Some life assurance companies have found creative new ways to repeatedly levy the maximum confiscatory penalties if you reduce your retirement annuity (RA) contributions, particularly if you have an automatic annual increase in your contributions.
But the Financial Services Board (FSB) is threatening to intervene and make the life companies pay back money if the penalties levied do not meet with the spirit of an agreement reached with the industry on the issue eight years ago.
Deputy Pension Funds Adjudicator Muvhango Lukhaimane told the Cape Town branch of the Pension Lawyers Association last week that some life assurance companies are claiming they are entitled to charge the maximum penalty every time there is what is termed a “causal event” if you have an annual contribution increase to keep up with inflation.
The offending life companies argue that each contribution update (annual increase) generates a new contract, with the entire contract then becoming subject to a maximum penalty again if there is a causal event.
A causal event may occur at any time within the contractual term of an RA. Causal events include reducing your contributions, skipping paying contributions, halting contributions altogether by making the RA policy paid up or transferring your savings to another RA product of that company or another company.
The penalty the life company can apply is a maximum of 30 percent of the amount saved for RA funds taken out before January 1, 2009 and a maximum of 15 percent for those taken out after that date. The percentage applied as a penalty should reduce to zero either over the term of the contract where the 30 percent maximum applies or over five years where the 15 percent applies.
The maximum penalties for life assurance endowment (investment) policies are 40 percent on policies bought before January 1, 2009 and 20 percent on policies bought after that date.
The penalties and the way they are applied led to the trustees of the PPS RA fund announcing last week that from October 1 it is closing its life assurance RA, which is underwritten by Sanlam, to new business. PPS members will now have only a unit trust option, which is flexible and allows members to change contributions at will without penalties.
Prior to 2004, when then Finance Minister Trevor Manuel intervened, life assurance companies could and did levy penalties of as much as 100 percent of accumulated savings.
In a settlement with the industry referred to as the Statement of Intent, Manuel in effect levied a R3-billion admission-of-guilt fine on the industry to pay back excessive penalties on both RA members and endowment policyholders.
Lukhaimane has referred the creative new ways for levying penalties to the FSB for action.
Jonathan Dixon, FSB deputy executive in charge of insurance, who was part of the National Treasury team that negotiated the settlement with the life assurance industry, says the FSB will be issuing further guidance on these issues before undertaking a focused assessment of life insurers’ practices.
“Where life insurers have applied methods that are not consistent with the spirit and principles of the settlement and subsequent regulations, the FSB will expect policyholders to be compensated,” he says.
Lukhaimane says RA products are aimed mainly at people in self-employment. She says these are people who have variable income flows and they need the flexibility to increase and decrease their contributions.
Yet, she says that, for example, when a person, who has been a life assurance RA member for more than five years, has increased income in one year and increases contributions, but then decreases contributions on the back of lower income, the member is penalised. And the penalty is not calculated on the increase alone – it is calculated on the entire amount.
Some life assurance companies are also double-dipping by applying penalties a second time when another causal event occurs, she says. For example, if an RA fund member decides to stop paying into one fund and move to another, a penalty will be applied when an RA is made paid up before the end of the contract term and a second penalty is applied when the savings in the RA are transferred to another fund.
Lukhaimane says that the proper management of retirement savings is crucial to the welfare and well-being of South Africans, and also to the economy, since they are a source of long-term savings.
She says one of the tasks of her office is to encourage accountability and responsible business practices.
The way in which causal events charges are being applied results in these penalties adding up to a lot of money, reducing the poten-tial retirement benefits due to members. The causal event charges also do not encourage people to save for retirement.
She says it is because of her concerns that she asked the FSB to look at the penalties.
However, Lukhaimane, whose office has already issued a determination against Sanlam for double-dipping on penalties, says that where the penalties are within the causal event and penalty regulations, she must rule in favour of the life assurance company.
For example, in a recent determination of a complaint made by an RA member, she ruled in favour of Momentum.
The complaint was based on the member changing his contributions, which is regarded as a causal event, in October 2005, after 12 years of membership. Momentum deducted R21 163 from the accumulated savings of R156 460 as a penalty because the member had contracted to pay a particular contribution rate.
Momentum maintained in its response to the complaint that it had properly evaluated the complainant’s pre- and post-causal event fund values and concluded that the charge fell within the permissible range stipulated in the regulations.
The adjudicator’s office engaged the services of an actuary, who confirmed that the causal event charges imposed by Momentum were in line with the Long-term Insurance Act and regulations and were correct.