Week after week, month after month, and year after year, complaints continue about how life assurance companies confiscate considerable sums of money from policyholders who either do not want to or cannot afford to pay contributions for retirement annuity (RA) policies or premiums on life assurance endowment (investment) policies.

Yet the life industry continues to deploy armies of product-floggers to sell these badly structured, mainly high-cost, often poorly performing, opaque and inflexible products to unsuspecting members of the public, many of whom don’t have much understanding of what they are buying.

The life companies do this even when they can sell lower-cost, often-better-performing, transparent and more flexible alternatives that do not have penalties if you adjust the contributions – namely, collective investments. But with these products, the profits are not as large, and the commission structures for their product-floggers are not as attractive, as they are for life assurance products.

That the life companies should be treating you fairly does not seem to have entered their collective mind, and the Financial Services Board does not seem to be getting across its message.

The issue has become a fiasco for the life companies, as the consumer-complaints structures – mainly the offices of the Pension Funds Adjudicator (PFA) and the Ombud for Financial Services Providers – increasingly intervene on the side of policyholders.

In her latest determination, the PFA, Muvhango Lukhaimane, slapped down Liberty Life and its Lifestyle RA Fund when the fund played word games in an attempt to confiscate R16 758.92 (20.92 percent) of a policyholder’s accumulated savings of R80 112.32.

In 2011, Ms M, with the help of her financial adviser, asked Liberty whether or not there would be penalties if she were to make her RA paid-up or transfer it to another fund. Liberty informed Ms M that there would be no penalties.

Ms M then sent a letter to Liberty, saying she was making her RA policy paid-up and that no further contributions should be deducted from her bank account. Liberty ignored her instructions and continued to collect the contributions.

In January last year, Ms M realised that Liberty was still deducting the contributions and brought this to its attention. The deductions stopped, but Liberty applied a penalty to her savings.

When challenged about the penalty, Liberty said it was not applying a penalty but a “deduction of unrecouped expenses”.

But Lukhaimane was having none of this. She says that Liberty “is being disingenuous in its explanation of what is an unequivocal statement to the complainant that no penalties are payable”.

Lukhaimane says Liberty was “at pains to try to distinguish the difference between penalty charges and unrecouped expenses. The reason why it is unable to do so is because there is none.”

Lukhaimane says that, in terms of the rules of fund, the fund was entitled to levy penalties when Ms M made the policy paid- up, but, because Liberty had told Ms M that no penalties would be applied, it could not then levy the penalties.

Liberty Life (the company, not the fund) was ordered to pay into Ms M’s paid-up RA policy all termination charges and/or causal event charges levied on her fund value by the Lifestyle RA Fund when she stopped paying the premiums.

There are a number of problems with life assurance products, including:

* The confiscatory penalties are applied without taking your circumstances into account. For example, if you lose your job and cannot afford to pay the premiums, the penalties will still be levied in most cases.

* No one knows how the penalties are calculated. For example, for the past few months, a Cape Town financial adviser, Arthur Weinburg, has been asking Momentum how it calculated the penalties that were levied on two of his clients’ policies. It seems that Momentum is unable to explain. And one wonders whether Momentum can accurately do so, when last year Momentum had to admit that it had made an R800 000 mistake in calculating the surrender penalties imposed on two brothers who had been sold a fraudulently constructed policy. Momentum imposed a penalty even when the policy was fraudulent, albeit reduced by R800 000.

Over the past few weeks, I have received complaints about penalties levied by Sanlam and Liberty, as well as penalties that seem to be inordinately high.

It seems that the life assurance companies base their penalties on the financial pain that will be suffered by policyholders, in order to prevent money from flowing into cheaper and better savings products. The penalties are produced out of a black box.

Anyone who has been hit by these penalties is going to be mightily discouraged from saving in the future, and they are likely to decry the savings industry as a whole – a development that is good neither for them nor the country.

Liberty deserved to get the smack down it received from the adjudicator. If Liberty and other life companies treated customers fairly, these types of complaint would never arise.