OPINION: No relief from RA penalty pain, despite TCF

By Martin Hesse Time of article published Mar 12, 2018

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The now-retired founder of Personal Finance, Bruce Cameron, waged a long war against contractual investment products sold by life assurance companies – namely, contractual retirement annuities (RAs) and endowment policies. These products bind you into contributing a fixed amount each month (which may or may not have a built-in annual escalation) for a fixed term. 

If, perhaps for some reason beyond your control, you need to reduce or stop your contributions, or, in the case of endowment policies, withdraw your capital prematurely, you are hammered with what Cameron called “confiscatory penalties”. In industry parlance these are known as causal event charges or early-termination charges.

For many years, these products were the norm – in fact, there wasn’t much else available. Heavily weighted against the investor in favour of the product provider, they were designed to give the broker – often simply a salesperson under no obligation to act in the client’s interests – upfront commission based on the client’s total contributions over the full term. This amount, plus interest, had to be clawed back from both broker and client if the client broke the contract – hence the penalties.

If you signed up for an RA policy over 30 years, for example, and stopped contributing after, say, five years, you could lose the entire amount invested.

In the 2000s, things started to change in favour of the consumer, and Cameron was influential in effecting that change. The Financial Advisory and Intermediary Services Act, which came into being in 2002, compelled financial advisers and brokers to abide by a code of conduct putting consumers’ interests first. And in 2005, a Statement of Intent was signed between Trevor Manuel, the Minister of Finance at the time, and the life companies, in which they agreed to limit their penalties on new and existing products.

The Statement of Intent, which has since been amended, requires that, on contractual RA products sold before January 1, 2009, the maximum penalty is 30% of the investment, and on RAs sold from that date onwards, the maximum penalty is 15%. Upfront commissions to financial advisers were reduced to a maximum of 50% of the total commission due.

More recently, the Treating Customers Fairly regulatory regime has been adopted by National Treasury. TCF, as it is known, is forcing a change in mindset in the financial services industry by focusing on principles instead of rules, where favourable outcomes for consumers are paramount. It is the underlying benign force behind current changes in legislation, including the Retail Distribution Review, which proposes a fundamental shift away from the commission-based approach to selling financial products.

With all this going on, and with a far wider variety of products available to consumers, you would think the big life assurance companies would have adopted a more flexible, consumer-friendly approach to investors in these so-called “legacy” products.

A doctor’s pain

A few weeks ago, I was approached by a financial adviser whose client was contributing to a contractual RA. The client was a medical specialist, and he had taken out the policy in January 2007, to mature 30 years later, in 2037.

The client had started by contributing R200 a month, with a 10% annual escalation. In October 2009, he increased his contributions to R2 500 a month, in April 2012 to R5 500 a month, and in September 2014 to R10 000 a month. By the middle of last year, with the escalation, he was paying R13 310 a month.

The doctor, who was earning well but, like many doctors, was self-employed, wanted a break. He decided to take a year’s sabbatical, putting his career on hold for that period.

The crunch came with his RA. He couldn’t maintain R13 310 a month on no income, so he asked to reduce his contributions to R500 a month, just for the duration of his year’s leave. The value of his investment at that point was R847 702. The life company wanted R122 944, or about 14.5%, as a penalty. 

Pleas to the life company to consider (a) that after a year he would resume his full contributions and (b) the culture of TCF were met with stony intransigence. The adviser lodged a complaint with the Pension Funds Adjudicator, but the adjudicator can review only how a penalty has been calculated; she cannot order the company to waive the penalty altogether.

On the intervention of Personal Finance, the life company came up with two options.

The first was essentially no different from the original one: the doctor’s fund value (which had increased in the interim) would reduce by R127 303, from R915 930 to R788 627, and the commission loan account (see “What is a commission loan account?”) would reduce from R212 908 to R81 339. Over the outstanding contract term, the life company would recover the R81 339, with interest, from the investment.

The second option was supposedly more “customer friendly” – but was it? The life company would leave the fund value essentially untouched. However, the commission loan account would reduce by only R4 464, to R208 443, meaning this far larger amount, plus interest, would be clawed back from his investment over the term of the contract. 

Whether the doctor resumes his R13 310 contributions or remains on the far-reduced R500 a month doesn’t seem to make much difference to the amount in the commission loan account to be recovered over the term. In fact, option two seems less favourable because the higher amount in the loan account will attract higher interest over the term. 

So where’s the compromise, the nod to TCF?

The good doctor has gone on his sabbatical with a bitter taste in his mouth …


The commission loan account is the life company’s way of calculating what is owing on an upfront commission paid to the broker. The amount is “loaned” to the broker and then recouped, with interest, from the investor’s monthly contributions. The interest rate on the loan account bears no relation to the returns on the investment, with a fixed annual rate of 10% appearing to be fairly standard across the industry. 

An example (on a contract before the 50% upfront limit was introduced):

• Policy contract: R500 a month for 30 years, with no annual escalation.

• Upfront commission: 3% of R500 x 12 x 30 = R5 400.

• The R5 400 in the loan account reduces to zero (amortises) over the 30 years at an interest rate of 10% a year.


Unit trust retirement annuities (RAs), unlike contractual life assurance RAs – and apart from the fact that you can’t withdraw funds (but can transfer them to another RA) before the age of 55 – are completely flexible: you can increase, decrease or stop your contributions, or pay in ad hoc lump-sum amounts, with no penalties whatsoever. Linked-investment services provider platforms offer a wide range of unit trust funds and exchange traded funds from which to choose.

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