Buy Right Annuity, Retire Rich

Annuity plans available to help you choose the right option that fits your needs best and ensures a happy retired life:

When Rahul Dravid called time on his legendary career last week, it served as a poignant reminder of the inevitability of what is a dreaded word for many — retirement. Indeed, the growing life expectancy in the country poses a challenge — of managing the risk of living long, particularly in a society that is increasingly moving away from the financially secure confines of the joint family system.

However, coming-to-terms can be relatively easy when you have planned for it meticulously during your earning years. In fact, a well-charted retirement process can even act as a springboard for a brighter future, besides ensuring peace of mind. All you need to do is to save and invest wisely to build a handy sunset-years kitty. Be it creating a corpus through equity, mutual funds and fixed deposits or buying a pension plan. In case of the latter, you will have to undertake the vital task of buying annuities, when the accumulated amount is handed over to you.

NEW PENSION REGIME IN FOCUS
Annuity-buying process gains significance particularly in light of new Irda guidelines on pension plans which have heralded several changes. Under the new regime, among other things, policyholders will not have the choice of approaching the insurer which offers the best annuity rates at the time of vesting. This has been done to reduce the burden on PSU behemoth LIC, which rules the space at present.

This makes it imperative for them to choose wisely while buying a pension plan itself, factoring in the insurer’s capabilities. “A full provider evaluation does become an important factor to be considered upfront when buying a pension plan. In addition, track record in managing the corpus, charges and fees, transaction convenience, payout history, etc, become important to evaluate,” says Vishal Kapoor, head of wealth management, Standard Chartered Bank. While rates are important, your decision cannot be based solely on the ones being offered at present. “Do note that the annuity rate at the time of buying a pension plan need not be an indicator of what you would get when you need to buy annuities in future,” cautions Sanjeev Pujari, appointed actuary, SBI Life. So far, nearly 21 products have been filed with the insurance regulator for approval since the new norms became effective from January 1, 2012. Last week saw the launch of MetLife’sdeferred annuity, or pension, plan. Also, SBI Life launched an immediate annuity scheme.

CHOOSING THE RIGHT ANNUITY STRUCTURE
Annuities refer to the stream of income an insurer pays at regular intervals until your death or the end of tenure you may have opted for. The corpus at the end of the accumulation phase will be paid out in two parts — 1/3rd in the form of lumpsum, with the remaining being converted into annuities. Now, you need to ‘buy’ annuities using the amount accumulated by your pension plan or any cash lump-sum. And the annuity option you choose would depend on your requirements and expectations from the plans. This would be applicable primarily to those who may have built the corpus through pension plans until January this year and others with a fund pool. As mentioned earlier, those buying pension plans henceforth will have to settle for the annuities offered by their insurer. Within the basket of annuity plans offered by your insurer, though, you still have to use your discretion. This would be applicable to everyone looking to buy annuities — irrespective of the date of purchase.

“While zeroing in on the right option, you need to ponder upon three questions — what kind of income you would require, whether your annuity requirement would go up or remain the same throughout your life-time and whether you would like to redirect the proceeds to your spouse upon your death,” says Pujari of SBI Life. Adds Kapoor of StanChart: “Customers should look at the expected rate of return (annuity rate) net of charges, the period of annuity desired (whether for life, or for a fixed period), flexibility in joint ownership and payout while buying annuities.”

KNOW YOUR ANNUITY
After an evaluation of your requirements, you can get down to the business of choosing an annuity option that fits your need best. Broadly, annuity plans are categorised into five segments although the range of options could vary as per the insurer.

ANNUITY PAYABLE FOR LIFE: The annuitant is paid a fixed annuity at regular intervals throughout his life. The insurer stops paying pension after the annuitant’s death. This is suitable for those who do not have any obligation post death. This option offers the highest amount of pension for an individual compared to any other options available.

ANNUITY PAYABLE FOR LIFE WITH A GUARANTEED PERIOD: Here, annuity is paid for certain number years, (say the chosen term of 10 years) and thereafter as long as the annuitant is alive. Shorter the guarantee period, higher is the pension. Annuity stops upon either the death of the annuitant or completion of the guaranteed period, whichever is later. This is a simpler tool to ensure income for the family for a stipulated period of time. For example, say the annuitant retires at a time when s/he is still the sole earning member in the family, but expects the kids to take over after five years; such individuals can look at annuity that is guaranteed for five years.

LIFE ANNUITY WITH RETURN OF PURCHASE PRICE:
This option could work for those who want to leave alegacy for their nominees to inherit. Here, the annuitant enjoys the pension till s/he dies. After the death of the annuitant, the purchase price of the annuity (that is, the premium paid by the buyer of the annuity) is handed over to the nominee. This is a popular option as both the annuitant and the nominee stand benefited. Some new variants also offer to get the purchase price back in parts.

LIFE ANNUITY INCREASING AT A FIXED RATE: Under this option, there is an increase in the annuity amount payable per year at a certain rate, say of 3-5%. “While it is not linked to the actual inflation rate, the rationale is that it would take care of the increase in expenses to an extent,” says Pujari.

JOINT LIFE AND LAST SURVIVOR ANNUITY: As the name denotes, annuitant is entitled to receive the pension throughout his lifetime. If the spouse survives the annuitant, the former is also entitled for the pension, ensuring ‘life-style maintenance’ of the spouse. The buyer can further choose the quantum of pension (50% or 100% of the annuity payable to annuitant) payable to the spouse.

ANNUITY VERSUS OTHER INVESTMENTS
The advantages notwithstanding, you would do well to refrain from putting all your eggs in the annuity nest. “Annuity income is taxable. Therefore, while buying one, you should ensure that your annual income from annuity is within the ‘no-tax’ limits,” says Lovaii Navlakhi, managing director and chief financial planner, International Money Matters. Besides, you can also consider other tax-efficient avenues such as shortterm debt mutual funds or tax-free bonds. “Annuity income is fixed, and if the interest rates move up, you may not get to participate in it. That makes it all the more important to ensure that you portfolio gets some exposure to instruments that are liquid,” adds Navlakhi. In other words, you would be in a secure position if you have allocated your savings amongst a mix of products that complement each other. Remember, while retirement is seldom thought to spell happiness, a carefully planned one will ensure you close your professional innings with your head held high.

China’s ICBC Opens Account in India

World’s largest lender in terms of market cap is the first Chinese bank to open a branch in India

Industrial and Commercial Bank of China, or ICBC — the world’s biggest lender by market value, has set up business in India, which could potentially open up the market for firms from Beijing, boost investment in infrastructure sectors and foster the growth of a rupee-yuan market. 

The bank will be the first of four Chinese lenders to start operations in India. India and China had signed a memorandum of understanding, or MoU, during Chinese premier Wen Jiabao’s visit, which will facilitate Chinese banks to open branches in India. “We have received a commercial banking licence. In the first stage, we would like to focus on wholesale banking services and products to Chinese enterprises and related parties,” said Sun Xiang, chief executive officer of ICBC, Mumbai branch. The bank, which is now expanding in Europe and other countries, will gradually offer personal banking to local customers and private banking services.

Four Indian banks — SBI, Bank of Baroda, Bank of India and Canara Bank — have a branch each in China. Chinese banks had sought regulatory approval to start commercial operations on grounds of reciprocity.

“ICBC would facilitate the investment of Chinese companies in India’s power, telecom and infrastructure sectors. We would also help companies raise yuan-denominated bonds if there is a demand,” said Yang Kaisheng, president of ICBC. “Corporates can get 3-5 funds by issuing dim sum bonds at an interest cost in the range of 1-3%. A similar issue in India could cost firms an interest rate of 9-10%,” said a treasury head with a private sector bank.

In 2010, China emerged as India’s biggest trade partner with a trade volume of $61.7 billion, which is nearly 20 times of what it was almost 10 years ago, while India is also China’s biggest trade partner in South Asia. ICBC has accelerated its overseas expansion plans. At the end of June 2011, the bank’s overseas assets stood at $140 billion, which account for 4% of its total assets.

“We are still a new comer in the international market when compared to other global players. In future we would like to see the share of international assets go up to 10%,” said Kaisheng. “This would be difficult as our domestic assets are growing faster,” he said.

On potential investments in India, Kaisheng said it would hinge on two factors — the bank’s capital adequacy and the proportion of funds allocated by the head office. “It is true that we operate as a branch instead of a subsidiary. However, as and when regulations demand, we would be open to converting into a wholly-owned subsidiary,” he added.

Definition of Corruption – The abuse of public power for private benefit – world bank

Shadow of the Law

Anti-corruption laws aimed at India Inc have been largely ineffective. But two changes are unfolding: anti-corruption measures are acquiring a global hue and focus is shifting to the supply side of corruption, reports

Transparency International, the global civil-society coalition against corruption, had been pursuing National Aluminium Company, a navaratna public sector undertaking, to include integrity pacts (Ips) in its procurement processes for quite some time. The company deputed a junior officer to sign up, but TI India insisted that Nalco’s chairman & managing director ought to make the affirmation for it to make meaningful impact down the line. “Strangely, the CMD’s office was reluctant and we left it at that,” recalls Ashutosh Kumar Mishra, Director (IP), TI India. “Later, this February, the CMD was arrested by the CBI on charges of corruption. Nalco now wants to adopt the IP process.” A relatively new concept in India, IP is a global tool developed by TI. Companies and vendors sign an undertaking that no bribes, gifts, kickbacks or facilitation payments will be asked for or given during procurement.

Members of civil society, designated as independent external monitors (IEMs), function as neutral overseers; in the event of a violation, they are the first stop for grievance redress. Take the case of Central Coalfields, which invited tenders for a coal washery. Monnet Ispat won the bidding, but a competitor, Aryan Coal Beneficiations, was unhappy and demanded re-tendering. The management asked the IEM to step in. The IEM heard out all bidders, inspected documents, consulted experts, made his evaluations and upheld the decision. It was accepted by all, preventing the issue from spiralling out of control, leading to delays and litigation. An IP is a legal document and a process. Forty PSUs have signed up. ONGC was the first in 2005; by 2010, the oil major had referred over a 100 cases to IEMs, who oversaw contracts worth . 150,000 crore. Although private firms bid for PSU contracts in large numbers, the private sector hasn’t really bitten into the concept. “Many of the private companies, barring multinationals, look upon IPs as merely another set of documents to be signed with the tender papers,” laments Mishra. “It’s a fig leaf for them.” The efficacy of IPs in India remains untested. “If you ask me if IP is working, maybe it is, considering the drop in disputes and litigation,” says DT Joseph, former secretary, ministry of shipping, now IEM for the Shipping Corporation of India. “But if you ask me if bribery and corruption has gone down, I just don’t know. It’s difficult to gauge.” TI India is in the process of conducting an impact study on IPs. While TI grapples with its work on hand, the introduction of IPs and the Nalco episode underscores two significant trends: globalisation of anti-corruption initiatives and the shifting of focus to the supply side of corruption.

BEYOND BOUNDARIES

Anti-corruption initiatives are increasingly acquiring a global hue, be it of the voluntary kind like IPs, the UN Global Compact’s 10th principle and the Extractive Industries Transparency Initiative, and also newer legislative measures like the Bribery Act of the UK, the implementation of which transcends national boundaries. The new UK bribery law, introduced from July 1, is similar to the Foreign Corrupt Practices Act (FCPA) of the US; in fact, it’s more severe, even disallowing facilitation fees or ‘speed money’, which finds safe harbour in the FCPA. The UK law puts the onus on companies to prevent bribery and corruption, also by individuals associated with them. And it goes beyond borders. A company headquartered in India with operations in the UK, or one that employs British citizens, is now answerable to the British Serious Frauds Office even if the offence has no connection to the UK. The FCPA, especially in the last decade, has ensnared a host of multinationals for bribing officials in the US and emerging markets, including India.

In 2010, companies in violation of the FCPA paid $1.8 billion in penalties. For instance, the London-headquartered liquor major Diageo Plc, in July, agreed to pay $16 million to settle bribery charges against it for offences in India, Thailand and South Korea. Diageo India was quoted as a ‘relevant party’ in the FCPA case, which involved illicit payments of $1.7 million “to hundreds of Indian officials”, including those from the military’s canteen stores department. By comparison, India has a rather inadequate Prevention of Corruption Act, 1988, and the Prevention of Money Laundering Act, 2002. “We also need to be more prescriptive in our regulations,” says Arpinder Singh, head of forensic at Ernst & Young. “The UK and the US Acts have well laid out procedures, which we lack.” The Indian government, to comply with the demands of the UN Convention against Corruption, which it recently ratified, has introduced a rudimentary Bill on prevention of bribery of foreign officials—something on which Indian companies are among the worst offenders from the leading economies (See graphic: Corruption Inc).

CORRUPTION REDEFINED

The Extractive Industries Transparency Initiative (EITI) is of particular relevance to India, in the wake of scams and disputes that have hit the mining and the oil sectors lately. The Norway-based EITI, launched in 2003, is a coalition of governments, companies and civil society. It seeks to ensure that natural resource benefits all, by outlining standards and deploying external financial, physical and process audits in extraction operations. EITI supporting companies include Areva, ArcelorMittal, BHP Billiton, BP, DeBeers, Exxon Mobil and Shell; countries include Australia, Canada, Germany, Japan, Norway, Qatar, UK and US. India, however, has been stalling. “In recent years, a number of efforts to engage the government of India and companies like ONGC in the EITI were undertaken,” reveals Samuel R Bartlett, director-Europe and Asia, EITI. “To date, the government hasn’t expressed any interest in becoming an implementing country.” This when the EITI is making headway in fostering transparency and curbing corruption in mining and oil. For example, In Nigeria, an EITI audit in 2006 confirmed a hole of $67 million in royalty payments to the government.

The mining and the oil sectors, globally, have come under the scanner of corruption initiatives like never before. In fact, a change in the very definition of corruption is being sought to reflect new realities.

The working definition of corruption put forth by the World Bank and TI, respectively, is “the abuse of public power for private benefit” and “the misuse of entrusted power for private gain”. A recent paper by Norway’s U4 Anti-Corruption Resource Centre, titled ‘Grand Corruption in the Regulation of Oil’, broadens the scope and redefines corruption as “the manipulation of framework conditions to attain exclusive benefits to individuals or groups at the cost of social benefits”. The paper explains the inherent complexity of regulations in the extractive sector. This is something that has parallels with the spate of controversies unfolding in India—the telecom 2G spectrum scam, allegations of gold-plating of costs in the D6 gas fields in the Krishna-Godavari Basin, and the plunder of iron ore mines in Bellary.

This para on ‘grand corruption’ from the paper does touch a chord: “The oil industry is usually governed at the highest political levels, and corruption usually involves political representatives at this level. These actors have different opportunities to benefit from corruption as compared to, for example, civil servants. They will not necessarily bend rules in secret, but will rather alter the rules of the game quite openly, or decide on significant exemptions from written regulations. The benefits they obtain through some form of corruption may be far more than a personal bribe, and may be tied to development aid, macroeconomic loans, party contributions, various political and diplomatic quid pro quos, intricate arrangements to increase revenues controlled by incumbents, or support of industries where politicians have personal stakes.”

SUPPLY SIDE OF CORRUPTION

The second significant trend is the turning of the spotlight on the private sector itself and its players—the supply side of corruption. There is evidently a rather reluctant—but growing—urge to look inwards, especially in the wake of the nationwide campaign against corruption triggered by Anna Hazare. As in most cases, in the Nalco case too, the probe lights were on the bribe-taker, the company’s CMD. The alleged bribe-giver, the Bhatia Group, is given a rather benign view, although some minor official was arrested and questioned. At the macro level, the stifling of competition by a few companies that influence the legal and policy environments is a serious concern that is beginning to be articulated. In recent times, a small clutch of business leaders like Ratan Tata, Deepak Parekh, Anand Mahindra, NR Narayana Murthy, and Anu Aga have been vocal about it. Speaking at a Harvard Business School meeting in Mumbai last week, Ratan Tata said: “Corruption has become worse after liberalisation…Prior to 1991, corruption was in the form of granting licenses. Now, it’s replaced by the award of contracts and in changing the terms of contractual obligations.” This trend is what the World Bank experts often term as ‘state capture’. It is now agreed that, in a ‘capture economy’, a few companies benefit in the short term—at the expense of the long-term health and growth of the private sector. A World Bank study says the overall growth rate of firms in a capture economy is about 10% lower than a non-capture economy over a three-year period. Several recent Indian industry surveys suggest the tide is turning.

A 2011 KPMG survey says corporate India now believes it is time the supply side of corruption is tackled head-on. About 68% of respondents in the survey said that corruption was induced by the private sector. “Companies resort to different ways and means to gain business due to heightened competition,” says Deepankar Sanwalka, head of risk and compliance at KPMG. “These include facilitation payments, cartelisation and (ensuring through illegitimate means) repeat procurement contracts.” An ET-Synovate survey, which polled 181 middle managers in eight cities from August 19-23, reflects the challenges and dilemmas of the Indian private sector. Only 36% of the managers polled felt their company would refrain from offering a bribe at the cost of losing business; 54% felt otherwise. The survey further shows the private sector has been unable to meaningfully address the issue of bribery and corruption. About 55% of the respondents were unaware about their company’s policy or stand on bribes, and 56% said they had never discussed the ethical dilemma of bribery with their top management. The industry chambers also have done precious little to address this issue in a comprehensive manner. Around the time Hazare began his fast, the Confederation of Indian Industry (CII), issued a hastily drafted ‘code of business ethics’ as a guide to each employee of CII member-companies. The CII code is a compendium of good intentions, starting with the need to serve national interests. But the mere issuance of codes and signing on the dotted line cannot stamp out bribery and corruption. It only creates a smokescreen and delays robust action, legislative or otherwise. Little wonder, Deepak Parekh, chairman of HDFC, thinks it’s about time for a UK Bribery Act sort of law for India with a clear focus on the corporate sector.