The Pension Funds Adjudicator has issued 69 rulings involving retirement annuity (RA) funds this year. These rulings have highlighted 10 general issues that are important to you if you are a member of a retirement fund. Naleen Jeram, the deputy pension funds adjudicator, explained these issues at a meeting of the acsis/Personal Finance Investors' Club in Johannesburg.
In any discussion involving RAs, Naleen Jeram says, it is important to remember that the primary purpose of an RA fund is to allow people who do not belong to a company-sponsored pension or provident fund to save for retirement in a tax-efficient way, or to allow people who do belong to occupational funds to further provide for their retirement.
1. Penalties for stopping contributions
If you stop contributing to your RA fund, you may be charged a penalty fee only if the rules of your fund or the policy documents allow for it, and spell out how the fee will be calculated, Jeram says.
2. Penalties for reducing contributions
Similarly, Jeram says, if you reduce your contributions to an RA fund, you may be charged a penalty fee only if it is detailed in the fund's rules or the policy documents. How such a penalty will be calculated must also be disclosed.
3. Projected values
When you join an RA fund, the fund may take out a policy with a life assurer to provide you with retirement benefits. In such cases, you receive an illustrative value from the life assurer of the payout you will get at retirement, based on certain assumptions. When these assumptions have been substantially met, the issue is whether you can hold your fund to this value.
The Cape High Court this week decided that on the facts of the matter in the case before it, the fund member was not entitled to the illustrative value.
4. Minimum pension increase
In terms of the Pension Funds Act, all pension funds, including RAs, must adopt a minimum pension increase policy, which will regulate pension increases.
Check that your fund has such a policy and that you are getting the minimum increase to which you are entitled, Jeram says.
5. Single transfers
When you move your retirement savings out of a company-sponsored fund and invest in an RA fund, ensure that the transfer is treated as a single, once-off premium and not a recurring premium, Jeram says. The latter will involve a different fee structure, which may be to your financial disadvantage.
6. No contract
The basis of a contract is agreement between the parties to the contract. Thus, if there is no agreement between the fund and the member on the material issues, it can be argued that the contract is invalid.
The adjudicator's office dealt with the case of a Muslim client who wanted the contributions to her RA fund to be invested in a sharia-compliant investment portfolio. In spite of her request, she was advised to invest in an RA that, unbeknown to her, was not sharia-compliant.
Jeram says the fund was not aware that the member could not invest in the product. "It was a classic example of non-meeting of minds, and in terms of a well-established contractual legal principle, the member is entitled to be put in a position that he or she would have been in had the contract not been entered into."
7. Term of an RA
When you join an RA fund, you are not obliged to commit to a membership term beyond your 55th birthday.
In accordance with tax law, many RA funds prescribe, in their rules, that a member can retire from the fund anytime between the ages of 55 and 70.
However, when joining an RA fund, many people commit to belonging to the fund beyond the age of 55.
Jeram says it is not clear why members select a retirement age beyond 55, "as in terms of current costing structures, the greater the term of membership, the greater the costs involved".
If you committed to retiring from your RA at, say, 60 or 65, and then decide to retire earlier, you may be charged a penalty. However, Jeram says, you may be charged this penalty only if it is authorised in the rules of the fund or the policy document.
8. The role of the trustees
Many RA funds, as well as preservation and umbrella funds, are managed by trustees appointed by the underwriting and administering assurer. These trustees are often employed by the assurer.
You have a say in the appointment of 50 percent of the trustees in your company-sponsored fund. But, as a member of an RA fund, you do not enjoy this right.
Jeram says that if the employees of the assurer are on the board, it can lead to a conflict of interest, especially when a member challenges the assurer's right to deduct certain fees.
"Would trustees who are appointed by the assurer, and who are often employees of the assurer, challenge the decision of their own employer?" He says this issue needs to be addressed when the Pension Funds Act is rewritten.
9. Policy or pension?
Jeram says that in many of the cases before the adjudicator's office, the funds and the assurers have questioned the jurisdiction of the adjudicator to make a determination. They argue that the disputes relate to a long-term insurance policy rather than a pension fund.
RA funds that are registered with the Receiver of Revenue and the Registrar of Pension Funds are able to offer their members certain tax perks.
When RA funds want to offer members these tax advantages, pension funds and assurers regard the RA funds as pension products and not as insurance products.
Yet, when the adjudicator imposes the duties and obligations under the Pension Funds Act on the trustees of RAs, suddenly the assurer regards these funds as insurance products, Jeram says.
"You cannot have it both ways," he says. "An RA is either a pension fund product, and all the obligations set out in the Pension Funds Act are applicable, or it is an insurance product, and therefore all the benefits applicable to pension funds should not be available to RA funds."
Jeram says the South African Revenue Service is investigating this matter and will soon issue a ruling regarding the tax status of RA funds.
10. Interest on a 'loan account'
Did you know that when you join an RA fund, the life assurer gives you an unsolicited loan in order to cover costs, such as commission payable to your adviser?
Furthermore, you are charged interest on this loan. This week, the adjudicator ruled against Momentum for what he termed "an undesirable business practice" - that is charging interest on a loan account of which the member is unaware and which is not disclosed in the rules of the fund or the policy documents.
'Adjudicator is all for fairness'
Contrary to popular belief, Vuyani Ngalwana, the Pension Funds Adjudicator, is not the "champion of the consumer". Rather, the adjudicator's office is an independent arbitrator of disputes of fact and law - and in about 80 percent of cases he finds against the consumer, Naleen Jeram, the deputy pension funds adjudicator, says.
However, the relatively small number of rulings by Ngalwana against the pension funds industry has created "enormous tension" in the industry.
Since the adjudicator's office has exposed illegal practices in the pension funds industry, the industry has retaliated, taking a number of the adjudicator's rulings on appeal, several of which are pending in various High Courts.
Addressing some misconceptions about the adjudicator, Jeram says Ngalwana is not against insurers charging fees for services provided by an RA fund. "However, whatever fee, expense or charge the fund or insurer imposes on the member's account must be clearly authorised either in the rules of the fund or the policy document."
Furthermore, he says, not all RA funds impose penalties on members who reduce or stop paying contributions. In this regard, Jeram says it is important to distinguish between an underwritten RA and a unit trust RA fund.