LAURA DU PREEZ: Penalty on retirement savings lawful but fails fairness test, adjudicator finds
With terms that long, no wonder people have reason to stop or reduce premiums
How can an "exorbitant" penalty of almost 12% of your retirement savings on a more than 20-year-old retirement annuity be in keeping with the letter and spirit of Treating Customers Fairly - a regulatory approach adopted by the Financial Services Board setting out fair outcomes for consumers of financial products? This is the question asked by the pension funds adjudicator in a recent ruling.
Good on the adjudicator, Muvhango Lukhaimane, for shining the light yet again on these penalties. The industry has taken at times up to 40% of people's savings on more than six million retirement and endowment policies since 2001, says the FSB.
The maximum penalty that can be imposed on policies sold since 2009 is now 15%, reducing to 0% on policies more than 10 years old. But many of us hold "legacy policies", sold before 2009. Life assurers have agreed to limit penalties on these to 30% - but 30% is still punitive.
If it wasn't for the adjudicator flagging these harsh penalties, we might have forgotten that not enough has been done to address the plight of those who incur them.
In November 2014, the FSB's Retail Distribution Review proposed banning the upfront commission paid to financial advisers that gives rise to these penalties on RA and endowment policies.
Life companies justify the penalties as necessary to recoup the upfront commission and the loan made against your future contributions to pay it. Upfront commission was reduced in 2009 to 50% of the commission payable. The latest proposal is that it should all be collected as and when you pay contributions, as it is on penalty-free RAs and savings products sold by unit trust companies and investment platforms.
But the ban on upfront commission has yet to be implemented and the FSB's deputy executive for insurance, Jonathan Dixon, says it won't be until the Conduct of Financial Institutions Act is enacted. The National Treasury is expected to publish the draft bill this year. Last year, the Treasury proposed to reduce the maximum penalty on legacy products from 30% to 20% from January 2018. Thereafter, penalties would reduce over the next 10 years to 5%. The Treasury hopes to amend Long-Term Insurance Act regulations to implement this before year-end.
In the case before Lukhaimane, J du Toit wanted to transfer her retirement savings out of Sanlam's Central Retirement Annuity Fund to an Allan Gray RA. Low-cost retirement product provider 10X Investments says paying 3% in fees instead of 1% can result in a 40% difference in your retirement savings over 30 years, so this was not an unreasonable request.
But Sanlam imposed a penalty of R41200, or 11.82%, on Du Toit's R348400 savings. She had a 33-year term during which she was bound to continue paying and to increase her contributions each year by 10% - well above current salary inflation. With terms that long, no wonder people have reason to stop or reduce premiums.
Who can be sure that illness, retrenchment, children or some other curve ball won't make it impossible for you to keep up with escalating contributions? Or that cheaper providers won't set up shop?
Du Toit's policy is 22 years old, but the high penalty probably stems from commission calculated on such a long term, and interest has been accruing for years.
A frustrated Lukhaimane had to dismiss Du Toit's complaint because the penalty was within the regulatory limit - 30% of the fund value. However, the central retirement fund's actions are not within "the letter and spirit of the TCF principles", she says.
Under TCF, companies must give consumers sufficient, clear information to enable them to make informed choices about financial products. Institutions are also not supposed to create "unreasonable" barriers to changing a product or provider.
As Lukhaimane says, the penalty on Du Toit fails to pass the TCF test on both counts.
• Du Preez is Money editor at Tiso Blackstar