Recently, the financial services industry body, the Association for Savings & Investment South Africa (Asisa), published an important advertisement.
Asisa reminded retirement annuity (RA) fund members who were penalised by life assurance companies for reducing their contributions between January 1, 2001 and December 1, 2006, that they may be able to claim back some of the money.
In the more extreme cases in the past, the life companies confiscated all the member's retirement savings when they reduced or stopped paying contributions.
The confiscatory penalties were highlighted in 2005 by Vuyani Ngalwana, the then Pension Funds Adjudicator (PFA), in a series of determinations against the life companies. The companies had the determinations overturned in the High Court. But it was to prove a pyrrhic victory for the life industry because, in the wake of public anger, then Finance Minister Trevor Manuel intervened and applied what was in effect a R3-billion admission-of-guilt fine.
He also reduced the maximum possible penalty to 30 percent of your accumulated savings. The maximum was reduced this year, to 15 percent, on all new RA contracts signed from January 1.
But some life companies have decided to get a bit too clever. Let me explain.
The confiscatory penalties normally occur when people run into financial difficulties and can no longer afford to maintain their contributions. The cause of financial difficulties can range from severe illness to retrenchment or the failure of a business.
So, with these unacceptable products the life companies give you a good kick to the head with hob-nailed boots when you are already down.
The reason Manuel intervened was to protect the retirement savings of ordinary people, but he could not simply ban the penalties and order full repayment, as it would have resulted in the collapse of the life industry.
The life industry agreed, in what was named the Statement of Intent (SOI), to pay back a large chunk of the money. But since then the industry has again been up to its nefarious ways.
Many of the life assurers have been using their armies of lawyers to find ways around the SOI and subsequent regulations.
What some, if not most, of them are doing is applying the penalties more than once. Say you reduced your payments because you fell upon hard times, but expect your position to recover. You could have lost 30 percent of your savings in penalties. But then matters get worse and you stop paying contributions altogether. The life companies then take another hit of a maximum of 30 percent.
Recently, the PFA ruled against Old Mutual for doing just this. She ordered the money to be repaid.
Old Mutual is now rolling out its usual phalanx of lawyers to argue that it should be allowed to exploit people trying to save for their retirement, saying the PFA is wrong.
Double whammy
In correspondence with Gregg Sneddon, an independent financial adviser who is fighting against the double whammy being applied to two of his clients, Old Mutual claims it was involved in both the negotiations on the R3 billion payback, as well as drafting the regulations, saying there was never an intention to limit the penalty to a single event.
My information is, firstly, that Old Mutual never had a direct hand in the drafting of the regulations and, secondly, that it never entered the minds of the regulation drafters that the penalty could be applied more than once.
Old Mutual now concedes that its input was indirect in that it was part of an industry body that commented on the regulations. But the company maintains its understanding is that it can keep clobbering its policyholders. To quote Old Mutual: "It has all along been our understanding that the regulations as drafted clearly envisaged more than one causal event, and it is for this reason that we did not agree with the PFA's recent ruling."
Importantly, Old Mutual simply does not answer the question put to it whether it and other assurers warn RA fund members that they will apply the penalty more than once on the first occasion the members alter their contributions. I wonder why they have not responded.
Old Mutual takes exception to me calling the deductions penalties. In a reaction to seeing a draft of this column it said: "We don't see benefit reductions as 'penalties'. In our view, reductions flow from the re-calculation of policyholders' benefits rendered necessary by the occurrence of so-called causal events, which impact on the recovery of incurred costs allocated to the policy."
They are penalties, Old Mutual, because you and other life companies sold and continue to sell products that contribute to the excessive salaries you pay your executives, company profits and the payments to product floggers. If your investment products were in the interests of consumers they would be designed like unit trust retirement annuities. There would be no penalties or "causal events", as you put it.
Fortunately, the Financial Services Board (FSB) is investigating this latest way the life industry has found to hammer its own customers.
Peter Dempsey, the deputy chief executive of Asisa, says: "The FSB has raised concerns about this with Asisa. How- ever, we do not know the extent to which this is being applied by companies or under what circumstances.
"But what is clear is that there are different interpretations of the Statement of Intent. Asisa has pledged its support to an FSB investigation of this issue and will participate in making sure that regulations are brought in line with the spirit of the Statement of Intent."
The solution is quite simple. The government should amend the regulations retrospectively.
Custodians
What I do not understand is how the life industry and its product floggers continue to sell what in my view are awful, expensive products when there are better and cheaper unit trust-based products available that do not apply any penalties.
Which financial adviser or life assurer can predict that you will not find yourself in financial difficulty in five or 10 years?
I am absolutely amazed at how arrogant the life industry continues to be, forgetting they are the custodians of money that will be used to provide a financially secure retirement.
If you have been hammered by the life industry in this way, take your complaint to both the FSB and the PFA. And if the product was sold to you after October 2004, also take your complaint to Charles Pillai, the Ombud for Financial Services Providers, on the grounds of inappropriate advice. If he finds in your favour, he can order full compensation for any loss.
And to make doubly sure that the life assurance industry's lawyers do not succeed with their bullyboy tactics, if you have to alter your contributions, consider stopping paying altogether. Then consider using the difference you can still save for retirement to take out a unit trust-based RA that comes without penalties.
Do not be conned into another life assurance RA that has unit trust funds as underlying investments but still has penalties, or into policies that don't have penalties but far higher costs. You could still be fleeced.
And if you were a victim of an excessive confiscatory penalty between 2001 and 2006 you must contact your life assurance company before the end of the year to claim back the money.
Finally, the life industry estimated that Manuel's intervention in 2005 would cost about R3 billion. It is going to be interesting to see what the final figure is at the end of the year.
Who to contact
- Pension Funds Adjudicator, Dr Elmarie de la Rey: 011 884 8454 or email [email protected]
- Financial Services Board: 0800 110 443 or email [email protected]
- Ombud for Financial Services Providers, Charles Pillai: 0860 324 766 or email [email protected]
- Cameron is the author of Retire Right (Zebra Press).