What exactly are the issues the Pension Funds Adjudicator (PFA) has raised with regards to retirement annuities?
There are basically three types of cases that the PFA has ruled on. The first involves the value of paid-up policies, which currently involves six separate cases. One that made headlines was the Da Sousa case against Liberty Life’s Lifestyle retirement annuity (RA) fund where, after fees, the paid up value fell from R37 983 to R5 439.
The second pertains to the illustrated values as in De Beer versus the Central Retirement Annuity Fund and Sanlam Life. In this case the PFA has ordered the fund to pay De Beer the highest of the four illustrated values that De Beer was shown relating to the maturity value of his RA on retirement.
The third type, which is the case of Ngubane versus Saraf and Old Mutual Life, the PFA states that it is his intention, in future, to find that RA funds should make provision for inflationary increases on annuities even if the member did not select it.
It is reported that the fund charged penalties on making the policies paid-up or reducing premiums without disclosing them up front. Why do the life companies think they are going to win the court cases?
There are three parties involved where RA funds are concerned: the life company, the RA fund and the member. The relationship between the member and the pension fund is governed by the Pension Funds Act, which falls under the PFA’s jurisdiction. But the relationship between the life company and the retirement fund which took out the policy of insurance with an insurer falls under the Long-term Insurance Act.
This is important because it is the life company that has paid out the proceeds less the charges to the fund. The fund itself can only pay over what they have received from the life company — the fund itself is not recouping the costs and they are the ones governed by the PFA.
Finally, the life companies maintain that the impact of early termination charges was disclosed in the illustrations contained in their quotations. This demonstrates the impact of fees on early termination and that the terms of the insurance policy contracts permitted them to make these deductions. They also believe that they acted in compliance with the provisions of the Long-term Insurance Act.
The life companies are fairly confident of winning these cases. If they do is it back to business as usual or will this make them a little more circumspect?
It is certainly not business as usual. It is important to understand that one of the major reasons the companies are going to court is to clear up the issue around jurisdiction and the rules that apply to retirement funds so that informed business decisions can be made going forward. But there is no point winning a battle only to lose the war.
Whether they win or not, the life companies are committed to changing the cost structures of these products, with early termination or ‘paid up†values being a major focus area. Our industry recognises that in light of socio-economic changes, such as job mobility, few people are able to contribute to an RA for 20 years.
The Life Offices’ Association has put forward proposals on how to spread commission more equitably over the term of the savings products. Commission is by far the most significant cost during the early years of a savings product and the industry will be able to come up with more innovative products once some of these proposals have been implemented.
We are also more conscious of the fact that consumers’ expectations need to be managed more effectively. As of July 1 all companies are now issuing new quotations that will illustrate both high and low inflation scenarios. This new code will also show costs by compelling life companies to show consumers the impact of their costs on the return and the subsequent required investment return they need in order to deliver a 4% or 10% performance in line with the low and high inflation rate scenarios. This is a great tool for comparative shopping and clients can compare quotes to see who is charging more.
Going back to the financial advisers? What exactly are the proposals on the table and do you think they are likely to be given the green light?
I think the advisers are a big part of this debate as commissions make up a large percentage of the costs during the early years of a policy. In a low-inflation environment costs are much more visible and consumers more aware of their impact and advisers and life companies have to justify their costs.
We have suggested that advisers receive a maximum of five years commission upfront rather than the whole period of the policy and from there commission becomes an ‘as and-when†payment.