Judge Peet Nienaber, the Ombudsman for Long-Term Assurance, has been asked by a financial adviser to adjudicate a case where the personal circumstances of an Old Mutual policyholder changed and he now faces confiscatory penalties for wishing to reduce the premiums on his retirement annuity (RA).
Colin Long, a certified financial planner from Durban, says in August 2002 it was ascertained that his client (Mr T) would need to invest an additional R1 000 a month to make up a shortfall in his retirement saving.
The premium on an existing RA with Old Mutual was subsequently increased.
Now Mr T intends marrying a North American citizen and is considering moving to her country.
Mr T asked his adviser to explain to him his options.
Long told him he could continue paying the premium from Canada; he could make the policy paid-up, in which case he would face penalties; or he could reduce the premium and maintain the current value.
Long said the view that there would be no reduction in value or penalties for reducing the premium "was based on advice from Old Mutual and its management in the past".
A request was submitted to Old Mutual for the premium to be reduced to the minimum of R250 a month.
But Long discovered that when Old Mutual reduced the premium, it deducted R30 000 from Mr T's savings.
"If we had known the financial consequences, we may never have opted for that solution."
Long and his compliance officer researched the guide to intermediaries on the product.
Under the section on "decreased premiums", the guide states only: "premium decreases unlimited". And under the section relating to "costs and changes", it states only that there is "a cost of R250 upon a policy change".
"I could not find any evidence of information that in any way related to the massive potential costs applicable to premium reductions," Long says.
Old Mutual says it believes that Mr T received Policyholder Protection Rule documentation, which includes the cost implication of premium changes.