/ 14 June 2006

Old Mutual pension appeal “will still take few weeks”

A deadlock has resulted in the aftermath of the recent pensions funds adjudicator case against Old Mutual. The adjudicator ruled against Old Mutual in late May in regard to the deduction of a benefit paid to a client on early withdrawal from an endowment policy. Old Mutual is now in the process of preparing a legal response, which they say “will still take a few weeks”.

“We are in the process of submitting affidavits and other interested parties also have to do this. It will take at least a couple of weeks,” says Old Mutual.

Deputy Pension Funds Adjudicator Naleen Jeram says, however: “The ruling raises several issues about the application of market level indicators [including the fact that only negative MLI’s are applied] and smoothed bonus products in general.

“However, it is important to note that the adjudicator rejected the application of the MLI as it was not authorised by the rules of the fund or the policy document.”

In their judgement the adjudicator tackled the fact that there was nothing in the rules of the fund and the policy document under investigation authorising Old Mutual to apply market level indicators (MLI’s) to reduce the complainant’s benefit.

Old Mutual was instructed to reverse a deduction from the complainant’s benefit to the tune of R29 592,04 plus interest.

In a response to the ruling, Old Mutual say that bonus declarations on the smoothed bonus portfolio are determined on the basis of actuarial valuation as required by the Long Term Insurance Act.

“The MLI applied to early withdrawals are there to ensure fairness between policyholders and not to serve the interests of the insurer and shareholders”, says Steven Levin, head of retail products at Old Mutual.

“If MLI’s were not applied, policyholders withdrawing before the end of the contractual term will be advantaged to the detriment of policyholders who adhere to the contractual terms of the full period.”

He says Old Mutual cannot and does not transfer any surplus arising out of the market adjusters from policyholder funds to shareholder funds.

“In fact the market adjuster is there to promote fairness between policyholders and if it were to disappear, it would not affect Old Mutual as a shareholder.”

Levin says the determination of bonuses and MLI’s are not arbitrarily determined by the insurer but in terms of objective actuarial rules in accordance with the requirements of the Long Term Insurance Act.

The Life Offices’ Association (LOA) also points out that during the demutualisation of life insurance companies some years back, the workings of smoothed bonus funds were described in detail in the demutualisation rules.

“These rules were approved by the High Court to ensure adequate policyholder protection after demutualisation. Included in these rules are detailed descriptions of how these funds are managed, including how and when MLI can be applied and how they work. The High Court recognised that these mechanisms are necessary for the protection of policyholders.”

However, the LOA says it is not their intention to comment on the actual ruling, just to point out how the practices in the industry are applied to protect policyholders.

Jeram says: “The adjudicator is not saying the insurer cannot adjust the value but because we are dealing with a pension fund, whatever reduction or fee the fund and/or the insurer wants to debit to the member’s account must be clearly authorised in the rules of the fund or policy provisions.

“This would enable the fund and/or insurer to effect a legal deduction and the member will upfront be aware of all possible fees and deductions,” he said.

Old Mutual feels it was at all relevant times compliant with its duties of informing members. Old Mutual says the client in this case was informed of the impact of the MLI and confirmed that he wanted to effect the early withdrawal on that basis, and for that amount, before the surrender of the policy was processed.

Levin says a smoothed bonus fund enables policyholders to share in the investment returns accrued in a fund through bonuses. “Not all of the returns are apportioned to clients via bonuses. Some of the money is held back in years of good market performance to bolster the stabilisation reserves, which allow the fund to smooth the effects of poor market performance.”

He maintains that in the case of strongly positive bonus stabilisation accounts, Old Mutual’s practice is to increase the interim bonus rates that apply to all claims prior to the next bonus declaration.

Levin also says that a key point is the implication that applying a positive MLI would have. “Say the market has done well and the Bonus Stabilisation Account (BSA) is +5%, then as a new policyholder you invest R100. The very next day you ask to withdraw from the fund and now you want your share of the +5% BSA. You would then receive R105. You then invest your R105 the following day and do the same thing. Besides being a get rich quick scheme, this is obviously detrimental to

other policyholders.” ‒ I-Net Bridge