Consumers who contribute to retirement annuity (RA) funds on a monthly basis are likely to be shocked at a practice in the life assurance industry highlighted this week by Vuyani Ngalwana, the Pension Funds Adjudicator. The issue of unsolicited, interest-bearing loans to RA fund members was first exposed by Personal Finance earlier this year.
When you join an RA, you are loaned money by the life assurer to cover commissions and other costs that the assurer incurs.
Life assurers typically pay commission to brokers - based on the full term of the investment - in two instalments: one in the first year and one in the second year of the investment.
In the early stages of your membership of the fund, these costs exceed your monthly contributions and so the life assurer lends you money, charges you interest on the loan, and redeems the loan in a manner that does not alert you to the fact that you are repaying a loan.
In his latest ruling, Ngalwana has found that where this practice is taking place and where the loan, the interest and the redemption of the loan is not authorised in the rules of your fund, it may not be done.
The complainant in the case, Brent Walters, joined the MM Retirement Annuity Fund in July 2002 for a period of 18 years. The RA fund is administered and underwritten by Momentum.
After contributing to the fund for about two years, Walters advised Momentum that due to cash-flow problems in his business, he could no longer afford to pay his monthly contributions of R1 000.
As a result, the fund deducted about R12 200 from his retirement savings, and Walters complained to the Pension Funds Adjudicator.
In his ruling, Ngalwana found that:
- Unbeknown to Walters, he was given a loan of R8 460, which Momentum used to pay the broker upfront commission. Had Walters contributed to the fund until his retirement date, he would have incurred interest charges of R14 180 on the loan.
- Momentum was charging Walters interest of 10 to 12 percent a year on the loan, which was recovered by selling units from Walter's investment portfolio each month.
- Momentum tried to recoup the loan and interest from Walters when he stopped contributing to the fund.
Ngalwana found there was nothing in the rules of the fund or the policy documents authorising the assurer to capitalise the future costs and deduct them in a single lump sum when Walters stopped contributing to the fund.
He ruled that all costs that were properly disclosed to Walters could be charged, but that these could only be deducted on a monthly basis, because Walters is still a member of the fund.
All the costs
In total, Walters had paid R24 000 to the fund, and when he stopped contributing to the fund, Momentum charged him R12 235. This was made up a policy alteration fee of R250, a policy fee of R240, premium charges of R1 050, a portfolio fee of R140 and outstanding loan of R10 554.
Ngalwana examined whether Momentum was entitled to charge these fees. He found that in terms of the rules of the fund or the policy documents, up to the paid-up date the only fees the assurer should have charged were a policy fee of R10 a month (totalling R240 over two years) and a monthly premium charge of about R40 (amounting to R970).
The adjudicator ordered the fund and Momentum to credit Walters' investment with R10 944 plus interest.
Walters is not, however, entitled to a refund of his contributions because the earliest that a member can retire from an RA fund is at age 55.
Ngalwana says the capitalising of costs and the granting of loans to RA fund members, to cover the payment of upfront commissions, appears to be widespread among RA funds administered by life companies.
He referred a copy of his ruling to the Registrar of Pension Funds, the Registrar of Long-Term Insurance and the National Treasury.
Nicolaas Kruger, the head of Momentum Group Business, says the ruling demonstrates the challenge in the industry where costs are incurred by the assurer at the beginning of a recurring-premium investment product and have to be recovered from the product over the term of the product. In the event of early termination, the recovery of outstanding costs is accelerated, Kruger says.
He says it is industry practice to charge interest on these costs because they are paid upfront but recovered over the term of the policy or investment period.
"It is not an unsolicited loan and not a bank product. Different structures are employed across the industry with similar results," Kruger says.
Momentum's documentation discloses how these expenses are recovered. Nevertheless, it recognises the importance of addressing these issues and is committed to viable solutions for the savings industry, he says.