“There is something that has been bugging me since 2004”, writes Andró Griessel on the Netwerk24 website, “and that is the so-called early termination charges on contractual savings plans.” (My translation)
Griessel states that, despite numerous complaints about this to the Pension Funds Adjudicator, the Long-term Ombud and the various appeal resources, not one complaint in this regard was upheld. He has been in discussion with various product houses about the matter on numerous occasions, but to no avail.
The latest example that he reports on, concerns a retirement annuity effected by a client in October 1993 for a premium of R500 with an annual premium increase of 20% and maturity date in October 2027.
As an aside, I can think of only one reason why a 20% escalation was chosen, and that had nothing to do with a benefit to the client.
By 2012 the premium had increased to R15 974,24. The client cancelled the escalation clause but continued paying the premium.
In May this year, Griessel suggested that he transfer his funds, which had grown to R5 403 583 in the RA to a pure, non-contractual unit trust based annuity.
According to the insurer, the monthly cost at this stage amounted to R363,71. Griessel argues that, even if the insurer had wanted to recover its loss of future revenue over 75 months, it should, ethically speaking, charge a termination fee of R27 278. Alternatively, given that it would get the money upfront, one would expect a discounted fee of R24 100, presuming an inflation rate of 4%.
Instead, the termination charge came to R419 821 – 17 times more than the “ethical” figure mentioned above.
The standard response from the insurer was that, in this specific range of policies, initial costs are spread over the term of the policy. This allows the policy to share in growth of the fund from the outset, rather than only after costs had been covered in full. The calculation of the recovery of costs is done based on the assumption that the client will honour all conditions of the policy, including retaining the policy for the full term. The insurer indicated that it was led by the “Statement of Intent” concluded at the end of 2005.
Changes to the treatment of voluntary premium increases only became effective in May 2017. It is not evident from the article whether penalties were charged when the client cancelled the premium update facility, or whether the calculation of the termination charge included future “revenue” as envisaged when the contract was initially effected. It is also not mentioned whether the same penalties would have been charged, had the client elected to change to the insurer’s own unit trust based RA. – editor.
The insurer was asked to respond to the article before publication.
It noted that an effective annual rate of 2.86% applied for this specific type of policy.
“As previously mentioned, this product is designed to recover all initial costs, including commission on premium increases over the term of the policy. The annual benefit statement also refers to the fact that costs will be levied should the policy be transferred to another fund before maturity.
Before deciding to effect a switch to another product provider, the insurer suggests that policyholders should consider the following:
- How long has the policy been running?
- How much is the transfer cost, expressed as a percentage?
- What would the growth have to be in the more flexible option in order to recover the transfer costs and growth under the current plan?
- Will the client sacrifice benefits like smoothing and guarantees?
According to Media24, the response from the insurer did not indicate how the transfer fee of R419 821 was calculated. It appears to be a percentage in line with the statement of intent.
In hindsight
Some points to ponder:
- Very little appears to have been done since publication of the Statement of Intent in 2005? When the matter first came to a head in 2002, it was agreed that the life offices would pay compensation for the preceding three years, and thereafter calculate termination fees based on a formula as agreed with the Minister. Despite a number of cases reported in the media where clients were exploited mercilessly, only the complaints were addressed, not the systems which led to the problem.
- Causal event penalties became part of the Retail Distribution Review process, but the last I heard was that the maximum percentages would be phased out over time to something like 2029. By this time, the majority of legacy policies would have reached its maturity dates, so what purpose is served?.
- Where does the fair treatment of clients come into this? TCF outcome 6 very specifically states: “Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.
Many advisers view the “advice” from product providers, when a client applies for a section 14 transfer to another provider, as a means to scare off the client, as it would mean a loss of income to the transferring fund of assets under management, where it makes its money. One way of making up for this is to charge the maximum causal event penalties.
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