SAIL plans to buy Rs 500-cr gratuity policy from LIC

MUMBAI: The turnaround in the steel industry has proven to be a bonanza for Life Insurance Corporation. Anticipating record profits this year, the once ailing Steel Authority of India (SAIL) has decided to buy a Rs 500-crore group gratuity policy from LIC.

SAIL, which has recorded profits of Rs 2,800 crore for the first half has identified a gratuity liability of Rs 2,100 crore for over a lakh employees. This is the present value of what the company will have to pay towards gratuity for all employees when they retire. Until now the company paid out gratuity from its profit and loss and had not set aside any fund for gratuity.

Besides the improved financials, companies are also being spurred to provide for retirement funds following the notification of the revised Accounting Standard 16. The new norms require banks to make provisions where there is a defined retirement benefit. Creating a fund also enables the company to save on income tax as contributions made to a fund created to meet gratuity and pension liabilities are eligible for tax breaks.

LIC’s group insurance business has improved dramatically in the current financial year on account of a surge in companies outsourcing management of their gratuity funds. The corporation has recorded group business of over Rs 6,000 crore during the first nine months of the current financial year, which is more than what the corporation has generated in the whole of 2005-06. Most of the new group business has come by way of gratuity.

According to sources, SAIL may sell some of its investments to LIC to meet the cash liability. Most of the investment of group plans is in debt instruments, as corporates have been going for traditional policies. The corporation is, however, shortly launching an investment-linked group plan based on ULIP. LIC is expecting a surge in group business on account of the revised accounting standards. A large number of companies and also banks have retirement benefits which are yet to be funded.

The corporation has already invited tenders from IT companies for its first unit-linked superannuation plan. LIC plans to come out with a product where employees can view the balances under their pension account online. The system will also allow employees to issue instructions to switch from growth, balanced and income funds depending on their risk appetite.

The new business is almost 180% higher than last year. The corporation has already completed its group premium target for the whole of 2006-07. The sharp growth has also increased its share of business to 84%.