contribution scheme is

not known in advance and it will depend on

i. the contributions that are paid,

ii. the investment returns on the funds in the period before retirement and
Ui. the cost of buying a pension at retirement.

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CHAPTER 8 SUMMARY

j) The contribution rates for a Group Defined Contribution scheme may be set
up by targeting a particular level of benefits. For example 1/ 80th of final
salary for each year of service.

k) If the member dies before retirement and the benefits are not insured, the
accumulated fund may be very small and insufficient to provide an •
appropriate benefit for a dependant

l) If a member retires on ill-health grounds before retirement, the insurance

could be used to

i. top up the accumulated fund which is then used to provide cash and
purchase an annuity, or
ii. provide an income of a percentage of the member's salary until
retirement or the member's health recovers

m) The key assumptions while estimating what annuity might be purchased from •.
the fund in any projections are:

i. the (post-retirement) investment return the insurance company would

use
ii. the rate of any pension increases
iii. the mortality rate assumption
iv. the insurance company's expense and profit margins.

n) In defined contribution schemes the member takes on the investment risks

and can usually control the way in which their funds are invested.
t
o) Under 'Income drawdown' arrangement the fund remains invested, instead
of buying an annuity, and the member withdraws an amount of the fund
each year.

p) The Guarantees offered to the members of group defined contribution

scheme by the sponsors fall into the following two categories:

i. Investment returns and

1i. Benefits
q) Investment return guarantees can be
i. Real,
ii. Nominal~
iii. Fixed and
iv. Indexed
r) Minimum benefit guarantees usually relate to the amount of pension on
retirement, for example, the minimum of 1/100th or 1/70th of the
member's salary at retirement for each year of service.

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 CHAPTER 9
GROUP INSURANCE - ADMINISTRATION, CLAIMS AND
RENEWALS

[ Chapter Introduction

Group Insurance is a separate vertical with several unique features. Hence

normally Gmup business in a life insurance Company is administered by setting
up Group Insurance and Pension Department (Group Department) within
organization.

• A brief discussion about the group insurance is already noted in the chapter
introduction. The special feature of this vertical, approach to segment etc is
dealt with therein. To precede further in this chapter few more aspects will be
touched.

The life cycle of Group Scheme involves various stages such as Proposal,
Negotiation, policy, renewals, review and claims. Group Policy will be granted
to Institution/ entity unlike individual insurance where in policy holder will be
an individual by default. The organization is treated as running entity/ going
concern and visualized to exit for an indefinite period. Hence the renewal of
cover is a part of servicing process. Each renewal is handled on par with fresh
contract and terms and conditions of contract are negotiated. Normally renewal
ends up with issuance of an Endorsement instead of fresh policy bond . This will
also add to low administrative cost.

The jobs in Group Department start from group sales personnel:

a) Negotiating group business scheme with organisation,

b) Concluding the contract and finalising the terms and conditions of the
master policy,

c) Collection of the data in the desired format and building the record,

d) Collecting the contribution/premium,

e) Keeping record of remittances, investment income, payouts, individual

member or scheme level fund value calculations and

f) Issuing statements, providing valuation data for reserving, generating

and providing various MIS.

IC·Il GROUP INSURANCE AND RETIRf.M[NT 8£NEEFITS 267

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 CHAPTER 9 CHAPTER INTRODUCTION

Generally group insurance is offered under One Year Renewable Group term
assurance plan (OYRGTA). Every year on Annual Renewal date insurance
companies charges the premium depending upon the changes in size, claims
experience and age distribution of the age group.

I Learntn1 Outcomes
A. Administration
B. Group Conversion
C. Group Renewals

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 AUM_!NI) I t\AffV f" .. - - - - -

j A. Administration
1. Administration
The ambit of administration of scheme (Group Master Policy Bond) is very Wide.
Every servicing job Will form part of this process. However in general there Will
be various stages in group insurance contract. Brief descriptions of common jobs
are mentioned herein. The claims and Renewal are part of these administrative
jobs. Still specific mention is made considering their importance over other
jobs.
Claims refer to discharging the commitment/ agreement made by the insurer to
the policy holder. Different types of claims are conceived. Common items are
dealt in broad manner in subsequent paragraphs.

In general the Group Insurance contracts are of OYIRGTA type viz. One Year
Renewable Group Term Assurance. Rather contracts come up for renewal on
each year. The Renewal process does exit even where there is no risk aspects
are there under contract. The process connected to renewal is discussed in the
subsequent paragraphs.
2. Negotiation

The process starts With negotiation With group administrator. Here the
eligibility of the group for Insurance Cover under Group Insurance is analyzed.

Insurance only for the Homogeneous Groups - There should be some common
attribute among the constituent members of the groups. This homogeneity is to
eliminate the underwriting risk - Selection against insurer.

Group Representative will study on the issues such as:

i. The objective/purpose of Grouping to understand that group is not

formed with sole purpose of obtaining Insurance.
ii. The flow of new entrants to group - There should be steady flow.
iii. Quantum and type of cover desired- On Grades/Uniform basis.
iv. Age distribution.
v. Membership base
vi. Who pays the premium, in case contributory what is administrator share.
vii. The product type

Above aspects are studied in depth to get into negotiation.

i. Homogeneity and the objective of the groupiing is the primary test to

proceed.
ii. The steady flow of new entrant helps to keep the average age of the
group constant over year. This is favourable factor. In case the avera~e
age of the group varies constantly the premium varies frequently. Th1s
will distance the attraction.

IC-113 GROUP INSURANCE AND RITIREMENT BENEEFITS 269

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 CHAPTER 9 ADMINISTRATIOH

iii. Quantum of Cover and distribution of desired cover matrix, if cover is on

graded basis, will through light on relation between the economic needs
and desired. The coverage should commensurate with the economic
needs.
iv. Age distribution is pivotal to decide whether to offer graded cover or
uniform cover. If graded what should the grades, if uniform what should
be the depth, What should be the Free Insurance Cover limit - i.e. the
cover offered without any medical requirement etc all these aspects is
based on the age distribution.
v. The size of the group witt be highly important piece of information. The
shar,e of the eligible segment that joins cover to the total group etc. ,
drive on premium quote.
vi. Who pays the premium helps to address the selection against insurer.
vii. The product type viz. Term Assurance, to address statutory needs such
as EDLI, Gratuity, etc. , Pension, Leave Encashment, Pension, Push
Savings etc are equally important information to shape the negotiation.

Once the prospect for Group Insurance (GI) is zeroed in, Group Administrator
witt be engaged in Negotiation to understand their needs and requirements.
Information about the various aspect enumerated herein above witt help
negotiator in shaping the talks. On reaching conclusi on about the requirement,
the Data of members needed for the type of scheme is desired from the
Institution.

Some data required normally for all types of Group Insurance Scheme are as
noted herein.

i. Employee unique identification number

ii. Name
iii. Gender
iv. Date of Birth/ Age
v. Designation
vi. Sum Assured proposed
vii. Monthly Basic Salary
viii. Annual CTC
ix. Date of Joining (DD/MM/YYYY)
x. Nominee Name
xi. Relationship with the member
xii. Age/OOB of the Nominee
xiii. Appointee Name in case of Minor

Apart from the above some additional information depending on the types of
scheme proposed will be ascertained viz. In case of gratuity - method of
calculation of gratuity, In case of Gl for leave encashment - the scheme of
benefit, etc., types specific information may also desired.

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 CHAPTER 9

3. Documentation

Once the concl_usion is arrived on various aspects, document required to finalize

the contract ts taken up. Proposal, Rules of the Scheme adopted by th
administrat~r, Benefi_ts schedule, and other documents specific to type ~ 0
products ~tll_be obtamed. In cas~ ~he group Administrator is a Trust than copy
of the_ P~nctpal Deed and vanatton deed if any is desired. The copy of
authonzatton granted by the group administrator to their officials to deal with
Insurer on various aspects is a necessity.

U~der individual ins_uranc~ contract , invariably a middleman - Insurance Agent

wtll be there. He gtves hts assessment of the prospect which forms the basis.
Rather keeping the role played by the Agent in assessment, Agents are called
First line Underwriter. In Group Insurance Contract agents is not a must . But
the person who introduces the group will normally give a report recording his
assessment. Such report by the introducer is called 'Group Representative
Report' (GRR). This GRR will forms a basis for risk appraisal.

4. Conclusion of Contract

On the receipt of GRR, Proposal and accompanied supporting Documents, Data

of Members the administrative wing will take up on underwriting the risk. The
tabular rate approved by the regulator under File & Use process is adopted.
Group Underwriting is done and premium is quoted on mode opted by proposer.

Group Underwriting is a very special subject. The following aspects are kept in
mind in the process .

Age band is within allowable limit as per the product design.

Type of Group, Type of Product, Occupation of Group, Geographical Spread of
Insured group (proposed).Mode of payment of premium, Mortality, Attrition rate
(rate at which members leaving the group), Salary Escalation (in case cover is
aligned with salary), Discount rate, Reinsurance needs etc. ,are the primary
deciding factors which goes into premium quote.

The premium quote will be given to the prospect. Generally pre~ium q~te
may be given either on Age band basis Unit premium or on Group Umt Premtum.
This will be arrived using Weighted Average Equal lent Premium Age method.
This quote will also speak about the consideration to be charged in res~t of
On and Off moment i.e. premium for New member joining th~ group of ~nsured
after the commencement of risk and refunds to be made m respect msured
member who is leaving the group before the expiry of the term. Normally the
premium quote will be provided mentioning the validity period for the prospect
to respond.

On receipt of consideration contract will be concluded by issuing First Premium

Receipt as token of acceptance of offer proposed .

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 CHAPTER 9
,..
ADMINISTRATION

5. Master Policy

O~ce th.is cycle ~f Off~r (Pro~sal) and Acceptance is over, Group Master Policy
wtll be Issued ev1dencmg the msurance contract. This one policy is to cover the
entire group of insured. The stamping is done taking into cognizance the benefit
offered but not only the sum assured. Along with the policy bond list of insured
member will be provided.

like individual policy bond group policy also has feature like Cooling Off period
Ombudsman Details etc. '

In General upon the renewal of cover, an endorsement will only be issued.

Normally there will be two endorsements on Renewal viz.

i. Renewal Endorsement covering Terms and Conditions including the

Benefits available upon renewal.
ii. Stamping Endorsement covering net incremental benefit available upon
Renewal.

Along with the Master policy bond, the group administrator will be issued the
list of member insured. Such list contains details unique insured number,
identification number given by the Group Administrator, Name of the insured,
the insured amount etc.

Individual Insured Certificates will also be issued to Group Administrator in case

the group is not an employer-employee group. This is to pass on the same to the
insured beneficiary.

6. Commission

On completion of contract, consideration to the insurance middle men will be

payable (Agency commission/Brokerage/Referral Fee etc.).

As a part of administrative process, in case the contract is through insurance

middle man, the eligible amount as per the provision in the product features
(file and use) will be settled.

7. Reinsurance

Administrativ,e jobs involve taking care of Reinsurance also in case the contract
of insurance necessitates reinsurance as per the administrative provisions of the
insurer.

This will be done as per contract with the reinsurer and the internal
administrative procedures of the insurer. At the time of negotiation of. sale
itself the aspect of Reinsurance will be dealt with. In case the quote IS on
facultative basis the sales process will get a shape only on clearance from the
reinsurer. Facult~tive method refers to assessing the risk on individual life basis.

272 IC-83 GROUP INSURANCE AND RfTIREMENT BENEEFITS

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 CHAPTER 9

This will be done for the cover beyond the Free Cover Limit offered under the
group.

Upon completion of the contract, wherever necessary, reinsurance is will be

done. Normally this will be done at Corporate level. The subordinate office will
pass on the details of insured with the designated office for reinsurance
arrangement.

Insurance Cover beyond Free Cover Limit shall be on receipt of Health

requirements. Normally only medical underwriting will only be done in :;uch
cases. In group contract, there will not be financial underwriting of
individual/ constituent members of the group. This medical underwriting will
also be with the concurrence of reinsurer wherever the same is required as per
the reinsurance contract and is in accordance with the internal administrative
procedures of the insurer. All the connected issues will be dealt under the
separate chapter elsewhere in the text.

8. Subsequent Additions and/or Deletions:

Another important jobs under Group insurance contract is to recognize the on

and off movement to insured group. This will be done on the basis of the Terms
and Conditions of the Contract read with The Rules of the scheme adopted by
the Group Administrator and taken cognizance by Insurer.

The Group Administrator will provide the details of New Joiner as well as
member who have left the group from the insured group.

i. The periodicity of such communications

ii. Charg~ng Consideration for the same Etc. , wiill once again as per the
terms of the agreement.
Reinsurance wherever needed will be done as per the internal
administrative procedure of the insurer concerned.

9. Claims

The Master policy bond will document the requirement for claims as well as
administrative procedure for processing the claim under normal circumstances.
Under Group Contract same policy bond covers multiple lives. Hence tendering
the Original Policy Bond for cancellation/defacing will not be there while
dealing with fulfilling claims preferred on an indiividual life. The process
generally involves intimation of claim, Preferring claim - Claim form, tendering
documents supporting the claim, giving discharge for having received the
proceeds.

Claim intimation may be given either by the master policy holder and/ or the
insured beneficiary/ legal heirs of beneficiary. Claim forms shall be from the
holder of the policy bond.

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 CHAPTER 9
- - .-........
ADMINISTRATION

The requirement normally shall cover details of the insured/covered member

~e nat~r~ of event - cl~im, The ~upporting documents wherever is necessa~
v1z. Cert1f1cate of Death m case cla1m is for Death benefit, Police Report in case
claim is for benefit under head Accident Benefit, etc. Proper discharge is
nece~sary for having received the proceeds. The word proper refers to legal
requirement such as Discharge shall be by affixing signature of the policy holder
as well as witness.

The group administrator will collect the claim form and supporting documents
wherever is needed from the beneficiary. This will be passed on to the insurer
along with his endorsement and additional requirement if there is any.

Depending on the type of group contract different types of claim will be there.
Claim by Death, Claim by Superannuation (Maturity), Claim for benefit other
than Death/Maturity such as Disability, illness, Accident etc.

Normally a simple claim form giving the details of the insured as well as the
claimant will be desired. In case of Claim for benefit other than maturity
supporting documents needs to be given (such as Certificate of Death for claim
by death, Proof of disability under claim for disability benefit, document
supporting illness under claim for illness, etc.)

The group administrator will give his endorsement conveying inter-alia the
details of insurance, the membership form and Health declaration wherever is
necessary.
The details of eligibility in case the claim is for benefit under Gratuity/Leave
Encashmentl Superannuation etc will be provided by the Group Administrator.

The insurer will process the claim received from the Group Administrator for
the benefits provided. The payment, in case the claim is admitted, will be made
to the beneficiary where the claim is for Term Assurance and Group is not of
employer-employee group. In all other cases the claim will be paid to the Group
Administrator provided the claim is admitted.

Insurer may conduct Investigation about the claim. Claims may also be
considered on ex-gratia basis.

The approach for different benefit under different types of scheme will slightly
vary. Normally provided types of benefits are as follows:

i. Death benefit.
ii. lllnes:s benefit.
iii. Hospitalizations Benefit.
iv. Disability benefit
v. Survival/Maturity benefit

Different types of scheme provide for different benefit viz. Gratuity, Leave
Encashment, Pension, Accumulations, etc.

IC-83 GROUP INSURANCE AND RETIREMENT BENEEFITS

274

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 '-" ""' ' t K 'I

The insurer on payment of claim wherever admitted will in turn pref l .

with Reinsurer wherever the benefit is reinsured. er calm

10. Duplicate Policy Bond

Request for D~plicate ~olicy Bo~d is a pa~ of ser;'icing/ administration of group

sc~em~. Duphcate. Polley Bo~d 1ssuance wlll go w1th the internal administrative
gU1dehnes of the msurer. W1th the issuance of Duplicate Policy Bond original
policy bond will lose its value. '

11. Change of Name

An administrative job for which request comes normally come across where
there is merger/ amalgamation/ takeover of entity. On receipt of necessary
supporting documents such request will be honored. Ex: In case of registered
companies, the Registrar of companies will issue an endorsement recognizing
the change in name. This will form an official document supporting the request
from concerned group Administrator for updating.

12. Change in Benefits Schedule

In general change in benefits schedule during the term of the contract will not
be entertained. However schemes influenced by the statute may necessitate
change to be incorporated during the term of the contract itself. For example.
Change in Rules under EDLI, Gratuity Act etc.

13. Experience Rating Analysis

As a part of the administration of the group insurance contract, the insurer will
undertake review of the group scheme well before the completion of the term.
The sum assured, the consideration received, the claim provided for at the time
of underwriting, the actual claim experience, etc. all these aspects are studied
in accordance with the guidelines issued by the Insurance regulator as well as
the internal administrative guidelines of the insurer. The result of this
Experience Rating Analysis will be recognized at the time of renewal of cover.

Experience Rating Adjustment will be done upon renewal of Cover only. There
will be two methods of adjustments viz. Fine tune the rate of premium based on
the experience. The other method is to pass the share in positive surplus
through appropriate reduction in Renewal Premium Quote.

1-t. Renewal

In general going be the terms and conditions Master Polic~ bond the ins~re~ is
not under contractual obligations to send notice to the pohcy holder remmdmg
about premium due/ renewal due etc. However the business prudence and
Consumer Protection Laws/ guidelines expect the insurer to do so.

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 CHAPTER 9
AOMINISTRA TION

Under Group Term Assurance, normally, each renewal will be transacted 1

addressed on par with fresh contract. Negotiation between the Group
Administrator and insurer will happen on the above lines. The experience will
be a basis ifor both the side.

Welt before the completion of the term , taking clue from experience rating
analysis, tlhe insurer will send 'Renewal Notice' to the Group Administrator. It
the general practice to call for adhoc consideration amount before formal
renewal, in order to ensure continuity in cover. The notice is to remind the
Group Administrator about the renewal due, calling for data of proposed group
for coverage, seeking adhoc remittance to ensure continuity in contract.

There will be slight changes in quote where the coverage offered is under
scheme other than Pure Term Assurance.

Once the agreement is reached between the parties on terms of renewal

adjustment and appropriation of consideration for renewal will be done.

Upon renewal of cover and endorsement to that effect will be issued. This will
become the part and parcel of the original master policy.

This will be accompanied with:

i. The Policy Stamping Endorsement upon renewal. In general fresh policy

bond will not be issued under Group Contract upon renewal of cover.
ii. The list of insured with necessary details.
iii. The Certificate of Insurance wherever is necessary
(Certificate of insurance is necessary in case the contract is of Pure
Term Assurance and Group is not employer-employee group).

The renewal of cover will be followed by payment of commission to insurance

middlemen. This will be done provided the product feature allows and is in tune
with the internal administrative guidelines of the insurer.

15. Cancellatfon/Merger/Transfer of Policy

All the above aspects are part of administrative process of group insurance
contract. However approach to the same is quite different from the one
followed under individual contract.

Group Master Policy can come up for cancellation during cooling of! period.
cancellation of contract will also be encountered under certam other
circumstance. This will be done as per the provisions of the contract.

Group Is considered as a continuous entity. Hence merger a~d. transfer is

conceived and provided. These transactions will happen at benef1c1ary level as
well as group administer level.

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The approach to this administrative aspect will depend on which level the
request is and also on prevailing laws which has an influence to the subject.

Individual insured beneficiary may opt for transfer on accrued equitable interest
from one policy to another Or from one insurer to another. In case the Rules of
the scheme adopted by the group administrator provide for such
transfer/ merger and contract recognizes the same, the subject will be dealt
accordingly.

Merger and Transfer of policy will be little bit complicated and needs
observance of various legal and regulatory issues apart from internal
administrativ·e instruction.

In case the merger/ amalgamation / take over of companies there will be

memoranda of amalgamation (MOA), Approval of Jurisdictional High Court, filing
of transaction with jurisdictional Registrar of companies. All these documents
are vital. The MOA will spell out how the assets and liability are dealt with.
Since the group administrator is an entity there will be documentation for each
of the above event. Insurance Administrator has to take in to cognizance what is
decided in that document before taking a call on request of the group
administrator.

16. Surrender

Apart from surrender of benefits provided to the individual insured beneficiary,

surrender of policy does come under group insurance contract. Such surrender
may be Partial or Wholesale surrender of policy.

Generally Pure Term Assurance contract does not provide for any payment on
cancellation/surrender. However if contract provide refund of premium on
prorate basis for the unexpired term, the same will be considered . The guiding
principle is documented in file and use and reproduced in the Group Policy
Bond.

All other types of policy do provide value on termi nation of contract. Herein
also the policy bond envisages such event and documents the approach. The
procedural aspect will be in tune with the internal administrative instructions.
The legal requirement shall be kept in mind.

For example:
The Master policy is granted to a Trust. His creator, the employer may wind up
his operation/ close the establishment. The group administrator cum master
policyholder continues to exit.

The Registrar of Companies is the governing body to recognize and record about
amalgamation/merger/ takeover of companies. He issues necessary document
confirming the process. This is a vital document to take call at insurer end.

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 .-. ..... ., , ,., ..,. I f'\" I 1V n

In case of approved scheme approved by the Commissioner of Income Tax and

Exempted Scheme, exempted by the Regional Provident Fund Commissioner,
there concurrence is a requirement to proceed with request of the master
policy holderr.

The product features document what is payable on surrender of contract. The

Master policy bond will spell out terms and condition of the surrender. The
Group Master Policy bond shall contain an exit clause - This may figure under
different name ex: Discontinuation of premium.

Under the exit clause terms and condition about the Surrender of the contract
will be mentioned. This will be guiding lines. Normally the Surrender of contract
will have following staged viz. Notice Period; Waiting Period, Exit Charges,
Payment Schedule.
Similarly the basic requirement shall be proper request from the holder of
policy, Tendering Original Policy Bond for Cancellation/Defacing, Discharge for
having received proceeds in complete and final settlement.

17.Information Sharing

To pay the consideration for cover different mode will be offered viz. Monthly,
Quarterly, Half yearly and Yearly. In all types of cover other than Pure Term
Assurance cover, the consideration has two component viz. Term Assurance
component and Savings/Fund component.

As a part of administration there are few products specific jobs undertaken by

the insurer. Under product where managing the funds of the policy holder is
involved following periodical jobs are conceived .

At periodical interval keeping the policy holder updated about the balance
available under the Policy, rate of interest declared, interest accrual, balance
at the beginning of the period, receipts received during the period, how the
receipts are appropriated, payments made out the balance, closing balance as
at the end of the period.

The policy holder will also be advised about actuarial valuation of the liability
of the employer. The valuation of liability will be done on the basis of
information provided by the policy holder on various underling parameters such
as salary escalation rate, Attrition Rate, etc.

18.Norms

The insurance regulator comes up with guidelines on various administrative

issues periodically. The students are advised to keep themselves up dated on
these. An excerpt from one such guideline is reproduced herein.

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 ADMINI ST~TIO!'!._ _ _ .... ___ _ __
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19. 1RDA Circular No. IRDA/ACTUULIP/124(2)/10/2010 gtves instructions

relating to Group Insurance Administration.

The same has been given below:

a) The premium charged and benefits admissible to each member of the

group shall be clearly specified in the group policy and the
administrator/group manager shall not have the Uberty to vary the
premiums or benefits with regards to the individual members unless the
same is a part of the change in the policy benefits and conditions made
by the insurance company or is made in accordance with the a pre-
determined basis of determining the sum insured as the outstanding load
amount. In any case, such changes should be agreed to by the insurer.

b) Group discounts on premium are given for the benefit of the insured
members of the group and should not be appropriated as additional
remuneration by the agent or corporate agent or broker or group
organiser or manager. Such discounts should be based on valid
underwriting considerations such as the group size and shall be passed on
to the members.

I Example
Where a part or whole of the premium is paid by the group organiser, say- the
employer in respect of insurance of his employees, the discounts may be shared
by those who paid the premium in proportion to the premium by them.

c) The commission paid to agents or corporate agents in respect of a group

insurance policy shall not exceed the percentage approved by IRDA of
India or as specified in the Insurance Act, 1938 read with IRDA Act, 1999
and Regulations framed there under. Insurers will pay commission at a
predetermined and published rate and should not indulge in
determination of commission rate on a case to case basis.

d) There shall be no payment whether as management expenses or

documentation expenses or profits commission or bulk discount or
payment of any other description, to the agent or corporate agent or
aroup organiser or aroup manager. The group manager should be
specifically prohibited from collecting by way of premium from the
members of a group, any amount higher for such insurance. The group
master policyholder is specifically prohibited to collect any other f~ as
administration or otherwise from the members other than the premtum
amount.

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CHAPTER 9 ADMI NISTRATION

e) There shall be attached to each group insurance, a complete ltst of

the person_insured there under. Where this is not feasible, in view of
the large s1ze of the group, a clear reference shall be made to a list
maintained in the books of the group organiser or manager that cannot
be subsequently manipulated, as being the list of persons insured.

f) Where an employer buys a group insurance policy as a service benefit

for its employees and pays the premium in full or in part, the
employer may be treated as the policyholder with employee being
treated as the beneficiaries. In such cases, the employer with clear
reference to group policies, the claims of individual persons insured
there under may be processed though the employer.

g) In non-employer • employee cases, the individual group member would

be treated as the insured beneficiary and the group organiser will be
only the holder of the group policy. In such cases every care should be
taken by the insurer in the matter of issues of certificate of insurance to
members of the group, who are truly the insured. It is necessary that
such certificate contains information on the schedule of benefits, the
premium charged and the important terms and conditions of the
insurance contract.

The certificate shall also state the procedure to be followed to register a

claim with the insurer including the full address of the office of the
insurer where the claim should be registered. While the group organiser
or manager may play a role in facilitating the registering and settlement
of a claim, the insurer in totally responsible to ensure that the claim
payment is made in the name of the insured member even if the cheque
is sent to the group manager for administrative convenience.

h) For operational convenience, in respect of non-employer- employee

groups the insurer may provide the facility to the group organiser or
manager to issue certificate of insurance to persons insured under the
group, provided the underwriting guidelines for the acceptance or
rejection of such a risk do not require use of subjective judgment and
can be easily programmed into a computer that will review acceptance
and print the certificate of insurance.

In such cases, the certificate forms shalt be supplied by the insurer with
in-built security features and in pre-numbered lots to group organiser or
manager. Utilisation and full accounting of the certificate forms should
be independently checked by the staff of the insurer every time before
furnishing a fresh lot of forms, either by personal verification or based
by auditor of the agent.

t) Under the circumstances the insurer wtll be responsible for the

certificate of insurance by a aroup oraantser or administrator, in
certificate form provided by the insurer.

280 1C· 83 GROUP INSURANCE AND RETIREMENT 8ENEEFITS

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