Don’t hide behind the TCF shield

26 November 2018 Jonathan Faurie
Muvhango Lukhaimane

Muvhango Lukhaimane

One of the biggest debates that has been present in the retirement savings industry for many years is that causal events charges are high and are detrimental to the public who want to move jobs and by default retirement funds.

It was once again an issue that the Pension Funds Adjudicator had to deal with during its 2017/18 reporting period. In this case, it was a fund that quoted Treating Customer Fairly (TCF) principles as the reason behind a causal event charge. 

The basics

While the complaint was dismissed, Muvhango Lukhaimane – the PFA – said causal event charges were obscure and mitigated against TCF principles because they could not be translated into value for members. 

Ms J Du Toit (the complainant) complained about the quantum of the causal event charges imposed on her retirement annuity policy when she decided to transfer her fund value to another investment product. The complainant applied for and was admitted to membership of Central Retirement Annuity Fund (first respondent). 

The policy commenced on 1 March 1995 with a contractual maturity date of 1 March 2028. The policy was subject to an initial monthly contribution of R80,81 subject to an annual increase of 10% on the plan anniversary. 

The policy was subsequently converted to a newer generation plan and the monthly contributions increased to R1 000, subject to annual increase at inflation rate. On 23 February 2017, the complainant requested a quotation to transfer the proceeds of her retirement annuity policy to Allan Gray Retirement Annuity Fund. 

She was provided with a quotation which reflected that an early termination charge of R41 193,96 (11,82% of fund value) would be levied. 

Major gripes

The complainant contended that her fund value was drastically reduced due to high administration/termination fees. She was dissatisfied with the fact that the early termination charge was levied when she decided to transfer her funds to a cheaper administrator. 

Lukhaimane pointed out that the complainant indicated that she should have the freedom of choice to move her funds to another fund that offers cheaper administration fees. She indicated she had lost interest on her investment and her funds were not growing due to high fees. Thus, she stated that she should be able to move her funds to another fund without penalties. 

The complainant submitted that it was not her problem if the second respondent (who was not named) paid commission upfront as she was not told that she was bound by the high fees. 

The second respondent submitted that as confirmed in the policy contract, it recovered alteration charges from a member’s fund value by cancelling units to the value of the fee when a member took when the plan charges were calculated, the second respondent assumed that the contractual contributions would be paid up to the end of the policy term. In the event that the premiums were stopped or the plan was discontinued, it would no longer be able to recover these costs from future charges. 

The second respondent also indicated that these charges were disclosed to the complainant in the product quotation which she accepted when she signed the application form. It submitted that the complainant stopped the payment of contributions prematurely and the policy became paid-up. 

The second respondent further submitted that it subscribed to TCF; further, it submitted that the complainant was appropriately informed before, during and after the time of contracting. 

Lukhaimane said the complainant was provided with quotations illustrating the charge that would be imposed in the event that she ceased payment of contributions or transferred her fund value to another fund prior to the contractual maturity date. 

Major intervention

Lukhaimane said the second respondent provided a breakdown of the complainant’s fund value and the amount imposed as a causal event charge. 

She added that the PFA Tribunal was satisfied that the causal event charge levied or to be levied by the second respondent was lawful in terms of Regulation 5 of the Long-Term Insurance Act (LTIA) and within the 30% limits permitted in terms of the provisions appropriate law. 

Lukhaimane added that although lawful, the actions of the respondents could hardly be described as being anywhere near the letter and spirit of the TCF principles. TCF is a National Treasury initiative that is intended to culminate in legislation that will guide

the relationship between the financial industry and consumers. 

Lukhaimane said the following TCF outcomes were applicable in this matter:

  • Customers are given clear information and are kept appropriately informed before, during and after the time of contracting; and
  • Customers do not face unreasonable post-sale barriers to change product or switch provider. 

She said that respondents should refrain from quoting TCF principles when levying causal event charges as the charges are obscure and cannot be translated into value for members of retirement annuity funds. 

Editor’s Thoughts:
It will be interesting to see how TCF and causal event charges are treated in the future. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Timothy Jones, 26 Nov 2018
I have had this situation several times, mainly with the big four life companies. When I complained about the high termination costs with one Cape Town based company I was told that the intermediary's commission was a large part of the problem. When I replied that I had originally wrote the policies and that I had not in fact received commissions on these cases for some time I was not given a suitable response. I would be quite happy for those commissions to be added back to this the clients fund values but perhaps those funds have been used for other purposes?!
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Added by Francois Meyer, 26 Nov 2018
I doubt if there would have been any significant penalties, if the policy was made out, in accordance with premium as well as the time already in force.
With the size of the premium it also look like a pure RA with no risk cover involved.
Then problem arises when the funds where transfer to another investment product, most probably with a section 14 transfer, and then with an insurance company, where the FA could earn upfront commission.
if everything was done with an investment platform, like Alan Gray, Glacier, Momentum Wealth, Investec or AIMS. This would have not been the case.
Wishing you more than enough!
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Added by John Johnston, 26 Nov 2018
If the client (policyholder) made her policy "paid up" she would at that stage have been hit with penalties. If more penalties were applied when she wanted to transfer her fund, she would in fact have been hit twice. That is a disgrace it is the case. One would however need more clarity on that aspect.
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Added by Francois Meyer, 26 Nov 2018
Unfortunately this happens.
Firstly from selective hearing, secondly when they don't ask relevant question, re what if :
1. I can't afford the premium any longer, will there be any costs involve?
2. I want to use the money now to retire, will there be any costs involve?
3. I die, what will the cost be for my heirs?
What is my costs for these changes that you Mr Adviser, suggest i must do now?
Unfortunately client also do not think clearly, and hide behind that fact that they did not know. Or know nothing of these things..
On the other hand, adviser's should refrain from selling these type of investment products, only to gain hi upfront commissions,
Wishing you more than enough!.

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