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Penal­ties ap­ply if you boost and then re­duce con­tri­bu­tions on a life as­surer’s RA UP­FRONT COM­MIS­SIONS ON IN­VEST­MENTS SET TO GO

Weekend Argus (Saturday Edition) - - GOODPOSTER - LAURA DU PREEZ

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

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