Fracturing the industry with causal event charges

23 November 2015 Jonathan Faurie

Causal event charges have been a perpetual source of anger, frustration, and often confusion within the retirement industry. Often, the client does not know how these charges are calculated or in fact what they are being imposed for.

This has been evident in a number of determinations handled by the office of the Pension Funds Adjudicator (PFA). Muvhango Lukhaimane, the PFA, recently ruled in favour of a company levying a causal event charge; but if we consider the context to which the charges were imposed, it was far from an open-and-shut determination.

The green pastures incident

Ms T Naidu-Lewin of Pretoria complained that a causal event charge was to be imposed by the second respondent on her value in the annuity fund (first respondent) that she was a member of. Charges would be imposed should she decide to decrease the current monthly contribution.

The complainant became a member of the first respondent by virtue of being issued with a retirement annuity policy on 1 February 2011.The initial monthly contribution was R500 per month.

In December 2011, she left Pretoria to work overseas for four years. Prior to leaving, she decided to increase her monthly contribution to R2 000 per month - with a 10% yearly increase - for a period of four years.

Setting guidelines

The monthly contribution increase took effect from 1 January 2012. She further submitted that her decision to increase the monthly contribution for the duration of her posting was solely based on the fact that she would be able to pay higher contributions as a result of her overseas posting.

In May 2015, she contacted the second respondent to ask for advice on decreasing her monthly contributions with effect from 1 January 2016 as she would no longer be able to afford the monthly contribution of R2 928.20.

She was advised by the second respondent that should she wish to decrease her monthly contribution to R500 a month, there would be a penalty of R9 281.95 that she would have to incur for decreasing the monthly contribution. The complainant’s fund value would reduce from R120 349.59 to R111 067.64.

A matter of contention

The complainant believed it was unfair that if she wished to change her monthly contributions, she should have to pay a penalty.

The second respondent submitted that the alteration charge to be levied was not a penalty as indicated by the complainant. It was charged in accordance with what had been stated in the policy.

The second respondent further submitted that most of the expenses with respect to policies were incurred at the commencement of the policy or when the premiums or contributions were reduced or stopped. These upfront costs were recovered by means of charges imposed over the term of the policy.

The second respondent also stated that the regulations issued under the Long-term Insurance Act, 52 of 1998 (“LTI Act”), confirmed the application of actuarial rules to policies. The deductions and charges were levied in accordance with these actuarial rules.

The ruling

In her determination, Ms Lukhaimane said that in deciding on the fairness and reasonableness of the causal event charge that would have been imposed by the second respondent, her office engaged the services of an independent actuary.

“Therefore, after careful consideration of the facts placed before this Tribunal, 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,” said Lukhaimane.

A need for education

FAnews spoke with Lukhaimane to find out the future of causal event charges in terms of Treating Customers Fairly (TCF).

“From the complaints submitted to this office, there has not been a change either way on causal event charges that can be attributed to TCF. Except for the fact that underwriters of retirement annuities suddenly claim that in levying these charges, they are complying with TCF. This will undoubtedly confuse members as they will deem TCF principles as not being useful at all. We often battle to get underwriters to disclose how they have calculated these charges other than just to state that they are in line with the 2006 Statement of Intent,” says Lukhaimane.

A matter of conjecture

There is a lot of conjecture when it comes to the understanding of causal even charges. Lukhaimane says that although these charges are said to be for marketing or set-up costs, complainants cannot relate to this as the value thereof is non-existent.

“As for on-going investment advice, that is pure lip service because for most complainants, they often see the financial advisor for the last time the day they sign the retirement annuity policy and never thereafter except if they want to sell another product to them. Therefore, for this person to suddenly be told that some of the charge is for on-going advice would not make sense and the underwriters know it. Lastly, the most unfair and irrational of charges is when a complainant had decided to increase their contributions and later on decide to decrease them. Except for the adjustment to the debit order, there is really no value add that the underwriter or the financial advisor would have added as the decision is often made individually by the member and facilitated through a call centre for implementation,” says Lukhaimane.

Editor’s Thoughts:
If we have the best interests of the client at heart, then product providers will go out of their way to explain certain aspects of their policy the client. Are we really embracing this and following TCF guidelines?  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Ben Holtzhausen, 01 Dec 2015
A clear sign that RDR is way overdue. At this day and age it is actually criminal to sell RAs on an up-front costing basis. There are many superior products with zero penalties available. Intermediaries should allow themselves to be seduced by the insurers perverse incentives.
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Added by John, 23 Nov 2015
As I find these charges and penalties so iniquitous, I only market unit trust based RA's which are transparent, flexible and sans any penalties. It is a sad indictment on the large life offices that they still so aggressively push the their high cost options
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Added by Gavin Came, 23 Nov 2015
There are a number of issues here:
1. Did the adviser warn the client that by increasing the contribution to R2,000 that he/she would earn an extra amount of commission?
2. Did the adviser warn that, by only increasing the premium for a temporary period, the client would be exposed to a termination charge (causal event charge) for breaching the contract at the end of 4 years.
3. Did the adviser consider taking a reduced commission since the client was only increasing for 4 years (eg 3.25% X 4) instead of over the full term of the contract?
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Added by kenny, 23 Nov 2015
This isn't that complicated. I only sell discovery ra's because I can take a 50% comm cut ... then the client has no charges applied for early paid up etc.
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Added by Harley Ritz, 23 Nov 2015
The LTI needs to be amended in line with TCF. Insurers are legitimized to legally steal policyholders monies claiming casual event charges & un-recouped expenses under the auspices of the outdated jargon of LTI.The adjudicator is duty bound to see through such antiquated and unfair practice which rife throughout the industry irrespective of how old the policy is.The adjudicator must apply their mind to the bigger picture by including the principles of the FAIS Act, TCF & Good Faith.
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