Justice at last for policyholders! From Friday December 1 life companies will start adjusting the value of all retirement annuity funds and endowment policies where premiums are cancelled or reduced, to ensure that investors get a fair return on their money.
In line with an agreement between the life industry and national treasury in December last year, the new order will cost life assurers about R3-billion. The agreement will bring greater legal clarity to an industry that has been in turmoil for 18 months.
In December last year, after a public attack by Pension Funds Adjudicator Vuyani Ngalwana, the industry proposed a statement of intent that agreed to reimburse excessive fees to members who made contractual changes to their policies. It also set new minimum standards for future values.
In one case, the original investment of R36 000 in an RA was slashed by penalty fees to less than R5 000.
Although the deal was expected to take effect in October this year, it will now be implemented from December 1. All retirement annuity fund policies and endowments affected will automatically be enhanced to the minimum percentage of fund value agreed in the statement of intent.
However, before members get too excited, the retrospective minimum surrender value is only 65% for RAs and endowments that remain on the books — meaning that the total cost of recoupment could still be as high as 35%. The implication is that only members whose surrender values were less than 65% of total value will benefit.
The deal also only affects policies paid up between January 1 2001 and November 30 this year.
An important distinction for endowment policyholders is that individuals who cashed in their policies and withdrew their funds will not be entitled to compensation and compensation will only be paid where clients stopped their premiums but left the money in the fund.
However the agreement covers all RA members who made changes to their policies, even if the policies have subsequently matured and been paid out.
If the policy has been paid out, the life company will make the reimbursement directly to the member. However, treasury still needs to clarify how those payments will be taxed.
Gerhard Joubert, executive director of the Life Offices Association, said life companies had six months to adjust qualifying RA funds and endowment policies to the minimum values.
As from Friday, any existing retirement fund member or endowment policyholder who stops or reduces his or her premium is guaranteed a minimum of 70% of the fund value. Ngalwana’s office this week expressed concern that the industry was interpreting the figure as a maximum, not a minimum. An investor who surrenders an endowment and has the proceeds paid out is guaranteed 60%.
Joubert said that although the Long Term Insurance Act and Pension Funds Act had still to be amended, the Life Offices Association believed the regulatory authorities had made good progress.
He said the amendments would clarify the legal relationship between the fund member, the fund and the life insurer, which have been at the centre of the dispute between Ngalwana and the life industry.
The amendments will also bring clarity in terms of how costs and charges are to be disclosed. “They will bring clarity and stability to the industry, which will be positive for the consumer,” said Joubert.
He added that the proposed reform of commission regulation, aimed at achieving a better balance between upfront and “as-and-when” commission, would be resolved shortly. This was pivotal to the affordability of the new minimum surrender values.
The change from upfront to as-and-when commission would, however, only be implemented by the middle of next year.
Joubert said the treasury would also need to regulate commission for policies already in place, to prevent churn during this period.