Penalties apply if you boost and then reduce contributions on a life assurer’s RA UPFRONT COMMISSIONS ON INVESTMENTS SET TO GO
If you contribute to a retirement annuity (RA) fund from a life assurance company, you should be wary of voluntarily increasing your contributions, because if you later want to reduce your contributions, you may face a penalty.
A ruling issued by the Pension Funds Adjudicator this week contains this lesson, together with strong words for life assurers for failing to educate members and putting profits before treating customers fairly.
The ruling followed a complaint by a member of Sanlam’s Central Retirement Annuity Fund, who had an almost eight- percent penalty imposed on her retirement savings after she requested a reduction of the contributions she had previously voluntarily increased significantly from the contracted amount.
Ms N complained to the office of Muvhango Lukhaimane, the adjudicator, that the penalty was “manifestly unjust”, but the adjudicator dismissed the complaint after finding the charge was within the limits set in the regulations under the Long Term Insurance Act and therefore “fair and reasonable”.
However, the adjudicator says in her ruling that the complaint indicates the “dire need for service providers in the retirement fund industry to educate and properly inform [retirement fund] members about permissible costs and charges”.
She says the time has come for service providers to “stop being concerned about profits only and start acting in line with the principles of [the] Treating Customers Fairly [regime]”.
But Sanlam says it believes in treating its customers fairly and Mrs N’s policy explicitly disclosed the “alteration charge”. Kirshan Reddy, the chief executive of Sanlam Personal Finance Actuarial, says such charges are not set to make profits but to cover the expenses incurred by Sanlam on events such as a premium increase.
Life assurers apply penalties on RAs or endowment savings if you reduce or stop the amount you agreed to contribute, or if you transfer your savings to another retirement fund before the agreed maturity date of the contract.
You may be forgiven for thinking that if you voluntarily pay more, you are free to reduce your Upfront commissions paid to financial advisers on retirement annuities (RAs) and other life assurers’ investments, which are the main source of the penalties imposed if you deviate from your contract, are only likely to be abolished from the middle of 2017.
Last year, the Financial Services Board (FSB) released its Retail Distribution Review discussion document with numerous proposals, including one to scrap upfront commissions on savings policies, contributions, as long as you continue to pay what you originally agreed to pay.
Unfortunately, this is not the case. As life assurers explain, the penalties cover the upfront costs the life assurer incurs – mostly the adviser’s commission, which is based on the term of the contract.
If you increase your contributions, your adviser earns a further commission, and the upfront payment of this commission can result in a penalty if you then including RAs, and replace them with an adviser fee on your contributions.
Jonathan Dixon, the deputy executive for insurance at the FSB, says this proposal is likely to be implemented only in mid-2017. It will not apply to policies taken out before then, but the FSB is looking at ways to speed up the phasing out of high penalties on these policies.
Dixon says that in 2009 the FSB changed the commission regulations so that, on policies taken out from that later reduce your contributions.
Reddy says if Sanlam did not levy policy charges, its shareholders and other customers would have to carry the expenses incurred to alter the policy, and this would be unfair to other policyholders.
RAs offered by unit trust companies and investment platforms do not have these penalties, as they pay commission to advisers as and when contributions are made.
Life assurers’ RA contracts typically have a minimum period of date, life assurers could pay only half of the adviser’s commission upfront. This reduces any penalty applied.
The industry and the FSB also subsequently agreed that when members voluntarily increase their contributions on policies taken out before 2009, only half of the commission would be paid upfront.
This agreement has yet to be implemented. Dixon says the FSB plans to release regulations to this effect in March or April next year. five years, but many advisers sign members up for far longer periods. In the case of Ms N, her policy, taken out in February 2011, stated that she would contribute until she retired – a period of about 24 years.
Ms N, who works for the government’s international relations department, was sent on a diplomatic posting overseas and her earnings during that time enabled her to increase her contributions – from R500 a month to R2 000 a month from January 2012.
Her policy had a 10- percent annual increase, which resulted in her premiums increasing to R2 928 a month early this year.
In May this year, contemplating her return to South Africa and a reduction in earnings, Ms N asked for her contributions to be reduced to the original R500 a month.
But Sanlam then imposed a penalty of R9 282 – 7.7 percent of her savings of R120 350.
In her complaint to the adjudicator, Ms N says she was “deeply shocked and disappointed” and says Sanlam told her the penalty was not a penalty but a charge for varying her monthly contribution.
In its response to the adjudicator, Sanlam says the “charge” is in accordance with the terms and conditions of the policy.
Lukhaimane says in her ruling that an independent actuary checked the penalty and found it was indeed within the provisions of the regulations under the Long Term Insurance Act that allow insurers to charge a penalty of up to 30 percent.
The adjudicator, however, notes that “costs and charges must not only be disclosed; service providers must ensure that the members actually understand them, and how these charges are calculated, from the inception of the policy”.
She says “what is problematic is the erosion of members’ benefits without the providers explicitly disclosing to members these penalties and how they are calculated”.
“This tribunal doubts that anyone who ever had the presence of mind to belong to an RA fund will decide to stop or reduce contributions without valid reasons. Often, difficult financial circumstances lead to members of RA funds reviewing their continued membership of such funds. This eventuality is presently not taken into account by the service providers who underwrite these RA policies,” she says.
◆ The annual report of the Ombud for Financial Services Providers released this week reveals that a life company settled a complaint from a policyholder that the company’s representative had failed to inform him of the charges he would incur for switching his RA.
The life assurer said it was reasonable to assume that the complainant was aware of the charge, but the ombud’s office recommended that the company refund the full R17 658 penalty (see “Insurance brokers censured in report” on