The life assurance industry has been forced yet again to toe the line over how it confiscates the savings of endowment policyholders and retirement annuity (RA) fund members who cannot afford to pay their contributions or who cash in their savings before the maturity date.
The Financial Services Board (FSB) this week published a new directive on how life companies may penalise endowment policyholders and RA fund members.
The directive follows a number of cases where life assurance companies have over-penalised policyholders – by R800 000 in one case – or have imposed penalties more than once on the same policy so that the total penalty exceeds the permitted maximums.
Life companies impose penalties when a “causal event” occurs. A “causal event” is when you unilaterally alter the terms of your RA contract or endowment policy, such as by reducing or stopping your contributions or by transferring the policy proceeds to another life company before the end of the contract term.
Last year, Old Mutual attempted to duck an agreement between the life industry and National Treasury by levying penalties more than once on the same policy, applying them whenever a causal event occurred.
The FSB rejected Old Mutual’s claim at the time that it was entitled to “double-dip” – the practice of charging more than once for multiple causal events – in a way that could result in excessive penalties.
Despite the FSB’s rejection of the practice, some life companies, including Old Mutual, continue to double-dip in a way that could result in excessive penalties.
Jonathan Dixon, FSB deputy executive in change of insurance, says that the FSB has been forced to issue the directive after a number of rulings by the Pension Funds Adjudicator (PFA) and the Ombud for Financial Services Providers.
The rulings have highlighted “the unfair and unreasonable practice by certain insurers where multiple causal events occur in respect of the same policy, to deduct the maximum regulated charge for each causal event”, he says.
“This practice is inconsistent with the spirit, intent and purpose of the Statement of Intent and the regulations, as well as fair outcomes for customers in terms of Treating Customers Fairly principles,” Dixon says (see “Ongoing pressure to reduce penalties”, below).
The directive also aims to stop life companies from arguing it is acceptable to charge maximum permitted penalties, he says. Only the lesser of the unrecovered costs determined on an actuarial basis or the maximum permitted penalty has been allowable.
Dixon says life companies may deduct a charge each time a causal event takes place, but they must adhere to the maximum limits. In doing so, the following principles must be applied:
* The life company must take into account the cumulative effect on a policy’s investment value of charges that have been deducted for previous causal events;
* When a second or subsequent causal event occurs, the charge for that event must therefore take into account the cumulative effect of that charge and all prior charges for causal events; and
* Life assurers must ensure that the cumulative effect of multiple causal event charges during the term of a policy does not result in the policy’s investment value at any time being reduced by a greater proportion than would have been the case if, at the time of the first causal event, the maximum causal event charge had been deducted.
And the FSB has instructed life assurance companies to make good on their past sins. The companies must check that they have not over-penalised existing policyholders and must make good if they have.
In the case of policies that have matured, the life companies must investigate complaints that a policyholder has been over-penalised and, if necessary, make good. This is the case whether the complaint comes directly from the policyholder, or is referred to the life company by the PFA or the Ombud for Financial Services Providers.
Dixon says that life assurance companies have also been directed immediately to improve their oversight of penalties, to ensure that, pending the rectification (where necessary) of their operating systems, they adhere to the regulations and the FSB’s new directive.
If life companies do not adhere to the new directive, they could be brought before the FSB’s Enforcement Committee, which can hand down hefty fines for contraventions of the laws regulated by the FSB.
ONGOING PRESSURE TO REDUCE PENALTIES
In 2005, then finance minister Trevor Manuel in effect levied a R3-billion admission-of-guilt fine on life assurance companies by getting them to agree to pay back confiscatory penalties levied on investors’ policies.
In what is known as the Statement of Intent (SOI), the life assurance companies also agreed to limits on how much they may confiscate from your endowment policy and retirement annuity (RA) fund savings.
Manuel’s intervention followed growing public dissatisfaction with the penalties and determinations by then Pension Funds Adjudicator Vuyani Ngalwana that rejected the penalties.
The regulations that govern commissions were amended to give effect to the agreement.
The initial agreement has since been amended so that, on RA products sold before January 1, 2009, the penalties would be limited to 30 percent, and on RAs sold after January 1, 2009, the penalties would be limited to 15 percent. The most recent changes also limited the penalties on life assurance endowment policies sold before January 1, 2009, to 40 percent and on those sold after that date to 20 percent.
Before Manuel’s intervention, the life assurance companies could levy confiscatory penalties of up to 100 percent of your accumulated savings.
In terms of the SOI, upfront commissions to financial advisers were reduced to a maximum of 50 percent of the total commissions due, and it is the intention of the Financial Services Board (FSB) to reduce upfront commissions to zero.
The life industry says the penalties are required mainly to recover costs caused by the payment of upfront commissions.
The FSB is undertaking “a retail distribution review” that, among other things, is considering a shift from life assurers paying upfront commissions to intermediaries for investment products to a system of predetermined fees for advice, negotiated between the intermediary and his or her client.
HEALTH WARNINGS
Investment products offered by the collective schemes industry, such as unit trust funds and exchange traded funds, do not come with the penalties that may be applied to most life assurance savings products.
With collective investment schemes, you can stop, increase or decrease the contributions without incurring a penalty. The only limitation is that, in terms of the Income Tax Act, you may not mature a retirement annuity (RA) before the age of 55.
If you sign up for a life assurance endowment policy or an RA fund, you should consider how you will continue to pay the contributions if:
* You lose your job;
* As a result of illness or disability, you are unable to earn a living; or
* You change jobs and your new employer compels you to join an occupational retirement fund, which means that you will have to contribute to both your employer’s fund and the RA fund.
MORE INVESTORS GIVING UP THEIR POLICIES
The poor state of the economy and consumers facing ever-increasing prices have resulted in more and more people defaulting on their life assurance investments.
The value of surrendered policies increased by 18 percent, from R22.4 billion in the second half of 2012 to R26.4 billion in the first half of 2013, according to a statement by the Association for Savings & Investment SA (Asisa).
Asisa does not say in how many cases penalties were applied to early surrenders, nor does it provide the amounts that the life companies may have deducted from the surrendered policies in the form of penalties. Asisa also does not say how many policyholders have reduced or stopped paying their premiums.
Peter Dempsey, deputy chief executive of Asisa, says a policy is surrendered when the policyholder stops paying the premiums and withdraws the fund value before the date of maturity. Only savings and investment policies can be surrendered, and the policyholder is paid the fund value, less any unrecovered costs.
The value of surrendered policies must be seen in the context of the total value of policies that are in force – which constitute a large portion of the life industry’s R1.8 trillion in assets – and not just the new investment business written, Dempsey says.
The increase in surrender values does not come as a surprise, given the state of the economy, the relentless increase in the prices of consumer goods and job losses, Dempsey says.
“While it is understandable that consumers will tap into their investments when they are no longer able to make ends meet, we need to caution policyholders against cashing in their policies unless this is a last resort, since it is almost impossible to make up the value lost in later years.”
Asisa does not collect or collate data on penalties levied by the life assurance industry.