More clarity on what constitutes causal event charges emerged from a recent Pension Fund Adjudicator determination after the complainant submitted that the deductions were “…exorbitant and do not comply with the principles of Treating the Customer Fairly. The complainant further submits that the response he received from the second respondent is difficult to understand and confusing.”
There were two policies involved:
- Policy 3853256X0, a reversionary bonus contract with a premium of R25, was issued on 1 January 1981 with a maturity date of 1 January 2022 and
- Policy 15253209X9, issued on 1 January 1996 with a maturity date of 1 January 2022. On 7 April 2009, the complainant requested that his monthly premium on this policy be increased from R274.95 to R524.95 per month, and on 17 November 2009, he again increased the premium to R1 124.95 per month.
On 31 August 2013, the complainant applied for early retirement after he was retrenched and no longer able to afford the monthly premiums. A termination charge of R19 021.81 was levied on policy 15253209X9. No causal event charge was levied on policy 3853256X0, only the discounted value as applicable to this series of products.
In response to the complaint that the causal event charged was “exorbitant”, the PFA engaged the services of an independent actuary to assess the charges imposed.
The actuary considered the first respondent’s rules, the policy terms, the provisions of the Act and LTI Act, generally accepted actuarial principles and the regulations. He found that the causal event charges, amounting to 14.41% of the complainant’s fund value, falls within the limit of 30% imposed by the LTIA, and were fair and reasonable.
The determination did point out some concerns expressed by the independent actuary:
However, the actuary noted with concern that the complainant’s policy document did not detail the specific components of costs deducted in the event on an early termination. The policy document did not include any methodology of calculating the fees and the assumptions thereof. The outstanding expenses on policy 15253209X9 increased by 40% during 2009 and again by 66% during 2010.
The main components of these expenses are:
- Sales expenses (commission) amounted to R5 281.00 for the period 1 January 2009 to 1 January 2012, excluding interest.
- Marketing expenses amounted to R2 343.56 for the period 1 January 2009 to 1 January 2011, excluding interest. This expense is excessive for an existing policyholder.
- Issuing/initial expense amounted to R2 297.81 for the period 1 January 2009 to 1 January 2011, excluding interest charged. The increase in fixed charges arising from functional costs is not fair on the customer as it allows the second respondent to charge any cost irrespective of its inefficiencies.
The actuary questioned whether an equivalent worth of services had been provided to the complainant to justify the costs deducted in light of the Treating Customers Fairly principles.
Concerning the complaint that the charges did not comply with TCF, the PFA noted:
“…this Tribunal notes with concern the independent actuary’s submission that the outstanding expenses on policy 15253209X9 increased by 40% during 2009 and again 66% during 2010. Even though the second respondent submits that it adheres to the principles of Treating Customer fairly, the calculation done by the independent actuary revealed that the costs deducted on the complainant’s policy are not equivalent to the services provided and that the deduction of costs therefore cannot be said to be in line with the principles of Treating Customer Fairly. Therefore, even though the charge levied on the complainant’s policy falls within the 30% set out in the regulations, it does not adhere to the spirit of Treating Customer Fairly as it continues to be a significant post-sale barrier and the costs are not linked to any tangible service nor are they transparent.
Despite this view, the PFA found that “…it is evident that the second respondent acted in accordance with generally accepted actuarial practice, the provisions of the rules, the provisions of the policy documents, the provisions of the LTI Act and the regulations” and dismissed the complaint.
No further mention is made of the complaint regarding the fact that the product provider’s response to the client was “…difficult to understand and confusing.”
Two questions arise from the above:
- What exactly constitutes “marketing” and “issuing/initial” expenses?
- Should this cost be borne by the client, or the product provider?
Click here to download the full determination.
