The life industry’s reputation has taken a mauling this year as pension fund adjudicator Vuyani Ngalwana issued a blizzard of rulings in favour of consumers.
Many of these rulings force the life companies to reimburse clients who have been over-charged in violation of their own rules, or where customers have been penalised for requesting that their investments be transferred to a better performing fund.
In one case, Ngalwana ruled that Sanlam was not entitled to deduct R43 000 from a client who wanted to reduce his monthly premiums. This would have eaten up most of the R49 000 he had paid into his retirement savings.
In another case, a Sanlam client whose portfolio had declined by 26% wanted to switch to a better performing fund. He was told he could only switch within the Sanlam stable, for which he would be charged nearly R24 000 on a R62 596 portfolio.
Each new ruling against the life companies triggers a fresh flood of complaints, so much so that the Life Offices Association this week criticised Ngalwana for taking too literal an interpretation of the law. Life companies have little option but to appeal these rulings, as the consequences for their businesses could be catastrophic.
The first recourse for disgruntled clients holding retirement annuities is to file a written complaint with the fund administrator, who is obliged to answer within 30 days. If the complainant is not satisfied with the answer, the matter can be referred to Ngalwana’s office.
The life companies have challenged Ngalwana’s right to rule on complaints beyond interpreting the rules of the fund and its administration. Ngalwana contends his jurisdiction in terms of the Pension Funds Act goes well beyond this to cover complaints relating to the investment of funds, application of rules, maladministration and improper exercise of powers by management, to name a few.
For those already investing in retirement annuities, the advice from financial experts is to study the policy document issued at the time of purchase. “This is best done with the help of an independent financial adviser, one who isn’t tied to one of the life houses,” says Garth Smit of Finsbury Financial Services.
Though the Financial Advisory and Intermediaries Services Act aims to raise academic standards within the profession and holds advisers accountable for poor advice, many are still tied to one of the life houses.
There is a financial disincentive to disclosing the costs of the product, or the penalties incurred should the client want to reduce or suspend payments. Brokers who sell a 20-year retirement annuity usually receive upfront commissions, paid over two years, which the life company amortises over the full 20-year period.
This explains why some clients get back less than what they paid in should they decide to terminate the retirement annuity early. In some cases, the first 18 months’ contributions from clients goes to pay brokers’ commissions and administration fees.
Some companies now pay brokers’ commissions “as-and-when” funds are received from the client. This is less popular with brokers because it means they may have to wait 20 years to get the full commission. If the retirement annuity is terminated before this, the broker stops receiving commissions. Bob Bartholemew of Brantam Financial Services says anyone planning to purchase an retirement annuity should establish whether the brokers’ commissions are paid up front or as-and-when. The life company may still penalise the investor for early termination, which is why a close study of the policy’s fine print is necessary.
One way to avoid all this is to invest in a non-insured fund — one underwritten but not managed by a life company. These generally use unit trusts as the building blocks.
Bartholomew applauds Ngalwana’s assault on the life industry. “For too long they have been able to get away with unethical practices. Retirement annuities have been sold on the basis of estimated values, and often they don’t even achieve that. The answer is better disclosure and it’s about time the industry was forced to explain why its costs are so high.”
The life companies have suffered a series of setbacks in recent months. Apart from Ngalwana’s rulings, actuary Rob Rusconi issued a report highlighting the high costs of saving for retirement in South Africa. The industry suffered further embarrassment when e-mail correspondence between life industry executives, urging each other to embroider their projected investment returns, leaked into the public domain.
One e-mail concedes that short-term endowments “probably struggle to beat inflation after charges”, while long-term retirement annuities “probably do around 2% to 3% per annum after tax and charges on a managed type portfolio”.