What does the life industry settlement mean?
The life industries’ settlement of between R2,6-billlion and R3-billion has in part brought finality to the seven-month battle between the life industry and pension funds adjudicator.
What is the deal?
On Monday the National Treasury and Life Offices Association (LOA) issued statements that agreed to terms in which policy-holders will be reimbursed for fees recouped by life companies as a result of early surrender. The agreement also set out new minimum standards that will be introduced in September 2006.
Who will benefit?
The reimbursement will take the form of a retrospective minimum surrender value of 65% for retirement annuities (RA) and endowments that remain on the books. It will affect policies written between January 1 2001 and September 1 2006. Policy-holders who paid up their policies during this period and received a surrender value of less than 65% of the fund value will receive an automatic reimbursement once the final figures have been calculated after September. An important distinction for endowment policy-holders is that individuals who cashed in their policies and withdrew their funds will not be entitled to compensation. Compensation will only occur where clients stopped their premiums but left the money in the fund. As RA funds cannot be accessed until age 55, the 65% minimum surrender value will pertain to all RA funds including ones where premiums were reduced.
What will it cost the industry?
The industry still needs to do a final calculation, which will only be concluded in September with the cut off of the retrospective minimum standards. Currently, the estimate stands at R2,6-billion but could be as high as R3-billion. Each company will be impacted according to the number of policies they hold.
How have the markets reacted?
According to Chris Steward, portfolio manager at Investec Asset Management, although there was a bit of a sell- off on Tuesday, especially of Liberty and Old Mutual, there are a number of other factors that could be influencing their share price such as the Old Mutual Skandia deal. Steward says much of the bad news was already factored into the price and that the potential resolution had been well communicated to the market. Going forward, however, there are still concerns about the low net inflows into the industry as South Africans continue to save less.
How does the life industry feel about the decision?
An important part of this agreement is that the Treasury is committed to clarifying in whose jurisdiction the life companies fall under. This has been a contentious issue as the life industry feels the Pension Funds Adjudicator (PFA) has been acting outside of its jurisdiction. According to Mike Jackson, chairman of the LOA, “The life companies understand that this is to be a quid pro quo and that by agreeing to the minimum standards there will be legal certainty going forward.” It also finally puts a number to the damages and the industry is hoping it will end the negative publicity so that they can move forward with better designed products.
What still needs to happen?
Although the proposals outlined on Monday still need to be passed by the boards of the life insurers as well as the trustees of RAs, Jackson believes this is merely a formality. In February next year, the Treasury will rule on a new commission structure for financial advis-ers based on the LOA proposals. They will also clarify the jurisdiction under which life offices fall. It is expected that the new commission structures will be implemented in September along with the new minimum standards.
What are the minimum standards of new products?
The future minimum standards about early termination values will allow new policy-holders to receive back a minimum of 70% of the value of the fund for early surrender of an RA and 60% in the case of an endowment policy.
What do affected policy-holders need to do?
The reimbursements will be handled automatically so there will be no need for policy-holders to follow up with their life office. But, the reimbursements will only take place after September next year.
Is this the end of the PFA rulings?
The PFA has been unusually silent since the announcement, which is creating a level of uncertainty. Experts expect that the PFA will drop cases against the life companies that involve fees and the life industry will withdraw all appeals relating to fees. Jackson says this does not apply to rulings that do not relate to fees such as illustrative benefits. The industry is awaiting clarity from Treasury in February about whether the PFA has jurisdiction in this area.