Complainant was made aware of investment switch, PFA rules

The acting Pension Funds Adjudicator has found that a complainant had been properly informed his investment portfolios would be switched to a money market portfolio after retirement.

The complainant, Mr R Hobohm of Welgemoed, Western Cape, complained to Dr Elmarie de la Rey that he should be compensated as his retirement values were transferred from a “with profits” portfolio to a money market portfolio without him being informed about it.

The complainant had two memberships of the Prudent Retirement Annuity Fund effective from on 1 July 1985 and 1 December 1983 respectively. The maturity values were R1 991 551.65 on his first membership and R1 066 918.28 on his second membership.

On 1 March 2007 Prudent merged with Lifestyle Retirement Annuity Fund (first respondent). Liberty Group Limited (second respondent) was the underwriting insurer and administrator.

The complainant’s memberships endured until his chosen retirement dates of 1 July

2009 and 1 December 2009 on each membership respectively.

On maturity, the complainant was of the view that these memberships should continue to be invested in their pre-retirement “with profits” portfolios until further notice. However, the complainant’s maturity values were transferred to the Standard Bank Money Market Portfolio.

The complainant was dissatisfied about the respondents’ decision to transfer his memberships from a “with profits” portfolio to the Standard Bank Money Market Portfolio on maturity without him being informed about it.

He only became aware of the transfer in August 2009. Therefore, he requested payment of a higher return after the maturity date.

The complainant claimed the maturity values were incorrect. He was dissatisfied about the causal event charge that would have been imposed on his first membership by the second respondent had he decided to take early retirement on 1 June 2009.

In response, the respondents said the complainant’s first membership made no provision for extension on a “with profits” basis after its maturity date.

The “Rate Book” in force at inception of the membership indicated that a member could defer retirement after maturity and the proceeds could be left to accumulate compound interest at a rate determined by the Prudential from time to time.

This would have been disclosed to members at the commencement of membership.

The Standard Bank Money Market portfolio was a more transparent way of ensuring the members who opted to defer retirement continued to get growth on their proceeds after maturity.

The respondents said had the complainant’s membership not been transferred to a money market account, he would not have received any growth after the original maturity date.

The second respondent confirmed that it had advised the complainant that his membership would continue automatically until he requested payment.

The complainant misunderstood this to mean that his membership would continue on a “with profits” basis, whereas the intent was actually that his membership with the first respondent would continue, but the investment after retirement would be in a money market account.

In response to the illustrative early retirement values, the second respondent said the initial policy was a conventional “with profits” investment with an initial sum assured, to which accrued bonuses payable on the normal pension date or on the prior death of the complainant.

The early retirement value is the basic cash value plus the cash value of the bonuses at the date of the claim. Therefore, it did not include the full bonuses.

The second respondent also noted that the complainant’s membership printouts did not extract the correct early retirement values from the system. Only the correct death and illustrative maturity values were extracted. This error was not known until after maturity.

One month to maturity, as at 9 June 2009, the values were reflected as R1 808 480.00 for a death claim, R1 717 538.00 as an early retirement value and R1 991 551.00 as the maturity value.

The difference between the illustrative early retirement value of R1104651.18 and the actual retirement value of R1991551.65 was R886 900.47.

The complainant incorrectly added this difference to the early retirement value of R1 717 538.27 reflected on his membership printouts to arrive at the opinion that his maturity value should be R2 604 438.74.

Also, the complainant was provided with a table reflecting the reversionary, terminal and performance bonuses. Based on this the complainant concluded that the bonus of “R886 900.47” included R391 108.00 reversionary bonuses and R8 134.00 performance bonus.

The difference of R487 658.47 must then be seen as the erroneous calculation. Adding this value to the early retirement value of R1 717 538.27 as at 1 June 2009, the maturity value will still be greater than the actual maturity value.

The respondents averred both the theories used by the complainant were inapplicable as the early retirement value and the actual retirement value were calculated differently.

The second respondent attached an actuarial certificate confirming the complainant’s retirement value of R1991551.65.

In determining whether or not the complainant suffered any loss, Dr De la Rey procured the services of an independent actuary who considered the policy terms, the provisions of the Act and Long term Insurance Act No 52 of 1998, generally accepted actuarial principles and the long-term insurance regulations.

Regarding the complainant’s first membership, the actuary was satisfied that the maturity value was correctly computed.

However, he suggested that the second respondent add returns of 11.55% per annum from 1 July 2009 to 1 December 2009 and money market returns thereafter until a new portfolio was chosen.

On the second membership the actuary was of the view that the claim should be rejected as the information about switching investment portfolios to a money market portfolio was known prior to the maturity date of the membership.

The Office of the PFA was satisfied that with regard to the first membership, the policy documents did not clearly state that there would be a switch to a money market portfolio after retirement.

However, by 19 November 2009 the second respondent had explained by letter to the complainant that his retirement benefit would remain in the money market portfolio until he advised of an alternative portfolio.

The PFA ruled that the complaint about the difference between the early retirement value and the normal retirement value was moot because the complainant did not retire early.

Dr De la Rey ordered the second respondent to add a net return of 11.55% per annum to the complainant’s normal retirement value in respect of his first membership from 1 July 2009 to 30 November 2009, plus Standard Bank Money Market Portfolio returns on this amount from 1 December 2009 to the date of credit of the complainant’s fund value.