On Monday Sanlam will be the first life insurance company to challenge the ruling of the pension fund adjudicator in the case of Mr de Beer in the Cape High Court. De Beer wanted to reduce the premium on his policy. Sanlam sought to penalise him R43Â 000 — the value of the policy was R46Â 000.
According to the Financial Services Board (FSB), if Sanlam is unsuccessful and the ruling is upheld, policy-holders who have previously cashed in policies and have paid penalties could claim a refund.
The number of affected policies are not known but conservatively could run to tens of thousands.
If the rules of the policy did not state that a penalty would be charged for stopping payments or reducing your premium, even if you made changes to your policy several years ago, the FSB says you would be able to contact the pension fund adjudicator who would be obliged to review your case in light of the new rulings as a precedent has been set.
All the cases that have been heard before the pension fund adjudicator to date pertain to retirement annuities (RA) as this is the only individual life product that falls within its jurisdiction.
Owing to the length of term of an RA, which can be in the region of 30 years, they are also more susceptible to early surrenders. Although individual figures are not available for the surrender of RAs, not more than four million policies were surrendered between 1999 and 2003 according to the registrar of long-term insurance’s sixth annual report.
Even if the ruling pertained to a small percentage of these surrenders, they could effectively create a class action against life companies.
Sanlam was unable to provide the exact number of RAs that could be affected owing to the “interrelatedness of many products”.
However, life companies will be relieved that RAs as a percentage of total business have been declining for the industry as a whole. Over the past 20 years the total premium income paid to life companies from RAs has halved from 22% to 11%.
According to an insurance analyst this has been in part do to with the decreasing tax incentives to invest in RAs. “The tax break you receive from an RA has not kept up with inflation and is having less of an impact on your tax savings. At the same time the government has introduced the taxation of interest in pension funds, so interest income from RAs is now being taxed which lessens the tax benefit.”
He also adds that people find it cheaper to top up their corporate pension funds through the use of provident funds rather than additional retirement cover through RAs. The fact that all employees of a company that offers a pension fund are forced to participate in the company pension fund has also drawn funds away from the RA market.
A discussion document, issued by the National Treasury late last year, suggested the possibility of the creation of a national savings fund to which individuals currently outside the retirement funding net can contribute. This would target people who, for example, are self-employed and not therefore contributing to a pension fund, although it would typically target the low-income earner in much the same way as the Mzansi bank account.
This could possibly place a further dent in RAs unless the government formed a partnership with the life industry, as has been mooted with the medical aid industry. However, current comments from the Minister of Finance, Trevor Manuel, suggest that the life industry will have to take some serious steps around cost containment.
Although the National Treasury has publicly stated that it views the explicit regulation of costs as a second-best option, it would like to see the industry change its current commission and fee practices voluntarily, in conjunction with improving disclosure to fund members and policyholders. “We are well aware of the current abuses taking place and if reform does not come voluntarily, the explicit regulation of costs will become necessary,” says Manuel.