Sanlam shuts down its with-profit annuities

The life assurer is offering a replacement product, but Momentum and Old Mutual are still very much in the market, writes Bruce Cameron.

Sanlam has quietly shut up shop on selling with-profit annuities (pensions), which, for many years, have been a major pension choice.

Its main competitors in the multi- billion- rand market, which include Old Mutual and MMI (Momentum/Metropolitan), are still very much in the with-profit annuity business.

Old Mutual dominates the market, with about 80 000 withprofit pensioners and R37 billion in assets under management on its books. The closed Sanlam portfolio has R6.5 billion in assets under management and 16 979 pensioners; and Momentum has about 12 000 with-profit annuity members with about R7 billion invested.

Roy Stephenson, Old Mutual annuities actuary, says Old Mutual is definitely not closing its withprofit pensions to new business. This view is echoed by Momentum.

Liberty closed down its withprofit product for new investments back in 2006, as it did with the Capital Alliance (Norwich life, Fedsure) product when it was taken over from Investec in 2005. The total assets still under management are R3.8 billion.

The closure for new business of the Sanlam product comes at a time:

National Treasury is looking at a with-profit-type annuity playing a far greater role in the local pension market (see “Treasury looking at a new type of hybrid pension”, right);

There are stricter new international capital adequacy requirements, which could see life assurance companies having to hold additional reserves to back guarantees, potentially reducing future pension increases for with-profit policyholders (see “What is a withprofit annuity?”, right); and

Low interest rates are affecting pension increases, because interestearning assets make up a big portion of the underlying investments.

Treasury wants to see pension providers, such as life assurance companies, sharing risks with pensioners instead of simply having traditional annuities where life companies take all the risks and investment-linked living annuities where the pensioners take all the risks.

Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions, says that withprofit pensioners who hoped their choice would lead to high increases relative to inflation were starting to question the product. Pensioners’ concerns included:

Pension increases were not transparent. The pensioners saw the way Sanlam applied its discretion in determining annual pension increases as a “black box”.

Many with- profit annuities were sold at relatively high purchase rates when interest rates were high. As increases are only given to the extent that returns exceed the purchase rate, members should expect relatively lower increases when returns are lower.

Pension increases are not only determined by investment returns, but also by the mortality experience of the assurer’s with-profit annuity book. If members live longer than originally anticipated, this will negatively influence the potential for future increases.

Van Zyl says although Sanlam is closing its existing with-profit annuities to new business, it has added another guaranteed annuity to its annuity stable. He says existing with-profit pensioners can switch to the new product or another type of guaranteed annuity.

The new product is called The Complete Picture Pension, in which Sanlam takes over all the mortality/ longevity risks. This means future pension increases will not be affected by pensioners living longer than originally assumed.

Pension increases will still be determined by market returns, but this will be done more transparently, with the increases “derived from published market indices”.

Van Zyl says given the level of guarantees provided, The Complete Picture Pension is considered a guaranteed annuity rather than a with- profit annuity. He gave the assurance that Sanlam will continue to actively manage its existing with-profit portfolio. Pensioners are not being forced to convert to another type of annuity, and Sanlam will continue “to meet the needs of the existing members”.